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Wednesday, November 27, 2024

The Trump Effect : How Deregulation is Supercharging the FinTech Sector

By Century Financial in 'Investment Insights'

The Trump Effect : How Deregulation is...
THE TRUMP EFFECT: How Deregulation is Supercharging the FinTech Sector

FinTech stocks are benefiting from what’s being called the "Trump trade" effect. Trump’s election-victory has made several sectors more attractive, like energy, cryptocurrency, and banking. Among these, FinTech too stands out as a sector that is expected to perform well under his administration.

 

The main reason? A potential shift in the regulatory environment.

Trump’s administration is expected to favour deregulation and adopt a more business-friendly stance, which could benefit FinTech stocks. This contrasts the Biden administration, under which the SEC maintained stricter sector oversight. Additionally, Trump has previously expressed interest in making changes to SEC leadership, including replacing the current Chair, Gary Gensler, who previously led crypto industry crackdowns. This idea has been supported by Elon Musk, the administration’s new efficiency leader, who aligns with Trump’s views on deregulation to spur innovation in these sectors. As this regulatory pivot unfolds, the five FinTech stocks below are placed well to likely thrive in the new regulatory environment.


Source: Bloomberg
Date: 20th November 2024
*Last Price: 19th November 2024


   

Robinhood has spent years battling regulatory hurdles, but Trump’s election win signals a potential turning point. This shift likely drove Robinhood’s stock up 40% since November 5th. A major factor is the potential for a new SEC Chair, as current Chair Gary Gensler had targeted Robinhood offering crypto products, accusing them of violating securities laws, claims Robinhood has denied. Republicans, including Trump, see these crackdowns as excessive, arguing they stifle U.S. innovation. A Trump administration could ease regulations, allowing Robinhood to expand its crypto offerings. For perspective, currently Robinhood lists only 19 cryptocurrencies vs Coinbase’s 263. Adding more, especially meme coins, could boost profits as they are traded more actively than Bitcoin & Ether. Lighter regulations may also draw more retail investors, as seen in Bitcoin’s recent rally past $93,000. On a new note, Robinhood’s app downloads on Apple and Google Play have surged recently, signalling renewed retailer interest. With a friendlier regulatory environment on the horizon, opportunity to offer more coins and tapping into a rising wave of retail participation could possibly be beneficial for the company.


Affirm is a tech company offering buy-now-pay-later (BNPL) services. During Biden's presidency, the Consumer Financial Protection Bureau (CFPB) increased scrutiny of BNPL companies, including launching a rule in July to tighten oversight. Trump could reverse this rule if he returns to office. The CFPB was much less active during his first term, which could work in Affirm's favor. Among BNPL stocks, Affirm is particularly impacted by U.S. regulations since 96% of its revenue comes from domestic markets. For comparison, PayPal earns only 42% of its revenue from the U.S., making Affirm more directly tied to changes in the U.S. regulatory environment.


Block, a tech company focused on financial services, could see gains under Donald Trump’s second term. Its crypto connection is clear—Bitcoin contributes 3% of its gross profits, and Block has been expanding into Bitcoin mining and self-custody wallets. Block has faced regulatory scrutiny from FinCEN and the CFPB over its Cash App and Afterpay services in the past. With less oversight expected under Trump, the company could rely more heavily on its Cash App. Block generates about 93% of its revenue domestically, making it highly influenced by U.S. policies. Block also has potential to join the S&P 500 index, a significant milestone. Of 48 analysts, 36 are bullish on the stock. Additionally, a business-friendly environment could boost small and medium-sized businesses, which make up a large portion of Block’s merchant base.


Bill Holdings also benefited from the broader rise in fintech sector. The company had struggled for years with slow growth in the SMB and software market, but with Trump’s election, investors now expect better prospects. Since the election, financial stocks, including Bill, have surged. A solid first-quarter earnings report, with an 18% revenue increase, further fuelled the stock’s momentum. Bill also raised its fiscal year guidance. Payments stocks are expected to do well driven by rising crypto prices and continued hopes for deregulation. Moreover, investors are betting that Trump’s policies will favor small-cap stocks. If this trend holds, it should benefit SMBs like those that make up Bill’s customer base.


Moneylion, a digital banking platform offering personal loans, cash advances, and investments, could thrive under Trump-era policies. His administration’s relaxed lending rules aimed to simplify credit access for businesses and consumers, directly benefit companies like Moneylion. Deregulation could enable faster loan approvals, making it easier for more consumers to borrow. For Moneylion, this would mean a larger customer base, higher loan volumes, and increased revenue.

Risks and Assumptions related to Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
The back-tested strategy might be at risk of data dredging, which is the behavior of testing multiple hypotheses at one time, resulting in picking the data that best supports your main hypothesis.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.
A trading strategy that performs well on multiple datasets from one market (e.g., forex) might not perform as well in another market (e.g., stocks).
The strategy may not depict accuracy in terms of spread changes due to the spread-widening events.

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