Lara Castleton: Hello, and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications they have for investors. I’m your host for the day, Lara Castleton.

With plenty of macro and political uncertainty dominating headlines, investors are questioning where opportunities may lie in the volatile equity market. Financials have been one of the more resilient sectors this year, with some relatively strong fundamentals, but it’s a sector very much tied to the outlook of the economy, and worries of recession are beginning to surface.

To talk about the varying possibilities and some specific fundamentals affecting financials today, I’m thrilled to be joined by John Jordan, Portfolio Manager and Financial Sector Lead, and Andrew Manguart, Financials Research Analyst. Gentlemen, thank you for being here.

John, we’ve had you on the podcast before as part of the co-head of our research franchise. Andrew, this is one of your first times on the podcast, so I want to get a little bit more background on you. You’ve been at the firm for three years. Maybe talk a little bit about where you’ve been before this and why financials in general.

Andrew Manguart: Sure. I’ve spent essentially my entire career within financials, so unsure if I chose it or it chose me. But nonetheless, I’m still here today. I started my career coming out of business school within consulting with Deloitte, where I worked in their risk and capital management practice, working with large financial institutions in areas around regulatory compliance.

From there, I’d always had a passion in investing and wanted to make a transition into the investing world, and so, made the jump with an opportunity within sell-side equity research, where I covered regional banks for three to four years, and then always wanted to do real tangible investing.

And so, I had the opportunity to make the jump to the buy side, where I made the move across to the entire other side of the world, to a large sovereign wealth fund in the Middle East, and spent about four to five years over there, where I was able to start to hone my skills as a financials investor.

I had an amazing opportunity out there, wonderful experience for my family, and then had the opportunity to come back to the U.S., where I joined Janus Henderson and have been here for almost three years now. It’s been a great experience, really a great opportunity to do bottoms-up research on a sector that I love.

Castleton: That’s awesome. True global experience, it seems like. Awesome. So, let me then turn to you, John, as we frame up this conversation. If you don’t mind, can you just talk about the broad macro backdrop facing financials, especially how they’ve navigated the tariff uncertainty year to date?

John Jordan: Well, maybe start by saying that financials are themselves not meaningfully directly impacted by tariffs. So, if we think about first-order impact of tariffs, the increase in product prices, some of that potentially being borne by the manufacturer or the distributor, that’s really less at play for financials.

But financials are, and potentially may be, significantly meaningfully impacted by second-order impact. So, how do tariffs flow through and affect the economy? How do they affect consumer spending? How do they impact interest rates? How do they affect market levels?

So far, in terms of what we’ve seen for financials, we’ve seen really very limited impacts. And overall, first quarter fundamentals were good at financials. So, what are some of the examples of that? Consumer spending. If we look, for example, at credit card issuers, debit card issuers in the U.S., pretty stable rates of growth. If anything, somewhat better than the overall rates of growth in 2024.

And a few firms provided us updates so far into early April, and there we’ve seen continued solid growth, in some cases even maybe a little bit of acceleration, although there’s some uncertainty about just the timing of Easter and maybe pull forward in some consumer purchases. But overall, consumer spend continues to grow at a healthy pace.

And second on credit quality. Credit quality continues to be quite strong across both commercial credit, as well as consumer credit. So, what we’re seeing, for example, in consumer credit card delinquencies is quite healthy.

Thirdly, an area where we’ve seen a little more impact from tariff and other policy uncertainty is markets. The negative impact of tariffs and impact on uncertainty does seem to be slowing some types of market activity, for example, IPOs [initial public offerings]. So, that’s been a headwind for some firms. But on the other hand, we’ve seen significant volatility, significant trading volumes, and so, that’s helped some of those same firms, as well as exchanges, for example.

So, overall, what financials are seeing through the end of the first quarter looks quite healthy.

Over time, we’ll have to just see how this policy uncertainty, how tariffs and other factors, flow through the macro economy, how that impacts interest rates, how that impacts consumer spending and, ultimately, how it impacts credit quality.

Castleton: Thank you for setting up that background, John. Andrew, I want to go to you, and I will say we are recording this April 29. We get Q1 [U.S.] GDP [gross domestic product] figures April 30 and April jobs data on May 2. So, there is some uncertainty in those numbers coming around as it affects the macro backdrop. But overall, there have been calls for rising recession odds in the U.S. I know that banks are generally more tied to the economic cycle. Can you talk about their outlook if there is a recession or how they may weather the storm going forward?

