EY ITEM Club Forecast: Outlook for Financial Services Autumn 2013
Forecast for Asset Management
Buoyed by improving economic news, the solid performance of UK equities has made this a good year for UK asset managers so far. Firms enjoyed strong inflows during the first half of the year, although this tailed off during the third quarter. European equities, which have often lagged UK markets in recent years, are expected to continue to benefit from increasing risk appetite.
The sector’s growing confidence also reflects its undoubted potential for long-term growth. Our forecasts suggest that asset management’s contribution to UK GDP could grow from the government’s estimate of £12bn in 2011 to as much as £20bn by 2017. This prediction is purely based on economic and market fundamentals, and takes no account of the government’s new focus on asset management. If the improvements in tax, regulation and marketing outlined in the Treasury’s Investment Management Strategy can be implemented, this forecast could prove to be conservative.
Wherever the road ahead may lead, asset managers still face a number of potential obstacles. A widespread expectation in the industry for flatter markets during 2014 is a reminder that many underlying weaknesses have yet to be addressed. Loose monetary policy and other interim measures cannot alter the fact that the UK economy has barely reduced its dependence on leverage and property, or that financial structures in the Eurozone remain fundamentally unchanged.
So it is no surprise that financial markets continue to be disrupted by sudden reversals of sentiment. In fact ‘risk on/risk off’ is arguably the new normal for asset managers. Institutional investors are becoming more sanguine about market swings, but turnover among retail investors remains very high. Asset managers need to do more to help investors separate long-term potential from short-term volatility. After all, the challenges posed by domestic US politics, European restructuring and the withdrawal of quantitative easing mean that unpredictability will remain a feature of financial markets for the foreseeable future.