- Benign levels of inflation and low interest rates make real assets highly attractive
- Increased inflation may ultimately lead to a credit driven recession
- Debt-laden auto sector may pose significant headwinds to US growth
David Jane, manager of Miton’s multi-asset fund range comments:
“Economic growth appears robust and inflation is finally reappearing, which is a foundation for our positive view on equities and cautious view on bonds. However, we try not to base our portfolios on a single point forecast, but to consider a range of scenarios. This way we can offer some downside protection were our base case to prove inaccurate.
“The greatest risk we perceive is around the market’s view of the reflationary trade. It’s based on a ‘Goldilocks’ type scenario of benign levels of inflation oiling the wheels of growth and reducing the burden of the debt overhang. This, combined with interest rates remaining below the level of inflation for a protracted period, makes real assets highly attractive.
“However, it’s plausible to perceive a similar but significantly less attractive scenario. Should inflation start to move materially higher than expected, say to 5%, then central bank rates must surely be raised to levels that might prevent further rises in inflation. If short term interest rates were 4% or 5 %, or potentially higher, it is quite plausible that many corporate borrowers would get into difficulty. The protracted period of ultra-low rates has enabled many companies to become leveraged to levels which would be difficult to manage at significantly higher interest rates. This scenario pans out with rising corporate default rates ultimately leading to a credit driven recession.
“For this reason, we avoid the riskiest of borrowers in fixed income and have a negligible exposure to leveraged businesses within equity, which should provide a cushion should this scenario play out. A further mitigation is that central banks must be very conscious of this risk and therefore unlikely to pursue policies that lead to it, but they may have no choice should inflation really take hold.
“On the opposite side of the coin, we might see a risk to the positive growth scenario from the US auto sector. In recent years, large amounts of debt have been used to support auto sales and there is some emerging evidence that this is leading some borrowers to become distressed. Like mortgages, auto loans in the US are securitised and default rates on sub-prime auto loans are picking up. Additionally, used values for autos have been falling which could lead to losses for auto makers. A significant contraction of the auto sector, while not catastrophic for the economy, could be a significant headwind, potentially leading to a reversion to the ‘stagnant growth, low inflation’ scenario of a few years ago.
“To mitigate this risk, we avoid US auto exposure generally, and have been reducing our exposure to auto parts suppliers worldwide, except where they are clear market share beneficiaries from the switch to cleaner fuels and more automated vehicles.
“Absent these two extremes, we are likely moving from a period of accelerating growth into one of steady growth, as the recovery from the slowdown of 2015 and early 2016 matures. With the US earning season over the next few weeks, investors will want to see evidence of company profit growth to justify the increase in valuations that we’ve seen in the last few months. Generally, the omens are positive, we have seen a lower than usual amount of profit downgrades this year, suggesting earnings surprises might occur, particularly for the pure cyclical sectors. As this expectation works its way into stock prices we feel increasingly keen to further build our positions in our growth focused themes at the expense of those positions simply poised to benefit from this cyclical rebound.
“The broad evidence would suggest that we’re in a ‘Goldilocks’ type scenario with a greater degree of economic clarity than usual. However, the other side of the coin is that any divergence from this scenario, particularly regarding inflation, comes with a higher degree of downside risk than has been the case recently.”
How the financial services industry can win with personalisation
By Lottie Namakando, Head of Paid Media, iCrossing UK
The Financial Services sector has a thin tightrope to walk between marketing investment and pay off. One misstep and consumer trust can hit the brand and bottom line hard. And that fear can paralyse. On the one hand, finances are both crucial and complicated – people need a friendly, authoritative, ideally tailored approach that speaks their language to help simplify them. On the other, there is a lot of mistrust and personalised digital communication can be seen as ‘creepy and obtrusive’. People are particularly sensitive about personalised communication when it comes to their financial information. So how can the financial services industry win with personalisation?
From customised content to tailored ads and offers, personalisation has certainly become more visible within the FSI. Indeed Accenture’s 2019 Global Financial Services Consumer Study found that one in two say they’d be happy to receive personalised financial advice from banks, like spending habit reports and advice on how to manage money. This type of guidance is likely to become even more valuable with the added pressures brought on by COVID-19. It’s clear that financial service brands are catching on.