Manguart: Yes, so, during this most recent bank earnings season, a prominent bank CEO had a quote, which I think really gets to the heart of your question in regards to the sensitivity of banks to economics in general. And that went something like, banks are a cork in the ocean when it comes to the economy.

So, the direct answer and short answer to your question is, banks are directly impacted by the broader outlook for the economy. In a lot of ways, banks are really a direct representation of economic output, so think about things like lending volumes, payments activity, capital markets activity, of course, credit losses, as well. And then the spreads that banks earn on their assets are a function of the yield curve, which is also very economic dependent.

And, frankly, as John just pointed out, we’ve seen really going into the election, given the uncertainty around the election, but also in the aftermath of the election with this tariff uncertainty, we’ve seen things like commercial lending volumes; investment banking activity has been rather tepid, actually. And so, to the extent that we continue to be in this very uncertain environment, that’s likely to continue.

Commercial clients are reluctant to go forward with their investment plans, with their capital markets activity, with their capital expenditures, just given the uncertainty that persists in the environment. And so, as long as that’s still out there, as long as the risk of recession is still out there, that’s likely to continue.

However, I would say I do take solace just broadly within the banking ecosystem. I take solace in the positioning of banks entering a potential recession relative to prior recessions. So, I’d point to things like higher levels of capital, less leverage in the system, cleaner lending portfolios, and then actually loan-loss reserves already contemplates a non-zero probability of a recession.

So, to the extent that we are going into a recession, it’s unclear. We’ll continue to monitor the data. But if we are on the precipice of a recession, I think it’s likely to be an earnings event for the banks, as opposed to a balance sheet event like we encountered in, most notably, the financial crisis.

Castleton: That’s a great point. That’s something we always coach our clients with. If there is a recession to come, it doesn’t necessarily mean it’s going to look exactly like the ones that we have recently encountered. So, it is important to be very active and mindful of different circumstances facing the markets today. So, thank you for that.

Both of you as part of our core Research Team at Janus Henderson also approach the entire universe, not just U.S. financials. And, John, I know you just spent some time in Europe speaking with a lot of companies over there. What’s the mood among the European executives in the financial space and banks, especially as it relates to the U.S.?

Jordan: So, I’d say many of the European banks and other financials that I met with were in a pretty constructive mood. I think factors driving that are, in part, that the European economy, at least up through recently, is holding up relatively well. In some markets, we actually have seen accelerating loan growth early in 2025. So, number one, a pretty stable or positive economic backdrop.

Secondly, regulation. I think regulation has been increasing and a headwind for returns in meaningful parts of the financial sector, particularly banks. For many years in Europe, we’ve seen that starting to plateau and even start to improve in recent years. And I think the banks are seeing that in some of the supervision, some of the rules or changes in rules that are coming out. And so, I think there’s optimism that the regulatory environment is becoming a little more focused on common sense and not quite so onerous.

The third thing I would highlight is potentially a change in European approach to fiscal policy. I happened to be there when Germany announced a potentially large fiscal package, increasing spending on defense, for sure. And so, I think that obviously can have a positive impact on the overall economy and banks, which are obviously meaningfully integrated into that.

The last thing I want to highlight, which is potentially a silver lining for Europe about some of this policy uncertainty, is that many of the European leaders, financial leaders that I met with, were optimistic about Europe pivoting around their approach to regulation for the broader economy, not just financials.

And a number of them attributed that to the uncertainty, geopolitical uncertainty, uncertainty about where the U.S. was headed, particularly in regards to their relations with Europe, and feeling like Europe needed to do more on their own. And that included a greater focus on private businesses and making sure there wasn’t overregulation. So, we’ll see how that plays out, but that was another source of optimism for executives there.

Castleton: That’s awesome, thank you for that. Really timely for your trip over there at that announcement. It is seemingly a very different backdrop shaping up going forward, of ex U.S. international companies stimulating, while we maybe are doing the opposite. So, interesting to see that play out, and obviously, why it is useful for investors to really take that global mindset. So, I appreciate that anecdote.

Let’s go to you, Andrew, because, again, if we are trying to be a little bit more insulated from the macro uncertainty, there are parts of the financial sector that aren’t as tied to the economic cycle. Do you mind walking through maybe some of those examples in your outlook for that going forward?

