Tough time ahead for financial services

BY Richard Summerfield

As higher inflation impacts UK households, and as a decline in real wage growth continues to take hold, the financial services sector is in line for a tough 2018, according to the latest EY Item Club Outlook for Financial Services.

The report notes that inflation will peak at around 3 percent in the second half of the year, while real household disposable incomes are forecast to decline by 0.2 percent in 2017 - the first drop since 2013. This fall in household income is likely to decrease the demand for mortgages and other 'big ticket' items and general insurance in 2018.

The combination of higher inflation and decreased real earnings will likely lead to an increase in consumer credit next year, as households look to compensate for any shortfall with increased borrowing. The amount of consumer loans will grow from £204bn in 2017 to £206bn in 2018 before rising to £212bn in 2019 and £218bn in 2020, according to the report.

EY UK financial services managing partner Omar Ali said: "Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country. Business lending, mortgage lending and general insurance look set to be the hardest hit. Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit."

Indeed, the pressures applied to consumer spending in 2018 could dramatically affect the UK’s short term economic prospects. With consumer spending accounting for 60 percent of the UK’s GDP, any significant reduction in consumer spending could have a knock on effort on GDP. With pay growth expected to remain subdued in the short term at least, real earnings are expected to fall by 0.5 percent this year.

The report predicts business lending will rise to £435bn by 2020, but only if the UK is able to strike a transitional deal during Brexit negotiations with the EU. Mortgage lending, however, will fall to £1.1 trillion in 2018, compared to a forecast £1.2trillion in 2017, though it is expected to climb slightly in 2019 and 2020.

Report: EY ITEM Club Outlook for Financial Services

Global deal volume reaches $705bn

BY Richard Summerfield

Global mergers & acquisitions activity has been on the up, according to Dealogic, with consecutive year-on-year increases for the last four years. And 2017 may prove to be even busier. There have been $705bn worth of deals announced in the year to date, marking the first time since the onset of the financial crisis that the $700bn mark had been surpassed in same YTD period.

One of the major forces driving activity has been firms pursuing cross-border deals. Such transactions reached $288.4bn in 2017 YTD, up from $144.9bn in 2012 and the highest YTD level since the $324.7bn recorded in 2007. The US accounted for $95.8bn worth of overseas acquisitions, the highest YTD level on record. The $31.4bn offer for Swiss biotech company Actelion by American healthcare group Johnson & Johnson is the largest announced deal o date.

From a sectoral perspective, the oil & gas industry saw the most activity, with a record $96.7bn worth of announced deals to date. Of this total, $52.4bn and $9.4bn occurred in the domestic sectors of the US and Canada respectively.

The second most targeted industry was the healthcare sector, with $95.9bn,and technology was third with $87.1bn.

Morgan Stanley topped the adviser rankings in the YTD. Though the firm’s share of total deals fell from 22.0 percent to 20.2 percent, it was involved in $142.7bn of deals, far outstripping Bank of America Merrill Lynch, which had an 18.5 percent share – up from 14.4 percent in 2016 – and a total deal value of $130.3bn. Citi Bank advised on 17.6 percent of transactions YTD, up from 13.2 percent in 2016 for a total value of $123.9bn. Goldman Sachs, which topped the global advisory rankings this time last year, suffered the most in the early part of 2017. Last year the firm advised on nearly a third of deals; this year, however, it fell to fourth place, with its share of deals nearly halved to 16.7 percent, having been engaged on $118.2bn of transactions in the YTD.

Report: Dealogic M&A StatShot

Global ETF AUM to top $7 trillion by 2021

BY Fraser Tennant

Exchange Traded Funds (ETFs) are expected to grow exponentially over the next five years, with global assets under management (AUM) set to top $7 trillion, according to a report released this week by PwC.

In ‘ETFs: A roadmap to growth’, PwC predicts that the ETF market will achieve further significant growth through entering new markets, expanding distribution channels and asset classes.

The report’s main findings show that: (i) the North American ETF market is expected to grow to $5.9 trillion by 2021 (a 23 percent cumulative annual growth); (ii) the European market is expected to grow 27 percent annually (reaching $1.6 trillion AUM by 2021); and (iii) Asian firms expect ETF AUM to reach $560bn by 2021 (an 18 percent annual growth rate over five years).

Furthermore, the top three segments that are driving this growth globally are financial advisoes, online platforms and retail investors (online platforms having overtaken wealth management platforms to take its place within the top three).

Also found to be a factor in the growth of ETF markets is the advances seen in technology and data analytics, which have encouraged new product creation and driven an evolution in distribution channels. In addition, says the PwC report, digital technology and Big Data will continue to enable successful firms to improve decision making processes, streamline costs and transform investor relationships.

“The global ETF market has a bright future ahead but the next few years will not be without their challenges," said Nigel Brashaw, global ETF leader at PwC. “The ETF market continues to be increasingly crowded, particularly in North America and Europe, where both maturity and momentum continues to dominate.

“Many firms are looking to expand their global footprint which presents challenges as well as opportunities with respect to local and global regulations, tax laws and establishing working relationships with distribution partners.”

Another key challenge and one cited as a major obstacle to growth by 47 percent of survey respondents is that of increased regulation.

Mr Brashaw continued: “Firms across the globe that wish to take advantage of the booming ETF industry will need to invest in investor education, differentiated products and strong distribution channels. There is plenty of competition in the sector and we expect the industry to grow at a healthy and accelerated rate.”

The PwC report surveyed executives (more than 70 percent of the participants were ETF managers or sponsors from approximately 60 firms around the world) during 2015 using a combination of structured questionnaires and in-depth interviews.

Report: ETFs: A roadmap to growth