An Econsultancy survey found that, when asked which three digital areas are top priority for their organisation, 37% of financial service respondents chose ‘targeting and personalisation’. However, another study, by software company Pegasystems, concluded that 94% of banks haven’t quite figured out personalisation yet. So what’s the holdup?
Striking the right balance
Despite the growing consumer demand for personalised interactions, in a survey of more than 2,500 customers, Gartner found that more than half would unsubscribe from a company’s communications and 38% would stop doing business with a company if they found personalisation “creepy”. Not everyone wants to feel as though they’re being monitored – particularly when it comes to their finances – and the price of getting it wrong is steep. Google also has guidelines around negative financial status in personalised advertising, so financial institutions need to tread carefully.
Keeping personalisation consistent
Paid media personalisation doesn’t seem to be the norm for any FSI brands at the moment. But when brands do start to embrace personalisation in ad copy, consistency will be key to hitting KPIs and ensuring the experience is a positive one. When a customer clicks on a personalised paid ad, for example, they’d expect to then hit a personalised landing page. Without that, the initial promise of relevancy is met with something too generic. But personalised content in the modern digital ecosystem needs to be dynamically generated – something that Google can have issues with. For any personalised landing page that isn’t behind a login, it’s important to decide what Google should see, and the answer is rarely straightforward – don’t risk a Google penalty by showing users any content that’s radically different from the non-personalised .
Cutting through the complexity
We need to reframe how we look at personalised content to win with it. Rather than seeing it as scary and new, it is crucial to remember that well executed personalisation should be an audience aid – to guide people through the complexity of the finance industry. Key to achieving this clarity that will be appreciated by audiences will be focusing on the differing needs of existing customers and prospects with ad copy personalisation. Think about the way a potential customer would be treated if they came to the bank for the first time – wait for them to sign-up and share their information before giving personalised advice.
So there’s an element of politeness which should sit alongside personalisation in the FSI, whereby people need to agree (beyond just accepting cookies) before brands can go ahead and get friendly. When approached sensitively – which is especially important in these uncertain times – personalisation will help FSI brands set themselves apart from competitors; not just other banks, but fintech start-ups too.
Personalisation projects need to be carefully considered and planned. Banks need to listen to customers. This would involve conducting consumer research on how they feel about different levels of personalisation. Do the potential benefits outweigh any concerns they have? Is there a cut-off point to their comfort?
It will by asking questions such as
- How comfortable are you with receiving personalised marketing from your bank?
- Do you see the value of personalisation in marketing for you as an individual?
- What do you feel is the right level of personalisation?
- Is there a point when you feel personalisation has gone too far?
This will give a real understanding of what level of personalisation consumers will both want and value.
However, the most important part of this whole listening process is hearing what consumers are saying, then be sure to use these insights and research to devise an audience and messaging matrix which is relevant for them and for your business. This involves defining the audience, what traits differentiate them from other personas and what level of personalisation is relevant to them.
In order to protect people’s privacy, restrictions on targeting do exist across many different paid media platforms to ensure that sensitive information is not inadvertently shared. It is prudent early on to examine the technical capabilities of the marketing platforms you wish to use, to understand if they support the personalisation strategy you have in mind. Auditing the audience targeting options and restrictions by platform is a good place to start.
Test and learn
Once the platform capabilities and the consumer base’s position on personalisation is understood, then thirdly the approach should be test and learn. Next steps are to map what signals are available to be able to target these differently defined audience groups, using platform curated audiences or 1st party audience data – and don’t go too niche with targeting.
Using this framework, ideally take one or two different audiences to start with, we recommend testing what type of messaging resonates best with them and using relevant engagement KPIs such as clickthrough rate or view rate to evaluate performance.
By comparing a version of an ad which relates specifically to the audience, versus one with a more general messaging, it’s possible to identify themes or phrases which really speaks to the target audience. The results can often be surprising, with what might be considered relevant ad copy just not landing with the consumers in the way expected. The advice here is to go with the data, not with the heart. Remembering the team is not necessarily the target audience, and whilst no result will be 100% it is the majority verdict that should be used to develop messaging.
Finally, this approach needs to be iterative – people, attitudes and needs are constantly changing. When using personalisation, the messaging needs to be constantly challenged, tested and evaluated. Just remember not to change too much at once to understand what elements are having the most impact.
