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
Finding income in Asia and largely avoiding China
Fed and inflation: missing the wood for the trees?
CoCos: The right instrument in a troubled world?
Has the outlook changed for emerging markets?
How to prepare for the next growth shock
The value of active minds: independent thinking