EY Eurozone forecast: outlook for financial services

Autumn 2015

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Welcome to the Autumn 2015 edition of the EY Eurozone forecast: outlook for financial services.

Andy Baldwin, EY Head of EMEIA Financial Services
“Welcome to the final edition of our Eurozone forecast: outlook for financial services. We've been mapping the outlook for the Eurozone financial services industry for four years now — a period that's seen unprecedented activity, volatility and change in Europe's Financial Services landscape and some major steps to recover from the financial crisis.”
Andy Baldwin
EMEIA Financial Services Leader
Read Andy's Forecast Overview here

Our autumn 2015 outlook for financial services sees firms responding to better export and consumer demand to increase capital spending. Boosting GDP growth to 1.8% in 2016, marking a high point of recovery. Growth will then begin to ease as the boosts from lower energy prices and a weaker euro fade.

Banking outlook

Our economic outlook highlights how easing credit conditions and a return to growth in new lending to non-financial businesses are positive for the Eurozone economy – enhanced still further by the prospect of net loan growth rising for the first time this year.

Read the full banking viewpoint from Marie-Laure Delarue, EMEIA Banking & Capital Markets Leader.

Insurance outlook

With the low interest rate environment set to remain in place for the next two or three years, investment yields will remain limited – especially given that 70% to 80% of Continental European investments are in bonds. At the same time, insurers in some countries are facing a need to pay high guaranteed bonuses to policyholders, putting further strains on their already depleted reserves.

Read the full insurance viewpoint from Andreas Freiling, Insurance Leader.

Wealth & asset management outlook

While some observers have interpreted the volatility and equity price declines seen over the summer as the first signs of a renewed crisis in global markets, the reality is much less dramatic. What's happening is more a process of correction and rebalancing than a slide back towards 2008-style turmoil.

While some observers have interpreted the volatility and equity price declines seen over the summer as the first signs of a renewed crisis in global markets, the reality is much less dramatic. What’s happening is more a process of correction and rebalancing than a slide back towards 2008-style turmoil.

While the stock market gyrations in China have grabbed global headlines, the fact remains that China’s markets are still ahead of where they were at the start of the year. And the devaluation of its currency was something China had wanted to do for some time, with the falls in stock prices providing the opportunity for the move, rather than being the root cause.

Meanwhile, the correction in European markets is exactly that: a correction that was overdue. Going forward, continuing low interest rates in the Eurozone are likely to see an ongoing move from cash, back into the markets in search of returns, reflecting a growing awareness that leaving assets in cash is not the route to long-term wealth creation.

However, concerns remain – not least around future liquidity, as more illiquid investments become the best option for higher yields. As well as property, other relatively illiquid investments such as infrastructure and credit are coming increasingly into play.

Long-term infrastructure projects offer good yields but are illiquid over the project term; and credit is an evolving asset class that can drift into the shadow banking space, with asset managers often regarded as an easier source of credit than the banks. Meanwhile, the continued importance of multi-asset strategies in Eurozone fund inflows reflects the desire to spread risk across asset classes.

Looking more widely across the world, one of the biggest disappointments of the current environment has been the heightened volatility and relatively poor performance of emerging markets – a factor that means the shift of assets from cash back into the markets is focusing mainly on mature markets. With the fears over China being overplayed – it’s increasingly evident that viewing the emerging markets as a homogenous group is an approach that’s no longer fit for purpose. While European emerging markets have not performed as well as hoped, some in Asia in still powering ahead.

In the long run, the question may be whether China should still be designated as ‘emerging’. It’s certainly hard to think of any other emerging market where a burst of volatility would have had such profound impacts on other markets around the world.

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Contact

EY - Andy Baldwin

Andy Baldwin

EMEIA Financial Services Leader
+44 (0) 207 951 1315

EY - Marie-Laure Delarue

Marie-Laure Delarue

EMEIA Banking & Capital Markets Leader
+33 1 46 93 73 21

EY - Andreas Freiling

Andreas Freiling

EMEIA Insurance Leader
+49 6196 996 27267