Personalisation should be on the digital agenda of every financial services business. It represents a huge opportunity for growth and when done right can strengthen existing customer relationships and build trust. Although learning to walk a tightrope may be tricky, balance can be achieved only through tackling and not avoiding it.
Lottie Namakando is Head of Paid Media at iCrossing UK. iCrossing is a digital marketing agency that is driven by insight, powered by Hearst, the world’s largest independent media, entertainment and content company
Tax changes, volatility and care: the challenges of later life planning in 2021
By Matt Dickens, Senior Business Development Director at Ingenious
Later life planning has become more topical than ever over the past year as our whole industry has worked hard to absorb the changes brought about by the pandemic, progressing financial planning to meet the “new normal”. This article explores three of the greatest challenges later life planners currently have to consider and prepare for, tax changes, market volatility and the cost of care, and shows how a comprehensive later life plan, delivering more than just estate planning for inheritance, is increasingly important.
The threat of tax rises
In 2019, the new Conservative Government, facing the challenge of delivering an orderly Brexit, but not yet dealing with the impact of a global pandemic, promised there would be no changes to Income Tax, National Insurance or VAT. Eighteen months on, they find themselves in an unprecedented economic scenario, with a deficit of £394 billion1 (19% of GDP), its highest level since 1945. While commentators remain focused on the ongoing pandemic and its impact on both lives and livelihoods and when it might come to an end, they also have one eye on the issue of paying for the extreme lengths the Treasury has gone to, to keep the country financially afloat. Likewise, investors are equally mindful of this issue – if the Government needs to balance the books through fiscal policy, how will any decision made now fare in a post-pandemic financial future?
For advisers, there are two clear ways to approach this planning dilemma.
Firstly, one could attempt to foresee the future and plan for the measures that might be implemented in the coming months and years. The problem with this approach is that one would need a crystal ball.
Secondly, one could accept that there is no way to predict the measures that will come into effect and wait until there is some form of clarity. But herein lies the problem of delay in the face of continued uncertainty. For almost a year now, many have held off on vital long-term plans due to the fear of the unknown, yet they need to accept that another year or more of inaction due to the potential of further uncertainty comes with its own real risk. And the longer it goes on, the more risk they are taking.
The simple answer to this conundrum is to embrace a strategy which remains flexible to any possible changes, but in the meantime delivers on the key outcomes the client requires. Any financial planning strategy needs to stack up in line with the wider objectives of the investor, such as achieving investment growth, rather than focusing purely on the tax advantages of a particular strategy, as these could change or even disappear. This is why I believe advisers should be developing a wider later life planning proposition, and not just narrowly focussing on estate planning.
Here is an example of a desired outcome of someone planning for later life;
- To invest capital in a way that maintains flexibility throughout later life to pay for any unplanned needs, but also consider any potential care needs that might be needed, knowing that their wealth has been successfully grown up to the point of death, so maximising the legacy that will be passed onto the chosen beneficiaries.
Breaking it down into individual objectives, the adviser needs to:
- Maximise wealth through continued investment growth
- Maintain flexibility and access to the investment, so they can make regular or lump sum withdrawals
- Provide both financial and logistical support to the delivery of care needs if ever needed
- Reduce the potential for Inheritance Tax (IHT)
Note the desire to reduce any IHT payable is deliberately last on the list of desired outcomes. The danger of focussing on the estate planning part of these objectives is twofold. Firstly, the threat of impending tax changes, or tax relief changes, causes uncertainty as to the efficacy of any purely tax-focussed strategy. And this remains the case whether one feels they can predict the future or not!
Secondly, the danger of ignoring the other higher priority objectives, as many tax-focused strategies are a one trick pony and restrict the potential for wider benefits. In this case, the investor may have to forgo any long-term investment growth, or the flexibility to easily and predictably access the investment to pay for care, for instance.
So, when considering the threat of tax changes to later life planning, the approach should always be to allow the investment rationale and wider utility of the service you recommend to lead the planning decisions, rather than just narrowly focusing on the tax benefits.
Another challenge that is particularly unwelcome in later life and particularly visible in the current environment is the potential for continuing investment volatility. In this phase of their lives, investors are unlikely to have the flexibility to “time the market” when they want access to their wealth. For instance, making a withdrawal to help family members in need, pay for care requirements or ultimately passing the investment onto beneficiaries upon death. These are not predictable events. Reflecting upon the volatility of markets in 2020 and the uncertainty of 2021 and beyond, investors may well be minded to forgo any potential upside of an investment, perceiving them as too risky.
