By Julia Khandoshko, CEO of Mind Money
The world economy is in a state of disarray and is becoming increasingly complex. In recent years, the world has witnessed deglobalisation and many things have started to shift since the pandemic, or even before in 2008.
What distinguishes us from the chaos ahead is that no one except professional asset managers, seem to be thinking about it. When the Federal Reserve starts lowering interest rates, returns will decrease and make the expertise of asset managers even more crucial.
That’s why it is important to identify how the investing paradigm is changing and how asset managers can adapt.
The evolving concept of market inefficiency
One of the main goals of trading has traditionally been to find some market inefficiencies, but this concept is changing in 2024. What market inefficiency is now is an open question.
Two to five years ago, smart mathematicians earned money using high-frequency trading (HFT) by being faster and seeing prices before others. Now, the widespread accessibility of artificial intelligence adds fuel to the competition and makes seeking for inefficiencies much harder.
Asset managers are also pushed to adopt advanced AI-driven strategies and long-term investment approaches to stay competitive.
Cryptocurrency trading fail
It became clear this year that cryptocurrency will not replace traditional financial systems. Previously, people dreamed of a world without banks, claiming that crypto was anonymous, safe, and reliable. However, 75% of Americans now find cryptocurrencies are unreliable.
We witnessed crypto wallets being blocked and saw cryptocurrencies fall below their expected levels. Ultimately, all the hype about crypto culminated in established American funds creating ETFs linked to cryptocurrencies.
We had anticipated a revolution in finance, but the revolution never materialised and most crypto trading ended up in ETFs, which were also losing their positions.
Declining confidence in banks
When was the last time we heard the phrase banking secrecy? Our relationship with banks has dramatically changed, even for important clients such as ultra-high-net-worth individuals (UHNWI). We used to be confident in the banking system and knew that a bank would support the client in any case.
This is where asset management companies can come to the fore — people are gradually losing their trust in banks, especially after a series of collapses.
In 2023, five major banks failed, triggering the whole banking system. This year, the failures continued with the collapse of Republic First Bank in April.
Tax planning issues
This year has also demonstrated that tax planning is just as serious as simply purchasing assets. In this regard, the same strategies or interests can be brought to life in various ways.
If an investor wants to buy gold, the question of how to do that arises. When purchasing it through US ETFs, you run the risk of incurring a 30% tax, and when purchasing it on the stock exchange, there may be other risks involved.
For example, if it is a gold mining company with assets in Central Asia, you must be aware of the potential risks involved in tax planning.
The complexity of investments in emerging markets
Before the shift in markets, there used to be a simple paradigm in which there were the old world and emerging markets (EM). When it is risk-off, investors infuse their money in the old world, and when risk-on, they are in the emerging markets.
Today, everything concerning EM has become more complex. Despite positive forecasts, these markets still have to overcome a number of obstacles, such as the lagged effects of high interest rates.
The local situation in many countries is also questionable. For example, the Argentinian economy is not in its best shape. China as an investment opportunity seems ambiguous. And Turkey — it is unclear if they still have any kind of economy.
Asset managers are here to adapt
To respond to the current changes, asset managers should always stay alert and be able to adjust. All the features of the global economy that people have become used to are now being transformed.
Further curtailment of globalisation, division of the world into economic zones, complex arbitration between these zones, an increase in the power and influence of large players on the regulatory system, and a reduction in inefficiencies should be expected, and professionals must be prepared for these changes.
