The megatrends series: Financial ecosystems

Duncan Goodwin

Premier Miton Global Sustainable Growth Fund manager

Global megatrends are macroeconomic and geopolitical forces that are shaping our world and our collective futures in profound ways. The implications of these forces are broad and varied, and they will present us with both tremendous opportunities to seize, as well as extremely dangerous risks to mitigate.

What are we looking at in this series?
Megatrends are macroeconomic and geopolitical forces which are shaping the world. They are big and include some of society’s biggest challenges and opportunities. The concept of megatrends is not new. Companies, governments, and nongovernmental organizations may call megatrends by different names, but the most effective ones have organized their strategy in some way, shape, or form around them.

The global implications of the megatrends require more agile and accountable approaches from government institutions and greater collaboration across the whole of society to mitigate risk. For some countries, being able to anticipate and adapt to the megatrends will be a matter of national survival.

In this upcoming series we work through a summary of the key megatrends and the potential seismic implications of them.

Megatrend one: Financial ecosystems
This megatrend looks at how the evolution of capital markets will be key to providing a deep and resilient pool of funding to key sectors of the global economy. Economic growth is arguably the most important driver of global development and alleviator of poverty. Since the first industrial revolution, economic growth, measured by gross domestic product (GDP), has been associated with a better quality of life.

Countries that were the first to develop economically, think about the leaders in industrial revolutions, benefitted from rapid advancements across society; life expectancy increased, child mortality fell, and levels of education rose.

While GDP as a pure measure for progress across a country’s population can rightly be challenged, it makes sense that within an economy of limited resources, the proper allocation of capital can be beneficial to its society.

Markets & money – a catalyst for growth
Public markets, such as the FTSE ALL-Share Index or the Amsterdam Stock Exchange (AEX) which is the world’s oldest stock exchange still in use today, allow for scrutiny and analysis of company returns. With the freedom of information and levels of corporate governance they offer, they enable investment into companies that are run more transparently, have shareholders needs in mind and may as a result be more efficient.

It is no surprise that with the advent of stock exchanges in the early 1600s, economic development began to accelerate – in this purest sense, a capital market is a catalyst to the allocation of capital. This process may lead to a higher natural long term economic growth rate, with all the benefits to society that one would expect.

More recently, countries that have opened themselves up to investment through the development of their own capital markets, China for example, have reaped the benefits. Historically, China A-shares were only available for purchase by mainland citizens due to China’s restrictions on foreign investment. However, since 2003, foreign institutions have been able to purchase these shares.

Markets & money – a platform for risk management
In 2022, the extreme heatwaves we experienced globally have no precedent. The volatility and unpredictability of the weather has knock on effects for crop yields and in turn soft commodity prices. Soft commodities refer to an agricultural good that is grown, rather than mined or extracted. Some examples include cocoa, coffee, cotton, rice, soybeans, sugar and wheat.

Farmers plant the seeds for crops ahead of the growing season and harvest, with a high degree of uncertainty about the eventual price their produce will make in a market when it is time to sell. The solution to this problem lies in the futures market, where commodities of all kinds can be bought and sold in advance at an agreed price.

The ability to sell/buy forward removes a large element of risk for both the producer (the farmer) and purchaser (the wholesaler). It provides a certain level of protection from the fluctuations in market prices. Without the futures market and the security that it provides, large industry supply chains would be at the mercy of short-term demand and supply movements; businesses would suffer, markets would be less efficient, and consumers would undoubtedly be paying more for goods and services. These futures markets will play an increasingly significant role as the volatility of global weather patterns strengthens.

Markets & money – the advancement of environmental, social, governance focused investing (ESG)
We have recently seen an exponential growth in ESG investing. More of us are taking sustainable, ethical, environmental, social and governance screening factors into consideration when deciding where to invest money. Not only is that good news for the planet and societies we live in, but it is also helping many investors to find new opportunities.

Governments are keen to encourage the flow of capital into the green economy. For example, in launching its green gilts in October 2021, the UK became the first country to introduce a green savings product from a sovereign issuer. These sovereign green bonds enable investors to assist the government’s funding of green projects, such as clean transportation, renewable energy, and energy efficiency.

Markets again provide a conduit for the movement of money to key areas in an economy. Companies such as LSEG (London Stock Exchange Group) and ICE (Inter-Continental Exchange) sit at the centre of these financial ecosystems, in a unique position to facilitate the growth in ESG investing. Both LSEG and ICE have created indices that have an ESG focus, facilitating direct investment into green companies and debt instruments.

In 2021 the FTSE EU Climate Benchmarks Index Series, was launched allowing investors to reallocate capital in line with the transition to a low-carbon economy. LSEG also operates a Sustainable Bond Market, helping create a debt funding market for sustainable companies. In addition, through their data and analytics business lines, LSEG provides ESG data and ratings on over 10,000 companies globally, aiding investors’ decision-making process.

Markets & money – Decarbonization
To manage and eventually reduce carbon emissions governments are implementing carbon trading schemes that provide some businesses with permits that allow a certain level of carbon emissions, with the number of permits reducing over time. The aim is to force businesses to decarbonize, with those business that reduce their emissions, selling their surplus carbon permits at a profit. This is known as cap or trade. A government sets a cap on the maximum level of emissions and creates permits, or allowances, for each unit of emissions allowed under the cap, which can then be traded.

The Inter-Continental Exchange (ICE) is home to some of the world’s major cap-and-trade carbon markets, including the European Emissions Trading System, the UK Emissions Trading System, and the California Cap-and-Trade program.

A megatrend underpinning megatrends
While demand for a clean, green tomorrow will advance energy conservation and technology is driving exponential progress in the tech sector and far beyond – underpinning these is the silent megatrend of the evolution of capital markets.

We believe that diversified financial services companies will play a pivotal role in the global economy’s transition to one that is more ESG aligned. We look to identify and invest in financial institutions that are helping the world develop in a positive way – acting as a catalyst for the allocation of capital.

A very practical application
Within the Premier Miton Global Sustainable Growth Fund we own three companies that sit within the diversified financial sector: London Stock Exchange Group (LSEG), Intercontinental Exchange (ICE) and Charles Schwab.

LSEG and ICE we have touched on in terms of their importance to the development of the future financial ecosystem, Charles Schwab is US investment platform, serving a financial ecosystem that includes professional and retail investors.

While some megatrends are well known and well documented, without a growing and evolving financial services ecosystems these may not nourished by the flows of capital they will need to grow and develop. With this megatrend we are looking to invest in the proverbial financial irrigation system, as well as the future crops it waters.

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Risks

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Reference to any particular stock does not constitute a recommendation to buy or sell the stock

Forecasts are not reliable indicators of future returns.

Funds that follow a sustainable investment approach exclude companies which do not meet their sustainability criteria from the investment universe and therefore can carry a higher risk than funds with a more diversified portfolio.

Funds that invest in specific sectors or industries may carry a higher risk and display greater volatility than funds with a more diversified portfolio.

IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE

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The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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