However, an alternative, as many asset managers have been doing over the last decade, is to look to private investments that are not exposed to market sentiment in the same way as listed investments are. While on the face of it this sounds riskier, certain investment strategies can provide investors with an appealing level of security and predictable returns. One way to do this is via private companies that engage in secured lending. By their nature, loans carry lower risk than equity investments as they do not fluctuate in value over time. Senior, asset-backed loans provide the investor with additional protection against any loss in value. Executed within sectors that are demonstrating strong resilience to the pandemic and any ongoing Brexit effects, these loans can provide an attractive return with low volatility. Such companies are common investments for Business Relief qualifying services where services should be valued on their “fundamentals” not reliant on positive investor sentiment.
The ever-increasing demand for care services
In the same way that the increasingly maturing cohort called the baby-boomers have recently come under detailed discussion by advisers with respect to their intergenerational planning needs, the same level of consideration should also be given to their increasing need for long-term care. During the pandemic, the importance of and reliance upon the UK’s care system has become very clear, yet there is an insufficient level of planning taking place to ensure that people are prepared. Research shows that the majority of family members who have experience of a loved one being in care were not satisfied with their experience. One of the factors that can surely make this unfortunate outcome more comfortable is being prepared, both financially and through being armed with knowledge or advice on this complex sector.
This is why it is more important than ever to flexibly have access to one’s wealth in later life. It is impossible to predict what any one person’s needs are going to be in the future and so separating money to prepare for care and to prepare for estate planning is futile. At the same time, perhaps the need will not arise and so the money could be contributing to the investor’s other objectives rather than being held back from an investment. So, undoubtedly a flexible posture to later life planning is key and if the investment can gain value over time to contribute to paying for life’s needs then all the better. The final benefit that could assist with this challenge is a specialist care advice service, which is included for all Ingenious Estate Planning (IEP) investors. As well as advising clients and their families on the vagaries of the UK’s complex care system, the IEP Care Service helps investors to make decisions in a time of need and stress. Specialist, independent advisers give individuals and their families invaluable support, liaising between the NHS and care providers to achieve the best possible care outcomes.
Only by considering any changes to the legislative landscape, delivering consistent and attractive risk-adjusted returns and considering any future needs and costs of our clients, can we deliver a truly robust and value-adding financial later life plan for investors who need it.
Chinese fintech platforms expected to meet capital requirements within two years – regulator
BEIJING (Reuters) – China’s financial technology companies are expected to meet capital adequacy requirements within a maximum of two years, said Guo Shuqing, head of the China Banking and Insurance Regulatory Commission (CBIRC) on Tuesday.
Micro lenders, consumer finance firms and banks operated by internet platforms should all have adequate capital like other financial institutions, Guo said at a news conference.
Chinese financial regulators have rolled out a slew of measures since last year to tighten the oversight of online lending practices in the country, particularly of technology firms looking to expand into the financial space, moving away from its once laissez-faire approach.
The drive scuppered Ant Group’s $37 billion initial public offering last year and has seen Alibaba’s fintech affiliate formulate plans to shift to a financial holding company structure.
“Starting a business needs capital, so does starting a financial business,” Guo said.
“As long as internet platforms conduct financial operations, the requirement of capital adequacy ratio on them should be the same as financial institutions.”
Financial regulators have set various grace periods for different internet platforms, according to Guo. Some have until the end of 2020 and others until the middle of 2021 to meet capital adequacy requirements, he said.
“But by a maximum of two years, (the capital adequacy of) all platforms should be back on track,” Guo added.
With regards to Ant Group’s restructuring, Guo said there were no restrictions on the financial business it develops but that all of its financial activities should to be regulated by laws.
Ant Group is in talks with other shareholders in its new consumer finance unit to bolster the firm’s capital as the fintech giant prepares to fold in its lucrative micro-lending businesses, Reuters reported last week.
It would need an additional capital of 30 billion yuan ($4.64 billion) to meet regulatory requirements, according to the report.
($1 = 6.4714 Chinese yuan)
(Reporting by Tina Qiao, Cheng Leng and Ryan Woo in Beijing; Se Young Lee in Washington; Editing by Christian Schmollinger and Ana Nicolaci da Costa)
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