SINGAPORE (July 25): Low interest rates are one reason why the financials sector is lowly valued, and the prospect of disruption may be another.

We think all industries are likely to be vulnerable to disruption in the coming years. We’ve seen it already in retail and media, for example, and this is likely to be a growing theme in markets for the long term. Financials, and banks in particular, are currently facing disruption to their business models. We can see this to some extent in valuations already.

The chart below shows that the price-to-earnings ratio (P/E) for the global developed market stock index, the MSCI World, is 17.4x (as at 31 May 2019) while financials are the most cheaply valued sector at 12.4x. Within financials, banks are even cheaper, with an average P/E ratio of just 10.1x.

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