It has been a difficult time to be a global bank investor, to say the least, as the crisis in Europe continues on and the US economy remains painfully sluggish. As the news of Italy’s troubles spread, new concerns arose of the health of the Euro zone’s heavily intertwined financial system.
The embattled region had no sooner agreed to a 106 billion euro plan to shore up struggling institutions than economists caution that it may take more than double that amount to renew trust in the European financial sector. In the meantime, the fallout in the United States from the subprime mortgage debacle continues to drag out, and there has been an alarming uptrend in levels of bad debt on credit cards and mortgages.
Global banks, meanwhile, are being forced by regulators to hold more capital, and scale down higher profit activities that carry more risk. In light of these issues, investors have been understandable cautious when investing in the financial sector. But for investors that have the nerve, and the patience, the US financial sector could pose some potentially profitable buying opportunities for those who are willing to wait.
Goldman Sachs Appeals To Investors Looking For Buying Opportunities
For possible buying opportunities in the financial sector, you may want to consider Goldman Sachs for a play on financials. Goldman Sachs (GS) is a financial and bank holding company, offering a range of financial services to a broad range of clients and is one of the largest, best known investment banks in the world.
In an environment where regulation has curtailed its most profitable activities, Goldman Sachs has struggled along with its peers to acclimate its business model in an increasingly challenging environment. Goldman Sachs has also experienced a slow down in corporate deal making as a result of a slower than expected US recovery.
The industry giant has seen its share price fall by more than 40% year-to-date, and this has raised concerns as to the investment bank’s viability as a “pure-play” on investment banks, in the absence of a large private or retail banking business to smooth out earnings.
Even in light of these issues, if you are on the hunt for buying opportunities in the financial sector, it may be wise to consider Goldman Sachs for a long-term investment strategy. The world’s most recognizable investment bank should not be discounted, and has historically been resourceful in finding new ways to realize a profit.
Goldman Sachs will have an opportunity to gain market share as global competitors, particularly in the Euro zone, have scaled back on investment banking. Goldman has also proved to be tougher on cost-cutting, including reducing bonuses, an area that has historically been exempt from cost-cutting measures.
Rocky Road Ahead, Long-Term Upside Potential
Goldman Sachs continues to be an institution that draws fire from both the public and politicians, and the investment bank is facing legal troubles concerning its role in packaging and selling United States mortgage securities in the days leading up to the financial crisis.
There is also the issue of US proprietary trading rules cutting Goldman Sachs’ trading revenues, with some analysts estimating upwards of 20% of Goldman’s revenue at stake. The Volcker rule – as it is called – is expected to hurt Goldman more that its rivals.
While buying opportunities are certainly present in this sector, it is advised that you proceed with caution. A plan that involves investing for yield – Goldman Sachs is paying 1.42% – with a price target of $141 gives Goldman Sachs a nice potential upside with dividend income in the meantime.