Easing cycles and elections make for an uncertain second half of 2024

According to Goldman Sachs Asset Management's mid-year outlook, central bank cutting cycles and potential surprises from elections add extra uncertainty in the second half of 2024.

In this climate, core fixed income exposure can help to build more resilient, well-diversified portfolios. Hedge funds and liquid alternatives can enhance diversification, which is important given the potential for flare-ups of market volatility and geopolitical shocks. In the equity market, small caps may be poised for a rebound after a multi-year period of underperformance versus large caps. 

Private markets continue to evolve, offering multiple avenues to enhance risk-adjusted returns and complement traditional investments potentially. In private equity, operational value creation levers — revenue growth and margin expansion — are poised to become the main determinants of successful investment outcomes, Goldman Sachs Asset Management suggests. In private credit, those with the scale and flexibility to lend throughout the capital stack and a deep book of existing borrowers look best positioned.

Some private equity investors are questioning what a “normal” environment will now look like. The breakneck pace of activity in 2021-22 was likely an anomaly, fuelled by historically low rates and easy access to capital. However, a prolonged return to pre-pandemic trendlines might not be the most likely path forward. The size, scope, and nature of deals will likely continue evolving, defying attempts to define “normal.”

Then there is the question of what the US election might mean for the Inflation Reduction Act (IRA). A repeal of the IRA, the US’s signature climate policy, seems unlikely regardless of who wins office. Despite potential post-election policy shifts, Goldman Sachs Asset Management continues to expect strong growth in climate-related and low-carbon investment opportunities, driven by improved pricing for solar generation and energy efficiency. 

The outlook also examines how AI will shape real estate and infrastructure. From a real estate perspective, the location of data centre assets is critical, given the need for affordable and reliable power in AI's evolution. Generating and delivering efficient energy will be vital in the coming years to support AI's expected growth curves. Investors with the resources and expertise to assess both halves of the supply and demand equation look best positioned to capitalise on this megatrend.

 

UN calls for sustainable strategies to mitigate digital economy’s environmental impact

UN Trade and Development (UNCTAD) has launched The Digital Economy Report 2024, shedding light on the significant environmental impact of the global digital sector and the disproportionate burden developing countries bear. The report highlights that while digitalisation drives global economic growth and offers unique opportunities for developing countries, its environmental repercussions are becoming increasingly severe. Developing countries remain unevenly affected both economically and ecologically due to existing digital and development divides but they have the potential to leverage this digital shift to foster development.

The report emphasises the pressing need to address the environmental costs of rapid digital transformation. Key concerns include the depletion of finite raw materials for digital and low-carbon technologies, escalating water and energy consumption and the growing issue of digitalisation-related waste. As digitalisation progresses at an unprecedented rate, understanding its link to environmental sustainability becomes increasingly critical.

Developing nations bear the burden but do not reap the benefits. This can change, the report emphasises. Developing countries are pivotal in the global supply chain for transition minerals and metals, which are highly concentrated in a few regions. Africa’s vast mineral deposits, essential for the global shift to low-carbon and digital technologies, include cobalt, copper, and lithium, crucial for a sustainable energy future. The continent holds significant reserves: 55% of the world's cobalt, 47.65% of manganese, 21.6% of natural graphite, 5.9% of copper, 5.6% of nickel and 1% of lithium.

According to the World Bank, demand for minerals required for digitalisation, such as graphite, lithium, and cobalt, could surge by 500% by 2050. The increased demand presents a development opportunity for resource-rich developing countries if they can add value to extracted minerals, utilise proceeds effectively, and diversify within the value chain and other sectors.

Amid current global crises, limited fiscal space, slow growth and high debt, the report says that developing countries should maximise this opportunity through domestic processing and manufacturing. This would help them secure a larger share of the global digital economy, generate government revenues, finance development, overcome commodity dependence, create jobs and raise living standards.

The report underlines the need to integrate digital and environmental policies and calls for urgent and bold action to ensure an equitable and environmentally responsible digital economy. This approach aims to allow countries to benefit from the opportunities the digital economy presents while safeguarding the interests and well-being of current and future generations.

 

Global economy tipped for soft landing 

Standard Chartered expect a soft landing for the global economy in the second half of 2024 as inflation slows and interest rates ease, following a quick succession of economic shocks in recent years. 

The bank’s Global Focus – Economic Outlook Q3-2024 covers the outlook for 58 economies, key geopolitical issues, and financial market implications, forecasts broadly flat GDP-weighted global growth of 3.1% in 2024 and 3.2% in 2025, following the 3.2% achieved in 2023. This benign soft-landing scenario, however, could be put at risk with potential negative geopolitical surprises on the horizon.  

Geopolitical events have played an increasingly important role in driving market moves, and 2024 has seen this trend accelerate with the heaviest election calendar in history. Standard Chartered expect the political risk associated with the US election to continue dominating the global economy's outlook. 

