After the fall of the financial markets following the dramatic events of the last few years, such as Covid-19 which brought the world's economic machine to a halt, multiple company bankruptcies, the economic forecasts of the largest banks and financial institutions swept aside, the financial markets making volatility and uncertainty their best friends, as well as wars, it is clear how dependent asset managers are on events that no one could have predicted.
Innovation and Evolution of global financial markets are the watchwords of 2023. How will asset managers have to adapt to tomorrow's world?
The last year was full of twists and turns. Indeed, the Global Market reached a peak inflection point in 2022 with geopolitical tensions, wars and supply issues resulting in a complete reshaping of macroeconomic conditions around the world and the way investors interact with financial markets.
This reshaping has had an impact on most asset classes. Indeed, the S&P 500 declined by 20.6% over the first 6 months of 2022, Equities faced a decline after reaching their highs in 2021. As for Fixed-Income, which is normally a way to hedge a portfolio against market reversals, we have seen a 10% decline over the first 6 months of 2022.
Yet, the asset management industry has started 2022 by breaking many records!
Indeed, the global assets under management industry achieved a historical peak of $126 trillion, accounting for 28% of total global financial assets. This represents a significant increase from the 23% recorded a decade prior, driven by robust market appreciation and favorable net flows from the previous year.
As a result, the revenue pool of the industry has realized an impressive expansion, reaching a total of $526 billion, which represents an increase of over a double from its size a decade ago.
However, contrary to the dynamic that was emerging for 2022, the market downturn has caused a net reversal in market dynamics. Uncertainty, coupled with high volatility, caused their dislocation.
Based on Morningstar's figures on Long-Term Open-End Fund Flows, North America including ETF(s), Open-End Mutual Funds but excluding Funds-of-Funds we see a complete market reversal when comparing the same months in 2021 and 2022. For instance, April 2021 shows a positive outcome of $128 Billion while in April 2022 $83 Billion came off the table.
More, the Morningstar's Annual and First-Half Totals by Asset Class, North America gives us a striking result. The trajectory trend for fixed income has changed from a positive flow in 2021 of $621 billion to a $219 Billion negative reversal during the first half of 2022.
These results reflect the effects of investors' uncertainty on the markets in the face of a global situation marked by a large question mark. They, therefore, prefer to be more cautious in order not to lose more than they have already lost in markets where price forecasting is impossible.
Indeed, who could have predicted that on Monday, December 12, 2022, China would significantly ease its anti-covid policy? That on January 8, 2023, Beijing would abandon the mandatory quarantine? And that the Chinese power would suddenly open its borders to international trade again?
The markets have already had to deal with many disruptions because after 3 years of closure to the world, this reopening has strongly revived the demand for goods, services and raw materials from a country that buys a fifth of the world's oil, more than half of the world's refined copper, nickel and zinc, and more than three-fifths of iron ore.
Based on Bloomberg data, we can see the percentage variation in metal prices after China's reopening announcement. Between October 2022 and January 2023, the variation of Copper and Zinc prices have varied by more than 20%. For Tin, over the same period, we are witnessing an increase of almost 80%!
These examples should inspire asset managers to evaluate new innovative strategies for mitigating market risk in the face of unpredictable events.
Because, even if it is impossible to predict market prices, we can nevertheless reduce the risks by better diversifying the assets in the portfolios.
How does technological evolution allow Asset Managers to reduce market risks today?
As the world becomes more and more digital and interconnected, the financial system is changing rapidly. One of the most notable changes is the rise of the Metaverse, Web 3.0 and Cryptocurrencies. These new technologies are providing a more decentralized and transparent financial ecosystem.
The Metaverse represents a visionary virtual reality landscape
brimming with real-world potential and opportunities.
Indeed, this term refers to a virtual world where users can interact with each other, buy and sell virtual goods, and even earn virtual money. Although this concept has been around for decades, it has only gained momentum in recent years. With the advent of virtual reality and augmented reality technology, driven by Facebook, Microsoft and HTC for instance, the metaverse has the potential to become a massive global market, similar to the internet.
But to make the Metaverse work in the best possible way, it must be supported by a new generation of the Internet represented by Web 3.0. In this new generation, the focus will be on a more decentralized, secure, and user-centric web. This new version is powered by blockchain technology, which allows for more secure and transparent transactions.
For the economic potential of the Metaverse and Web 3.0 to
develop, it is necessary to have a currency adapted to their
That's why cryptocurrencies are poised to occupy a central position in the forthcoming economy. Being decentralized and secure digital currencies, they leverage the power of blockchain technology and with a growing popularity as a means of value storage and transfer, as well as a payment alternative, they are set to play a critical role in the world of tomorrow.
So how can asset managers incorporate these technologies into their portfolios and thereby reduce market risks?
Asset managers can incorporate these cutting-edge technologies into their portfolios by investing in companies involved in these new markets. These may include companies developing virtual and augmented reality technologies, blockchain-based projects and platforms, or directly investing in cryptocurrencies.
By placing an investment in these companies and/or in
cryptocurrencies, they can therefore exploit the growth potential
of these emerging technologies and limit the risk associated with
unexpected market movements by diversifying portfolios with assets
that do not necessarily have a direct correlation to traditional
By doing so, asset managers can limit the risk of massive losses in the event of market shocks.
It would even be possible to imagine the implementation of themed portfolios with the projects behind the component cryptocurrencies as the flagship.
Indeed, due to multiple different projects, cryptocurrencies can at the same time be created around cinema like KlapCoin based on the Tezos blockchain, around the Metaverse like Decentraland MANA Axie Infinity, The SANDBOX, or even ecology via SolarCoin which aims to value solar energy production.
For example, an asset manager could decide to build a portfolio with an ecological theme, bringing together traditional assets with SolarCoin as a flagship digital asset to signify the green nature of the portfolio.
It should be noted that these assets are not risk-free. It is therefore crucial to do a thorough analysis before including them in a portfolio.
Given the recent scandals in the crypto industry, such as those involving FTX, Terra Luna, and the substantial drop in Bitcoin value, it's understandable to have concerns and doubts.
However, it's important to note that several factors could alleviate these fears.
Firstly, the introduction of regulations like MiCA will help
regulate the crypto market and provide investor protection.
Secondly, it's worth remembering that Bitcoin has historically been a highly profitable asset, with an annualized return of 230% between 2011 and 2021, outperforming the Nasdaq 100 index over the same period.
Finally, it's important to keep in mind Bitcoin's current market value, which started in 2013 at around $13 and is now valued at approximately $16,500 in 2023.
Moreover, the underlying risks of investing in firms involved in the Metaverse and Web 3.0 ecosystem such as technical glitches, security breaches or advancements that may render current technology outdated can be resolved by the acquisition of specialized expertise to understand the complex technical architecture and dynamic evolution of the various projects that companies are developing.
Thus, by strategically incorporating digital-related assets into a portfolio that leverages traditional assets with a medium to long-term investment strategy approach, asset managers can exploit the full potential of these innovative technologies while effectively reducing their market exposure risks.
Indeed, thanks to their respective evolution and the dynamic that arise, the potential returns from investing in Cryptocurrencies, the Metaverse, and Web 3.0 have a strong probability of compensating any potential future losses under changing market conditions.
This conditioned outcome is dependent upon effectively addressing the technological and analytical operational challenges involved in implementing digital assets in investment strategies because, without proper consideration, the transition into the digital investment world may turn out to be difficult.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.