There are reasons to be cautious about the near-term outlook for financial service providers such as AMP Limited (ASX: AMP), such as the concerns that valuations are becoming stretched and we could be in for a period of flat returns, but the long-term outlook is still appealing.
Firstly, let's consider the near-term risks which the current bull market presents. Financial services companies are highly leveraged to overall stock market levels thanks to the fee income they generate from both the level of funds under management (FUM) and the increased activity that is usually present during 'the good times'.
While the current market level is helping companies such as AMP, Macquarie Group Ltd (ASX: MQG) and BT Investment Management Ltd (ASX: BTT) grow profits, should the bull market stall lower share prices and more attractive entry points into these financial services stocks could materialise.
Turning our attention to the long term and the outlook for the Australian financial services industry is incredibly positive thanks to the ongoing government support of the superannuation system, which should lead to compulsory contributions rising from 9.5% currently to 12% by 2022.
A future success story
Despite this long-run tailwind, AMP hasn't actually been a great long-term investment thus far. Much of this underperformance is company specific with problems occurring in certain business units such as the recent troubles in the wealth protection business. Likewise, the share price arguably got well ahead of itself back in the late 90's and early 00's, which created a long-running drag on total shareholder returns.
From current levels however with the stock trading on a price-to-earnings ratio of roughly 16x, the future outlook for the stock is appealing. AMP boasts the largest financial planning network, a well-regarded brand and a solid operating base upon which to leverage further growth in FUM.