A key risk is further escalation of trade tensions following the US election in November. This would have direct implications for China’s economy, where external demand has partly offset the ongoing property-market correction and weak domestic sentiment this year. It could also weigh on the outlook for ASEAN economies that rely heavily on China as a trading partner.  

For others, rising US-China tensions could create new opportunities; Japan and Korea, for example, might see longer-term benefits from US efforts to exclude China from its IT supply chain. However, a universal tariff on US imports – which Donald Trump has pledged to impose if elected – would adversely affect all economies with US trade dependence. In such a scenario, financial markets would likely react negatively to inflation and global growth implications.  

 

BAFT explores digital currencies and financial crimes concerns

International transaction banking association BAFT has released a white paper titled ‘Digital Currencies and Financial Crimes Concerns’. The paper examines the intersection between digital currencies and the challenges posed by financial crimes. 

As digital currencies continue to gain prominence in the global financial ecosystem, stakeholders are increasingly grappling with the potential risks associated with their use in illicit activities. BAFT’s white paper is a resource for financial institutions, regulatory bodies, policymakers, and other industry participants seeking to navigate this complex terrain.

“Digital currencies present both opportunities and challenges for the financial industry,” said Deepa Sinha, vice president of payments and financial crimes, BAFT. “While they offer innovative solutions for cross-border transactions and financial inclusion, they also pose significant risks in terms of financial crimes. Our white paper aims to provide a comprehensive analysis of these issues and offer practical recommendations for stakeholders to enhance their AML and CTF efforts in the digital currency space.”

The paper includes an examination of digital currencies and central bank digital currencies (CBDCs), including their characteristics, mechanisms, and adoption trends. By understanding the diverse nature of digital currencies, BAFT says stakeholders can better appreciate their implications for financial crimes.

Recognizing the inherent anonymity, borderless nature, and decentralisation of many digital currencies, the paper identifies their risks in facilitating money laundering, terrorist financing, fraud, and other illicit activities. It also highlights the challenges of effectively detecting and mitigating these risks within the existing regulatory framework.

The paper also explores the efforts of global regulators to address AML and CTF concerns. It examines various regulatory approaches, including licensing requirements, transaction monitoring, customer due diligence (CDD), and information-sharing mechanisms, and evaluates their effectiveness in combating financial crimes.

In addition to a discussion of the role of advanced analytics, blockchain analytics tools, artificial intelligence (AI), and machine learning algorithms, BAFT also examines the benefits of a collaborative approach to tackling financial crimes associated with digital currencies and the importance of partnership among financial institutions, regulatory bodies, law enforcement agencies and technology providers. The paper offers insights into emerging trends, regulatory developments, and technological advancements for digital currencies and financial crimes.

 

US Treasury and FSSCC look at effective practices for secure cloud adoption

The US Department of the Treasury and the Financial Services Sector Coordinating Council (FSSCC) have published a suite of resources to share with financial services institutions on effective practices for their secure cloud adoption journey. These deliverables are the result of a year-long public-private partnership of the Financial and Banking Information Infrastructure Committee (FBIIC) and the FSSCC.

To provide leadership support for this joint effort the US Department of the Treasury established the Cloud Executive Steering Group (CESG) in May 2023 at the direction of the Financial Stability Oversight Council (FSOC), to help close the gaps identified in Treasury's landmark report on the Financial Services Sector’s Adoption of Cloud Services. 

The documents are intended to arm financial institutions of all sizes with effective practices for secure cloud adoption and operations, and to establish a continuing effort and partnership to begin to address the gaps identified in Treasury’s report, which include:  

• Establishing a common lexicon that may be used by financial institutions and regulators in discussions regarding cloud.
• Enhancing information sharing and coordination for examination of cloud service providers.
• Assessing existing authorities for cloud service provider (CSP) oversight. 
• Establishing best practices for third-party risk associated with cloud service providers, outsourcing, and due diligence processes to increase transparency.
• Providing a roadmap for institutions considering comprehensive or hybrid cloud adoption strategies including an update to the Financial Sector’s Cloud Profile.
• Improving transparency and monitoring of cloud services for better “security by design.”

 

SFP Group scores €120m loan for green gas

ABN Amro has played a role in providing a green loan of €120m to SFP Group. The financing, provided in collaboration with ING and Zencap Asset Management, is intended to construct two large-scale biomethane plants in the Netherlands. 

SFP Group can produce approximately 800 GWh of biomethane annually, enough to supply green gas to more than 50,000 households through these plants. The bank says this initiative underscores its dedication to sustainable financing and promoting renewable energy sources.

“We are proud to support SFP Group in this groundbreaking project, which aligns with our ongoing commitment to the energy transition in the Netherlands,” said Mark van Zon, Director of Project & Infrastructure Finance at ABN Amro.