Current Financial Crisis Filled with Mixed Outlook for the Future
Globally, it remains factual that COVID-19 has put emerging and developing countries' vulnerabilities under the spotlight once again. The pandemic has forced countries to deal simultaneously with health, economic, and humanitarian crisis. Unlike past crises, when support from the international community was decisive, the global environment is now less constructive for these countries and Namibia is not an exception. Advanced economies are, understandably, dealing with their own problems first and have shown an impressive response to save their own economies.
While COVID-19 pandemic was the story of 2020, how firms recover from the pandemic and thrive post-COVID-19 is expected to be the story for the investment management industry for 2021. Though investment management as a whole sustained less damage than some other sectors of the economy, revenues for investment management firms remained largely intact, but the people, the operations, and the technology used by investment managers were impacted. At the same time, market volatility and price movement intensely accelerated at the industry and asset class levels.
It is possible to argue that asset managers are already facing a new normal as a result of the Covid-19 crisis. Fund managers are taking a retrospective look at their strategies to re-evaluate their portfolios and ensure they are prepared for the months ahead, with high levels of volatility going forward. The Covid-19 crisis has caused a level of disruption not seen in recent memory, but it will lead to welcome shifts in the industry as managers innovate their processes and re-think strategies in light of this new normal.
Looking at the financial services industry as a whole, the negative impact from COVID-19 will not be uniform for all segments; rather, some sectors will fare worse than others. Insurers have benefitted from consumers staying close to home and subsequently reduced claims frequency in personal lines. However, several market researchers are arguing that the financial services sector will be hardest hit by so-called second-order effects. This means, the deteriorating credit quality of customers, along with the continued low-interest-rate environment, the pandemic, and its after-effects will be felt throughout over the next several years. This means the economic impacts of the crisis are still likely to affect the sector for years to come. I believe we have come to the end of a positive credit environment, and we will see increasing numbers of both personal and business defaults.
Furthermore, according to the market researchers, as we shift our attention to the future, it is important to note that although COVID-19 presents significant challenges, other fundamental factors such as evolving regulatory regimes will shape financial institutions significantly in the mid-to-longterm. This means there is a set of macro trends that financial institution leadership teams need to understand in order to properly plan for the future.
While post-COVID-19 brings many challenges and uncertainties, I believe these can also yield business opportunities for financial institutions. Challenges in the world's geopolitical setting and a difficult credit environment provide asset managers with opportunities to support clients in navigating these challenges, adjusting portfolios, and developing new investment opportunities. It is not arguable that crises tend to reveal weaknesses in business strategy and execution as well as show the merit of wise strategic choices on where to play and how to win. This includes for instance asset allocation and maximizing risk-adjusted returns and possibly asset manager consolidation. Consolidation in the asset management industry is a hot topic worldwide. According to the article published in the financial times, investors are looking for fewer firms to provide advice and they are seeking holistic conversations for a complete portfolio. This means consolidation in the sector is not about scale and cost-cutting, but it is about providing a broad conversation with clients. Other strategic options also include new opportunities for partnerships and better leveraging of technology.
However,, according to Leonard Mlodinow, a theoretical physicist, and author " You might be able to predict your future in the short term, but the longer you look ahead, the less likely you are to be correct." This means that everything above can be summed up by three words " time will tell".
Issued by: Trophy Shapange, Managing Director, Hangala Capital (Pty) Ltd