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Iress Ltd and ASX Ltd: 2 stocks for an upswing in financial services

One indicator of the increasing optimism in the share market is the return to profitability of ANZ ’s (ASX: ANZ) online stock-broking arm, Etrade. Etrade posted a $34 million profit for the year to September 30, which was in stark contrast to the $1 million loss a year earlier.

Commonwealth Bank’s (ASX: CBA) Commsec, Etrade’s primary competitor, boosted profit for the year to June 30 to $86 million, despite not capturing the latest surge in activity due to its earlier reporting period.

One needs look no further than last month’s $11.8 billion of IPO activity, the strongest in history, for more evidence of an uptick in investing momentum. So let’s investigate two quality Australian businesses that will profit from increased activity.

ASX Ltd (ASX: ASX)

One obvious beneficiary is the ASX, with Deutsche Bank analysts saying it profited from not only solid cash equity turnover in December (traditionally a soft month) but also the stunning IPO activity. Despite regulatory barriers to entry, the potential threat of competition in other segments such as derivatives and equities clearing and settlements remains. However, the ASX has been responding to such challenges by upgrading servicing capabilities and reducing fees to globally competitive levels

Iress Ltd (ASX: IRE)

A feature common to most online services is Iress desktop software. It began by providing this software to institutions and corporate market participants and is now becoming the trading software used by the major banks and others.

There are two divisions within Iress: Financial Market Services (FMS), comprising 69% of total revenue and Wealth Management Services (WMS) with 31%. FMS is set for growth due to recent strong performances in its key geographical regions of Australia & New Zealand (79% of total revenues) and South Africa and Canada (10% each). The WMS division is currently buoyed by reporting a return to positive equity inflows.

Foolish takeaway

Having confirmed from disparate sources an upswing in momentum for financial market activity, in my opinion an excellent way to invest for this theme is via some first class Australian stocks, namely the ASX and Iress. Threats posed to both the ASX and Iress by increased competition should be closely monitored.

 

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