While Brexit may have spooked financial markets for much of this year, participants in the wealth management industry are relatively optimistic about the sector’s outlook in 2018, writes Saloni Sardana.
Neither Brexit nor interest rate hikes have dampened optimism about the private banking and wealth management outlook for 2018. However, consolidation could be a key concern.
Go deeper with GlobalData
Private Banker International asked a number of players how they thought the wealth management sector would evolve in the coming year.
Many said Brexit was unlikely to generate a significant impact. This optimism comes despite the tricky negotiations that will ensue between the EU and the UK in 2018 as part of the ‘divorce’ deal.
Brexit
In terms of the possible impact of Brexit on the UK economy, UBS wealth management economist Dean Turner said in November that UBS’s assumptions are conditional that the UK will move to the second stage of the Brexit negotiations.
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By GlobalDataUBS’s prediction proved correct, as on 8 December, the UK and EU secured a deal, paving the way for both partners to proceed to the second stage.
Turner says: “We do not think the Irish border [issue] will be a stumbling block,” adding that even a ‘soft Brexit’ is unlikely to be enough to stop a slowdown of the UK economy.
Thomas Schneider and Emmanuel Lumineau, co-founders of real estate investor BrickVest say:
“Despite investors seemingly focusing away from the UK, there has been an abundance of international capital flowing into real estate. Almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years, mainly because of a lack of alternatives.”
According to BrickVest, while the UK has fallen behind Germany as a preferred choice for real estate investment, interest in the UK’s real estate sector has been increasingly high.
However Liz Bottomley, MD at private bank Arbuthnot Latham, takes a more neutral stance on Brexit. “Of specific note for 2018 will be the impact of Brexit, which is as yet unknown but is likely to create structural changes in the way the current UK economy functions.” According to Bottomley, the impact of Brexit is not known at this stage, with potential for both economic damage and benefits.
UBP’s head of UK branch, Martin Fricker, says: “From a business perspective where [Brexit] is concerned, it is not having a major impact on UBP London. [This is] because we are a branch of Switzerland and we were never able to passport into Europe.”
Macroeconomics
Institutions are divided on how they expect the country’s macroeconomic policy to shape out, but most are expecting interest rates to rise worldwide.
The Bank of England raised interest rates in November from 0.25% to 0.5%, the first increase in the country in almost a decade, prompting speculation that more rises may be expected.
UBS says it expects central banks to tighten monetary policy, and also raise interest rates in 2018. The Swiss bank says this would present opportunities, particularly in the financial services industry as long as interest rates do not rise significantly.
It, however, warns that as a consequence of higher rates, investors should expect higher volatility, dispersion of returns from individual stocks and also higher correlations between equity and bonds.
However, BrickVest thinks interest rates will “stay at historic lows until at least 2019, in order to help financial markets adjust”. This is because the European Central Bank is expected to cut its quantitative easing asset-purchasing programme from €60bn ($70.76bn) to €30bn.
Bottomley says: “The management of net interest income margin will become critical as interest rates gradually begin to rise, and private banks will need to manage the issues associated with rising deposit costs.”
Regulatory burden
Most financial institutions express concern about forthcoming regulations set to flood Europe’s financial markets. MiFID II is due to come into force on 3 January 2018.
However, even though the deadline to be MiFID-compliant is looming, most businesses do not feel ready or are sceptical about its impact on their operations.
“MiFID II will radically change the regulation of EU securities and derivatives markets, and will significantly impact the investment management industry,” warns BrickVest.
“It will have a significant impact for wealth and asset managers on profitability, product offering and their distribution across Europe. [It will also impact] operating models, pricing and costs.
“As a consequence we expect MiFID II to widen the gap between global, infrastructure-based players and local players.” He added that crowdfunding platform may be affected by these changes.”
Others have similar views. UBS’s chief investment officer in Spain, Roberto Scholtes, says: “Regulations like MiFID II are changing completely the environment [of the] financial system in Spain. This will force smaller [companies] to consolidate.”
Bartosz Golba, head of content at GlobalData Wealth Management, thinks the combination of MiFID II, the General Data Protection Regulation that comes into force in May 2018, and the Common Reporting Standard means regulation could be one of the most important areas for the industry in 2018.
While Scholtes says MiFID II will force smaller players in the Spanish wealth market to consolidate, institutions identify other factors that will prompt market consolidation.
“I believe 2018 will be characterised by more exits from the private banking business that represent small contributors to over profitability of bigger players. I forecast Standard Chartered Bank and Deutsche Bank will exit the arena,” says Simon Hopkins, chief executive at Milltrust International, a global investment organisation.
Hopkins adds there will continue to be an increase in small external asset managers and in tech savvy platforms that offer consolidated, digitised services.
“[While] 90% of fintechs will go bust, a small number of funds will revolutionise the industry as true disruptors. The bigger banks are hamstrung in their efforts to grow as various markets are simply off limits, irrespective of the provenance of the wealth and the calibre of the clients, due to cross-border compliance,” he says.
Regional preferences
Despite recent geopolitical tensions on the Korean Peninsula, wealth management players are optimistic about growth prospects, specifically in the Asia-Pacific region.
“We think Asia is the most exciting region in emerging markets. It offers a range of opportunities from China, South Korea, India and Taiwan,” says Carlos Hardenberg, executive vice-president at Templeton Emerging Markets Group.
Hopkins adds: “I anticipate that funds will continue to flow into private banks, as wealth per se continues to grow, especially in Asia.”
UBS’s Turner says: “Extreme political scenarios, principally a US-North Korea conflict, remain a low-probability risk for markets. However, politics may have a significant local impact.”
Hardenberg is bullish on opportunities in Latin America: “We’re finding opportunities in Latin America.
“Brazil has just emerged from a prolonged recession and faced several challenges, including high unemployment and huge corruption scandals, but we are generally positive on the possibilities within that market given the new emphasis on reform efforts. We are also finding appealing investments in other countries in Latin America, most notably Argentina.”
He is optimistic about frontier markets across the world, particularly in Asia, and Latin America: “We view these markets as offering the opportunities for tomorrow, ideally for longer-term investors with a time horizon of over five years.”
But BrickVest warns of price corrections resulting from rising tensions between the US and North Korea.
In conclusion, private banks and wealth managers must adapt to technological change and prioritise providing tech-savvy digitised advice, otherwise the combination of forthcoming regulatory changes and cheaper fintech solutions could force many to exit the private banking space.
With the right strategy, 2018 offers more benefits than losses.
