When Donald Trump made his case in front of the US electorate why he should be the next US President, he mentioned many changes in policies adopted by the Obama administration. Every proposed change has consequences - some good and some bad, there is no debating that.

But for the banking sector, if the proposed changes are implemented, they will make a big positive difference. This is why we are seeing a strong rally in the sector.

In his debates, Donald Trump made three important declarations which should influence positively the banking sector once adopted. These are as follows:

* Lighter regulation across industries;

* Lowering corporate taxes;

* Higher interest rates in the US.

Although all three points mentioned above are favourable for the US Banking sector, I have no doubt that it is Trump’s promise to dismantle the Dodd-Frank banking regulations that led to such a strong rebound in banking stocks.

What is Dodd-Frank reform?

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. Named after sponsors U.S. Senator Christopher J. Dodd and US Representative Barney Frank, the act's numerous provisions, spelled out over roughly 2,300 pages, are being implemented over a period of several years and are intended to decrease various risks in the U.S. financial system.

The act established a number of new government agencies tasked with overseeing various components of the act and by extension various aspects of the banking system.

Which US Banks Benefitted most post-election?

Wells Fargo, Bank of America, Morgan Stanley and JP Morgan all rallied over 10% post the election. Citigroup on the other hand rallied but at a slower pace than its rivals due to a larger international exposure and a strong presence in Mexico.

Why are European Banks rallying?

European Banks (together with European politicians) have criticised the new regulatory standards under Basel IV which have been designed to reduce further the risk of the financial sector.

However, now that Trump has been elected, it is highly probable that one of Basel IV’s key advocates, Federal Reserve Governor Daniel Tarullo will lose his place on the committee leading to an increased probability that the reduction in regulation in the US will also happen in Europe, giving greater flexibility to the banking sector.

Another reason why European Banks are rallying is due to the latest rumors of a potential increase in interest rates in Europe as early as next year. Although it is too early to make such a call, we are alreadystarting to see a large adjustment in the European Sovereign yield curve as long term debt is selling off, leading to a steeping of the yield curve.

These are the two main reasons why we are seeing European Banks rally, albeit at a slower pace to their US peers.

Getting exposure to the US Financial Sector via an ETF

For those investors wanting to get exposure to the US financial sector via an exchange traded fund, they can do so by purchasing the S&P US FINANCIALS UCITS ETF (Ticker: SXLF:LON).

The fund's objective is to track the performance of large sized U.S. financial companies in the S&P 500 Index.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  


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