Manguart: Absolutely. I think a great example is the property and casualty insurance ecosystem. Generally speaking, insurance, both for businesses and consumers, is compulsory. In fact, personal auto insurance, which we’re all required to carry as drivers, is mandated by law. And if you look back over the last 30-plus years, insurance premiums across the entire U.S. – this is the total property and casualty ecosystem – have grown in every year barring 2008 and 2009, in the depths of the financial crisis.

So, insurance in general has been a durable grower even through periods of economic downturn. Two areas that we like that offer defensive characteristics within that particular ecosystem are personal auto insurance and the insurance brokers. And I can touch on both briefly.

Maybe just starting with the personal auto insurers, they actually exhibit some countercyclical elements. Namely, in a recession, people tend to drive less. They lose their jobs. They have less reason to drive. People are driving less. That means less accidents, and it means higher levels of underwriting profitability for the insurer.

But beyond that, we are attracted to the broader fundamentals of the personal auto space, specifically the consolidation that’s undergoing to the best positioned players around things like data analytics, underwriting, and distribution. And so, there’s opportunity to play those durable share gainers that are well positioned around those themes.

The second one that I mentioned is the insurance brokers. They don’t have the same countercyclical element as personal auto insurance, per se, but they have proven to be highly defensive over time.

The business of insurance brokerage, in its simplest form, is acting as an intermediary between the carrier, the underwriter of the insurance, and the buyer of the insurance. And in reward, the brokers collect a commission or a fee on those premiums. So, they are directly tapping into that very durable growth in insurance premium that we’ve seen over the last 30-plus years that I highlighted. And so, that provides a very, highly visible revenue stream, a highly predictable, durable revenue stream that also enables consistent margin expansion over time, even through periods of economic downturn.

In fact, there’s a few of the larger insurance brokerage players that actually were able to demonstrate margin expansion through the financial crisis as they pulled their own expense levers. So, those are two great examples of defensive businesses, but businesses that also offer attractive fundamentals beyond their defensive characteristics.

Castleton: That’s great, and thank you for highlighting those two examples. It is really important, I think, for investors to understand the divergence that can occur within financials. So, obviously, you do have a big portion of it tied to the economic cycle. You already pointed out how maybe some of those banks are already more higher credit quality and well-formed ahead of any potential volatility. But there’s definitely opportunities underneath the surface in some other sectors that are even countercyclical. So, thank you so much for that.

John, let’s just end with you, if you don’t mind. Is there anything investors might be missing as it pertains to financials and the outlook ahead?

Jordan: Yes, let me first start by acknowledging the outcome for the economy, for interest rates, for employment, is really difficult to call now. There’s a lot of uncertainty and we can’t have much confidence in our guesses, frankly, where that might be later this year.

But I want to maybe start by emphasizing a couple of things that Andrew said. First, I think the financial sector is in a quite strong position from a balance sheet perspective, from an overall health of the institution, safety of the institutions, particularly the U.S. banking system. And so, I think, to the extent that we have more uneven economic outcomes, I think the financial system can actually act as somewhat of a shock absorber to that, but at least not exacerbate that. So, I highlight that first.

Second highlight, the financial sector is quite diverse. We have lots of different businesses and subsectors. Andrew’s talked about parts of insurance that really are less tied to the level of interest rates or to whether we’re in a recession or not.

And then, lastly, that just gives us a lot of places to look for opportunities. So, in part, that diversity of subsector, in part, the overall health and resilience of the sector. But importantly, there are lots of things that we can feel a lot more confident about happening over the next few years. We may not know exactly where the macro is going to be, but we can be confident that firms with strong competitive advantage and good management teams can continue to take market share. And so, we’re looking for opportunities like that.

We can be confident that some of the broader trends that I talked about, I think, for example, more stable regulatory or improving regulatory environment for banks, is likely to persist. And we can be confident that technology is going to continue to help some firms disrupt and cause others to be at less of a competitive advantage or a competitive disadvantage.

And so, we are looking intently at firms that can leverage data, that can leverage technology, to do a better job for their clients, win market share, and improve their competitive position. And so, things like that we are confident are going to change over the next few years, and that’s where a lot of our research is focused.

Castleton: Well, thank you both. There clearly is a lot of uncertainty. As we tell our clients, you cannot predict when a recession is going to hit. So, it is really looking at you as active investors to navigate this space. Clearly, there are some sector opportunities within financials, too, that may even be countercyclical.

So, it was great having you walk through those examples. Really appreciate your time being here. And thank you all for listening. We hope you enjoyed our conversation. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts or visit janushenderson.com.

I’ve been your host for the day, Lara Castleton. Thanks, see you next time.