Financials fighting to find opportunities in the next digital revolution
Banks are fighting back against fintech companies by embracing innovation, poaching top tech talent, and changing their ways of working says Guy de Blonay, Head of Global Financials and Innovation.
The pace of inflation and whether it is transitory is the key question for the next 12 months and likely to dictate central bank policy as to whether to raise interest rates. I believe that although inflation is high, it is ultimately peaking and will recede next year as global growth slows. The outlook for financials is largely dependant on the policy decisions central banks take, chiefly – when they will raise interest rates, if at all. I don’t believe we will see any rate hikes before 2023 in the major developed economies as central banks will be equally tempted to remain dovish.
Looking more closely into 2022, the macroeconomic environment looks supportive for financials, especially in the US and Europe. If short-term interest rates remain low and longer-term interest rate expectation continues to rise, profitability will continue to increase, supporting financials. The economic recovery is underway, and the global banking system is turning from zero growth to sustained expansion with capital redistributions (by way of dividends) returning to investors. This means that the outlook for global financials appear healthy, buoyed by recent strong quarterly earnings results. Despite the strong share price performance we have seen from financials over the past 12 months, I believe that they remain attractively valued due to earnings rising faster than their share price rerating.
Big banks aiming to disrupt the disruptors
We are living in a world which is evolving even faster than the one we inhabited before the COVID-19 pandemic. This can be exemplified by a recent news headline; Ocado and Homebase have recently announced that they will give cashback to customers in bitcoin, facilitated by Mode, the open-banking firm. The fact that consumers will soon be able to get bitcoin as a cashback option demonstrates how mainstream the cryptocurrency is becoming within public consciousness. These structural changes taking place in society and the pace of innovation accompanying it present a plethora of opportunities within the global financials industry.
One of the most exciting ongoing themes for 2022 is fintech. Over the past few years, the traditional world of finance has been shaken up by a wave of fintech companies that have taken advantage of digitalisation to disrupt the incumbent financial stalwarts. However, going into 2022 this trend may include retaliation as the large incumbent institutions fight back by poaching top tech talent, joining the ‘agile’ way of working, and innovating, to claw back market share and better serve their customers.
The pandemic has greatly accelerated the trend to online banking and payment systems which we had already started to see pre-pandemic. The rate of financial innovation has reached warp speed proportions as the majority of consumer spending is now done online and cryptocurrencies beginning to permeate into mainstream consumer behaviour. Within fintech, I see some of the biggest potential within digital and cashless payments. There is still a long way to go in the transition from cash to cards and from in-store retail to e-commerce, and the opportunity exists to create large fintech ecosystems or “Super Apps” á la Ant Financial and WeChat Pay.
Beyond payments, a much broader number of segments such as InsurTech, PropTech, neobanks, digital wealth management and crypto-currencies are “crossing the chasm”, moving from the early adoption stage to the next phase of growth – the masses. In 2020, 66 million market participants had either traded a crypto-currency or used a blockchain application. This number has tripled to 260 million this year, and I expect it to multiply again in 2022 as the integration of cryptocurrencies into mainstream consumer behaviour continues.
I believe that the shift in consumer behaviour and the acceleration in the pace of financial innovation in the wake of the pandemic is structural rather than transitory. With the digitalisation of the financial services sector still in its infancy, I expect large potential upside for investors.
Read more about Jupiter outlook 2022
Outlook 2023: Environmental solutions are crossing a watershed
Outlook 2023: Bonds are back
Outlook 2023: Shunning predictions to focus on sustainable trends
Outlook 2023: Recession, but that needn’t be bad for bonds
Outlook 2023: Is the time ripe for emerging markets?
Investment outlook 2022: the value of active minds
As the start of another pandemic-era year beckons, investors and the world at large are once again faced with the need actively to balance both opportunities and risks.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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