The effect of inflation on your investment returns
The effects of the supply chain disruptions experienced since the onset of the Covid-19 pandemic and the ongoing crisis in the Ukraine have sent the prices of various goods soaring. The most notable effect since the start of the Ukrainian conflict, has been the sharp increase in oil and grain prices.
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Financial Technology (FinTech) has been around longer than most of us would acknowledge, yet millions across the globe remain blithely ignorant of its uses and merits. Sadly, many in the developing world are effectively excluded from deriving full benefit from FinTech, but this is changing. At its most basic and generic level, FinTech is a field of innovation that applies technology to deliver and improve financial services. Perhaps the most common form of FinTech most of us could not live without is the credit card dating all the way back to the 1950s. Today, the most common technological manifestation of FinTech is the use of smartphones to conduct banking, payments, investing and borrowing. In 2020 alone, the value of payments through smartphones exceeded US$ 500 billion. Indeed, FinTech is big business. After a dip in 2020, investment in FinTech for the year 2021 topped some US$210 billion.
At the level of the personal user FinTech, China’s figures are staggering. An Ernst and Young study found that a massive 87% of the country’s digitally active population use at least one FinTech application in their lives. But dangers lurk alongside the unimaged opportunity for FinTech. Much of this relates to personal data privacy and its abuse (by the state, commercial interests and criminals). Regulation lags development and this is something that authorities across the globe are seized with and has resulted in rather heavy-handed intervention by the Chinese state over the past year. The impact of such regulation has been felt by companies ranging from ABC and META, through to ANT and TenCent.
An area of growing interest is the application of FinTech to financial portfolio construction and advice. I am personally not in favour of Robo-Advisors as a replacement for skilled, experienced and qualified personal financial advice. An algorithm simply cannot identify, extract and interpret all pertinent relevant information, including that of personality when constructing and managing a personal portfolio of investments. Nonetheless, there is a place for this sector, particularly among younger, tech-savvy and perhaps for those with a greater risk appetite.
Where I do see merit and a place in the market, is the intelligent design, construction and management of algorithms in financial portfolio management. A Harvard Business Review captures the major merits of algorithms in portfolio management as follows: They can analyse huge quantities of relevant data extremely rapidly; they can identify potentially outperforming equities by finding new patterns in existing data sets; they can make new forms of data analysable, and they can reduce the negative effects of human biases on investment decisions.
Will algorithms replace human intelligence in portfolio design and management? I don’t think so, but as a powerful analytic tool in the armoury of modern portfolio management, FinTech and algorithms are here to stay.
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Notorious as the world’s most exclusive and expensive talk shop, the World Economic Forum (WEF) meeting at Davos 2022 was different and more ‘business-like’ than usual for a number of reasons. Held in late May, rather than mid-January as is customary, the most notable physical feature of this year’s talk fest was simply the absence of snow. Denuded of sleigh rides and glühwein, the famous Swiss village was missing some of its characteristic charm, but this also removed a number of excuses for the rich and famous to engage in playtime while out of office. This was also the first time for two years that Davos has been held face-to-face, rather than virtually. Often the most important discussions at the annual Alpine retreat are held in side-bars and other bars, so this first ‘post-pandemic’ WEF was a welcome manifestation of global normalisation. If nothing else, the WEF sends important signals to both business and political leadership regarding market and investor sentiment and so it was encouraging to see leadership engaging with each other in the flesh.
An important point of distinction to Davos 2022 was the recognition of the unique complexity confronting global business and political leadership. Historically, the WEF has been susceptible to criticism of being comfortably removed from the harsh realities facing billions of ordinary people across the world and in debating big picture abstract issues that do little or nothing to solve global challenges of poverty, inequality, underdevelopment, conflict and climate change. Indeed, far too often, Davos is reduced to a corporate and political reputational beauty parade, replete with sincere pledges of commitments to “work together to find solutions to some of the greatest challenges facing humankind”. Not so this year. This was the year that Davos grew up and got real.
The highest levels of inflation in decades have come back to stalk the global economy after being held in check and it is far from clear that central bankers and treasuries have the repertoire and policy tools to force the genie they released, back into the bottle. This is compounded by the inconvenient truth of an apex energy producer going rogue and invading a major food producer and by so doing holding millions in Europe to an energy ransom, and millions more in Africa to a food ransom. Beyond the immediate human security issues, the crisis in the Ukraine has also relegated climate change commitments made at the Glasgow CoP26 just last November, literally onto the back burner.
But the most profound realisation that forced its way onto the WEF agenda this year, was that given the re-emergence of aggressive and protectionist nationalism, globalisation itself may be over, at least as we knew it. After all, the entire basis of the WEF is predicated on deepening and spreading the virtues of globalisation. So, while this year’s Davos delegates were confronted with a unique set of global challenges, the really sobering truth is that the very raison d’être for the WEF may, in fact, be over.
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