- Value of UK asset manager assets under management (AUM) grew by a projected 3.6% to £1.5t in 2020, despite economic turmoil amid COVID-19
- In 2021, UK AUM value is forecast to rise 7.1% to £1.64t, subject to a successful vaccination rollout, relaxation of lockdown restrictions and economic rebound
- Household saving ratio forecast to average 11.5% over 2021-24, compared to 6.5% from 2016-19
- The growing appetite for a “green recovery” may accelerate the rise of ESG investing
Despite the economic shock from the COVID-19 pandemic, the value of UK asset manager AUM rose last year, with further growth forecast for 2021, according to the latest EY ITEM Club for Financial Services Forecast. Although down on 2019’s 11.6% gain, UK AUM grew by a projected 3.6% to £1.5t in 2020 and is expected to rise by 7.1% to £1.64t this year, supported by a Brexit deal and assuming a successful initial vaccination rollout and a relaxation of lockdown restrictions from Q2 2021, resulting in a rebound in economic activity.
In the second half of 2020, the UK benefitted from the global market recovery. UK bonds performed strongly, supported by ultra-loose monetary policies from the Bank of England and other central banks, and the relative weakness of the pound boosted the value of overseas assets held by UK asset managers. However, UK equities substantially underperformed their global peers - the FTSE All-Share Index ended 2020 12% down on the level a year earlier, compared to a 16% gain for the US S&P 500 and a 3.6% rise in Germany’s DAX index.
Gill Lofts, UK Head of Wealth & Asset Management at EY, comments: “Despite the pandemic-related economic shock, the value of UK asset manager AUM increased last year as the UK shared in the H2 global markets bounce-back, and further growth is forecast for 2021, boosted by agreement of the Brexit deal. The level of growth forecast for this year, however, is contingent on a number of factors playing out, including a successful vaccine roll out, which would lead to a gradual relaxation of restrictions and ultimately the reopening of the economy. Asset managers have ridden this period of economic downturn relatively well, and while the outlook is brighter than it is for many other sectors, the path ahead still has many challenges to navigate, and much remains uncertain.”
UK equity values look set for growth
UK equities, which at the close of 2020 were trading at a significant discount to global peers, are forecast to rise in value this year, particularly as the risk of a no-deal Brexit has been removed. However, a stronger pound recently will partly offset this.
A brighter economic outlook could prompt a greater appetite for risk, supporting valuations for alternative, riskier asset categories. However, the structural effect on demand for property from the shift to home working is likely to overall dampen demand in this sector. And the disappointing performance of many UK hedge funds during the pandemic relative to index-funds is likely to weigh on inflows.
Mixed outlook for bonds
The prospects for the bonds market look mixed. An economic recovery will most likely rule out central banks loosening monetary policy further - including the Bank of England cutting interest rates into negative territory - which will reduce the relative attractiveness of fixed-income assets. In addition, the policy stimulus provided by Governments and central banks may raise fears among investors of the return of inflation, prompting a shift into riskier assets. However, continued large-scale bond purchases by central banks - for example, the Bank of England has committed to purchasing an extra £150b of gilts this year - will support bond values and counter upward pressure on yields.
Meanwhile, the social impact of the COVID-19 pandemic and ambitions for a ‘green recovery’ should continue to promote the rise of environmental, social and governance (ESG) investing.
Household balance sheets expected to emerge from the crisis in good shape
Government income support - through measures such as the Furlough Scheme - means that household balance sheets look largely set to emerge from the COVID-19 pandemic in a strong position. While the household saving ratio has fallen back from the record peak of 27.4% recorded in Q2 2020, it’s expected to have averaged 17.5% last year, exceeding the previous peak of 14.3% in 1993, and meaning households have greater access to cash than before and more spending power – although currently fewer avenues to do so. Over January-December 2020, households added £150bn to bank deposits, almost three times the extra £55bn saved in 2019. Additionally, in the year to Q3 2020, household gross financial assets reached the equivalent of 492% of incomes, the second highest on record.
Household savings should fall back as the economy reopens and consumer confidence revives. However, many people have now experienced two major economic shocks in 12 years, and according to the EY ITEM Club, the pandemic in particular, could encourage a greater degree of cautiousness in spending. The EY ITEM Club forecast sees the household saving ratio averaging 11.5% over 2021-24, compared to 6.5% from 2016-19. Despite this, the possibility that taxes - including taxes on wealth - may ultimately rise to pay for the fiscal cost of the COVID-19 pandemic, could result in some of the higher savings flowing to the Government, rather than into AUM.
Gill Lofts concludes: “The pandemic has positively changed investor perspectives, with many now calling for a ‘green recovery’ fueled by more sustainable products and services and a spotlight on the responsible allocation of capital. This is likely to accelerate the rise of ESG investing as people become more concerned with where their money is going and the impact it could have on the environment and society. UK asset management firms are moving with pace to align to these changing priorities and given how they have coped through the recent economic downturn, they should be a leading driver in sustainable growth as we move towards recovery and chart our course to a lower carbon economy.”