Risk aplenty

Political, technological, regulatory, competitive, pandemic-related and much more; risks are all around us, writes industry veteran John Gubert, who identifies a new, broader and larger market place, albeit a far more complex, competitive and risky one.

The UK has relaxed restrictions despite rising COVID cases and high infection rates. Australia, with few infections and a relatively modest level of cases, goes into serious lockdown. The former is seeking to live with COVID whilst the latter appears to be adopting a zero-risk policy.

Investors across the world appear to be UK like rather than Australian. There is a huge list of risks that they believe to be discounted in share and bond prices as well as new investment types despite the fact that indices are at historic highs relative to economic and corporate performance, whilst new investment models mostly lack the key driver to investment, namely profitability.

What are the risks? One can identify many. There is the level of markets across the world and their increased volatility, allied to historically low and sub inflation rate bond yields. There is the likely battle between the traditional value-based investment model and the millennial future value technology driven one. We have the highest level of political risk since the days of the Cuban Crisis (JFK presidency) and a plethora of regulatory refinements that will increase the legal and compliance grip on business. And, over and beyond the risks of pandemics, other event risks overhang markets. On the technology front, the never-ending flow of new developments risks by major providers creating a standardisation crisis that the doughty legacy platforms of many market players will not be able to overcome.

And around this risk scenario, demand is changing and the leaders are putting greater distance between themselves and the industry laggards. Whilst changing demand from millennials, generation Z and their successors are likely to leave gaps for new entrants that could impair future market profitability.

Against this background, I have sought to come up with a 2030 market scenario. And like all budding futurists I have sought to be radical in my approach. But, thinking back over the changes we have seen in the two decades of the current century, radical is reasonable.

First of all, we will have a crisis of confidence in the markets during the decade. I do not know how many of the wonder stocks will crash; I am unclear how many trusted blue chips will fail due to being wedded to legacy business models in a period of accelerating change; I believe speculation driven by the general public through an increasing number of trading intermediaries will create bubbles and lead to margin failures of increasing magnitude. And I believe that quantitative easing and cheap money will be replaced by a more balanced approach to global economies. The shake out will be healthy longer term but the road to survival will be rocky and benefit the value investors in dynamic companies and those who have been prudent about leverage.

Political risk will grow with the PRC becoming the dominant global player as the US focuses on domestic issues rather than saving the world. The EU will become more protectionist and the UK will meander between the different blocs. Terrorism will get more sophisticated with cyber crime as the main challenge, both in terms of its ability to create monetary loss and domestic disruption. This will impact global investment with a trend away from the OECD nations towards PRC and its regional neighbours as well as other emerging markets rich in mineral or agrarian wealth.

Regulation will become ever more intrusive as the authorities, fearing the potential consequences of market disruptions, add controls. They will demand ever more data, but, as often happens currently, this will serve to analyse events post a crisis moment rather than prevent the crisis itself. In line with the internal focus of their political masters, global cooperation between regulators will reduce or, at best, stagnate with areas of potential regulatory opaqueness occurring in the major investment markets of the future which in turn are those with the most domestic focused regulatory systems.

The market will be obsessed with pandemic risk and lockdown events, travel constraints and disruption to the supply chains will become a way of life. Over and above pandemic risk and terror risk, markets will be wary of technology risk, both cybercrimes related but also connectivity linked. Markets will look at liquidity risk with the abandonment of risk free and plentiful money creating genuine squeezes which threaten any over leveraged institution; and the concept of over leveraged will be far south of the levels acceptable today.  And asset price risk will also become a potential negative factor. Quite simply, event risks mean that markets will return more to the status quos of the twentieth century after their boom periods and sectoral love affairs of the current millennium. However, instrument focus will change with new opportunities (and risks) in the cyber security and synthetic instrument spaces.

Over and above cybercrime and connectivity risk, technology advance will be faster than the markets can accommodate. I question if the distributed model will supersede the concentrated one, for in times of uncertainty market participants will put ever greater value on trusted intermediaries running well managed environments. Safety of assets is as important as price performance, if not more!  But the investment needed to provide such an environment can only increase and that favours the larger players or those willing to radically change their business models and enter new non-competitive ventures with their peers. There will be fall outs and some regional players will become asset gatherers feeding their product into the operational bowels of the major processors. There will be new entrants, especially on the retail side and one can expect asset gathering and product distribution to change radically as a hi-tech new generation, well ahead in their thinking by comparison with the traditional suppliers, seek a totally different product approach and risk profile to their elders.

It will be interesting times and. just as the list of leading banks change from decade to decade, so the market shares of the current leaders will change in the decade to come. But the likely good news is that revenues will be drawn from a broader and larger market place, albeit a far more complex, competitive and risky one.