EY ITEM Club

Outlook for financial services
Winter 2016-17

Wealth & Asset Management forecast

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Finding growth in a slower economy

The asset management sector will no doubt take heart that the economic outlook has brightened since our last report, but it is not plain sailing. Forecast GDP growth of 1.3% remains weak compared to the rate seen in the last three years and will provide an ongoing challenge, tempering the growth in AUM.

However, a changed economic outlook also brings opportunities. Whilst inflation may prove to be the biggest drag on economic activity, it could prove positive for asset managers.

 
Gillian Lofts
Partner, UK Wealth & Asset Management Leader, EY UK
Read Gillian’s full forecast viewpoint

Finding growth in a slower economy


EY - Gillian Lofts
Gillian Lofts
Partner,
UK Wealth & Asset
Management
Leader,
EY UK

The asset management sector will no doubt take heart that the economic outlook has brightened since our last report, but it is not plain sailing. Forecast GDP growth of 1.3% remains weak compared to the rate seen in the last three years and will provide an ongoing challenge, tempering the growth in AUM.

A changed economic outlook also brings opportunities. Whilst inflation may prove to be the biggest drag on economic activity, it could prove positive for asset managers. Savers’ appetite for risk is likely to increase, influencing asset allocations, as they look to equities and bonds to protect against inflation eating into cash savings. ↓ [... more]

Rising household wealth will encourage savers

The sector benefited from a climb in UK household wealth last year. It increased by 8.6% — an 11-year high. Pension funds, which account for around half of total financial wealth, were the key driver in this increase — on the back of rising bond and equity prices, plus auto-enrolment. Steadier, but still significant, predicted growth of 5.7% in household wealth this year will support investor sentiment towards asset management, and therefore savings inflows.

Nevertheless, rising inflation will squeeze households’ spending power and ability to save in the longer term. With the UK still a nation of spenders, there is still much the industry can do to educate consumers and incentivise saving with new solutions and services.

Slow economic growth and rising inflation will see steadier growth in AUM…

Helped by the strong performance from the UK FTSE, and the fall in sterling — which indirectly boosted the value of UK equities — 2016 delivered a far better year than expected for AUM. Total AUM grew by 12.3% to just over £1t1, well up on the previous year’s 7.7%. Despite this, we’re still expecting a slowdown over the next few years as inflation rises and the economy slows. AUM are forecast to rise by 5.1% this year, reaching £1.24t by 2020.

… but also spur investors to shift asset allocation to chase returns

As investors seek to maximise their returns in the face of rising inflation, we will see a shift in asset allocation. The trend of equities being slightly more attractive than bonds continues, helped by a brighter outlook for the global economy and in particular, for the US. This will see the proportion of the sector’s assets held in bond funds fall from 15.3% last year to 13.6% by the end of the decade.

UK equities benefited heavily from the depreciation in sterling

2016 saw the value of equities under management rise by 9.8%, a three-year high. The boost to the sterling value of the overseas earnings and assets of UK corporates, and the cut in interest rates to a historic low 0.25% were amongst the factors behind this increase. A smaller rise in the value of UK equities in 2017 is predicted to lead to equity funds growing by 6.5% this year. This reflects expected weaker economic growth, and the effects of the depreciated sterling beginning to ease.

By contrast, assets held in money market funds are set to fall back this year, following strong growth in 2016. Multi-asset funds are also set to see growth stutter in the short term, as the improved global outlook and strong performance from equities ease these funds’ recent market outperformance.

Brexit unknowns provide pause for thought…

The uncertainty surrounding Brexit still poses a risk to growth, and its potential impact on the industry’s pan-EU manufacturing and distribution model is a key concern. However, Brexit is not the only geopolitical risk on the horizon. Elections in Europe, a new approach from the new US administration and changing dynamics between global superpowers all have the potential to weigh on the growth. Scenario planning, therefore, remains a priority for asset managers.

…as asset managers seek alternative routes for growth

Longer term, challenges abound for both asset managers and investors. With an uncertain economic and political backdrop, it will be hard for them to achieve more than 4% growth unless they broaden their horizons. For instance, the performance of the gold market may provide a source of long-term growth, with the London Bullion Market Association predicting prices to rise in 2017. The growth of the European private lending market may provide opportunity too, with it expected to reach 15% of SMEs’ financing by 2020, up from 6% in 2015.

Disruptive technologies and new products should also provide new routes to growth. The FinTech revolution, for example, continues at pace seeking to provide new ways of operating, interacting and delivering access to new investment horizons.

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Highlights:

Faced with a low-growth economy, global geopolitical uncertainty including Brexit, and regulatory pressure, now is the time for wealth and asset managers to find new routes to investment growth and build efficiencies.

  • Total AUM will climb by 5.1% this year to £1.1t1, compared to 12.3%2 rise in 2016.
  • Equity funds will continue to grow in 2017, with equity AUM to climb 6.5%, compared to 9.8% growth in 2016.
  • The share of the sector’s AUM in bonds is forecast to fall from 15.3% in 2016 to 13.6% at the end of the decade.
  • Multi-asset funds are set to see slower growth in 2017, but will reach £192b by 2019, a 25% increase compared to 2015.