Financial services giant AMP Limited (ASX: AMP) is off to a flying start in 2013, with its share price rising over 9%, compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which has gained 2.6% so far this year. It was a similar story in calendar year 2012 with AMP outperforming the index with gains of 18% and 14.6%, respectively.
Many companies in the financial sector have revenues that are to some degree tied to the ups and downs of the stock market. AMP is one such stock. With the stock market rallying strongly in the six months to December, AMP saw its assets under management (AUM) grow considerably. This has provided the impetus for a rally in its share price.
With the outlook for financial services looking perhaps a little rosier, the result has been a broad-based increase in share prices across the sector. The wealth management arm of Westpac Bank (ASX: WBC), BT Investment Management (ASX: BTT), fund manager IOOF (ASX: IFL), and international fund manager Platinum Asset Management (ASX: PTM) have all made index-beating gains. However, annuity provider Challenger (ASX: CFG), with its complex accounts, has lagged the index.
At the smaller end of the market, financial adviser SFG Australia (ASX: SFW), which was formed through the merger of the listed Snowball Group and Shadforth Financial Group, is also one worth watching. It is currently in merger discussions with accounting firm WHK Group (ASX: WHG), although latest reports are that talks may have cooled between the parties.
The Foolish bottom line
Many companies and industries are subject to business cycles. The building industry is a commonly followed one, with its periods of heavy building demand and high profitability followed by periods (such as now) of low demand and low profits. The financial services industry also has similar attributes. In bear markets, AUM are lower and investors chose to hold cash, but when the cycle turns to optimism, AUM begin to rise and funds begin to flow into financial firms as investors clamour to reduce their cash holdings and get exposure to equities, investment products, and advice.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur doesn't own shares in any companies mentioned.
