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Stormy markets drive investors to money market havens - Industry roundup: 8 November

Stormy markets drive investors to money market havens

Investors fled for the exits in droves in October as soaring market interest rates put asset prices of all kinds under ever more intense pressure. The latest Fund Flow Index from Calastone registered the most significant outflows from equity funds in over a year, record selling of mixed asset funds and ongoing withdrawals from property funds. Fixed income funds suffered further outflows too, though there are signs of buying interest following the dramatic bond-market repricing of recent months. Meanwhile, safe haven money market funds enjoyed their third-best month on records as investors looked for a low-risk, high-yield home for their cash.

Equity funds suffered outflows of £1.20bn in October, the sixth consecutive month of net selling and the largest since September 2022’s mini-budget scare. Year-to-date equity funds have shed £2.88bn of capital.

Unloved UK-focused equity funds once again bore the brunt of the selling. The £739m outflow was the highest since April. Equity income funds were also hit hard – the £475m of outflows in October marked the 16th consecutive month of net selling from the sector. August, September and October have been the three worst months for outflows from income funds since early 2021. Elsewhere, European equity funds had their worst month of the year with outflows of £318m, and specialist sector funds had their worst month on record (-£275m) – funds investing in infrastructure accounted for almost one-third of withdrawals from sector funds.

ESG equity funds had their second-worst month on record with outflows of £700m (after August, -£953m). Some £3.14bn has left the sector in six consecutive months of selling, which has become a clear trend away from the sector after its three-and-a-half-year boom. ESG fixed income and mixed asset funds are also being hit with outflows.

Global funds and emerging market funds continued to attract new capital, however. After a £311m inflow in October, the latter is on track to have its best year on Calastone’s record if November and December do not see significant net selling.

Money market funds were the biggest beneficiaries of investor cash in October. Investors consider them a safe haven and added £586m of new capital, the third-best month for the sector in Calastone’s record.


Most finance organisations lag other functions in AI implementation

Most finance organisations have yet to adopt AI, despite optimistic leadership views towards the technology, according to a survey by Gartner. The survey of 130 finance leaders and 91 associates in administrative support functions in June 2023 revealed that 61% of finance functions either have no plans for AI implementation or are still in the initial planning phase. Only 9% of finance organisations are in the scaling and using phases, compared to 20% of other administrative support functions, such as HR, legal, real estate, IT, and procurement.

“Despite AI’s potential, most finance functions’ AI implementations have remained limited,” said Marco Steecker, Senior Principal in the Gartner Finance Practice. “As they begin to chart out a plan for how best to prioritise that additional investment, CFOs should partner with their finance leadership teams to compare their current progress against their peers’ and identify concrete recommendations from early adopters on how best to accelerate AI use in their function.”

Gartner research shows that four out of five finance leaders anticipate the cost and effort they allocate to deploying AI within finance will increase over the next two years, with 52% of finance leaders expecting cost and effort to increase by more than 10%. However, finance is currently well behind most other business functions regarding investments in AI by the organisation.

Finance leaders whose functions are not yet using AI cited four primary reasons: other priorities, lack of technical capabilities, low-quality data, and insufficient use cases. Three commonly cited reasons (lack of technical skills, suboptimal data quality, and insufficient use cases) are related to workflow- and capability-based limitations. However, the most frequently cited reason for not using AI is that finance leaders have other priorities. 

“This speaks to an important aspect of finance leaders’ beliefs about AI, which is that it is a discrete project that would need to be added separately to their function’s transformation roadmap,” said Steecker. “What this perspective underappreciates is that AI can be a critical enabler of finance leaders’ ‘other priorities,’ such as more dynamic financial planning or close and consolidation efficiency.”


Credit risk steady in trade, supply chain and export finance amid global uncertainty

The International Chamber of Commerce (ICC), along with partners Global Credit Data (GCD) and Boston Consulting Group (BCG), has released its 2023 Trade Register report, reaffirming that credit risk in trade, supply chain and export finance remains stable despite times of ongoing global macroeconomic uncertainty.

Before the COVID-19 pandemic, strong growth in global trade, which typically exceeded the GDP growth rate, was the prevailing trend. Even at the height of the pandemic, trade remained relatively resilient, with a robust rebound in 2021 as the global economy reopened and economic activity increased. Since 2022, a different trajectory has emerged with slower trade growth due to the disruption to supply chains in, for example, the energy and agricultural sectors due to the Russia-Ukraine war, broader geopolitical tensions, elevated global inflation and high interest rates, among other causes.  BCG expects global goods trade to fall by 2% from 2022 to 2023 on a nominal basis before returning to modest growth for the remainder of the decade.

Despite these shifts, the role of trade, as well as trade and supply chain finance products, is more critical than ever. As the geopolitical and economic environment becomes more challenging, access to liquidity and risk mitigation is increasingly valued. Fortunately for banks, corporates and investors, the ICC Trade Register once again demonstrates that even in these circumstances, trade, supply chain and export finance products remained low risk in 2022 compared to other asset classes.

ICC Secretary General John W.H. Denton AO said:  “Since the pandemic, we have been waiting to see whether the trade finance market finally shows signs of weakness as it battles the delayed impacts of the pandemic. However, this seems to simply not be the case. While default rates are clearly increasing in a less geopolitically-stable world, trade, supply chain and export finance assets continue to be resilient in the long-term – which should attract banks and investors to continue support for this valuable asset class.”


Mastercard demonstrates how existing commercial bank rails could drive CBDC adoption

Mastercard has completed the Hong Kong Monetary Authority’s (HKMA) e-HKD Pilot Programme, which demonstrated the efficacy of the Mastercard Multi-Token Network solution to settle Web3 transactions involving decentralised applications and digital assets, such as NFTs. The pilot also showcased the potential for seamless funding and settlement in and out of Web3 marketplaces via a retail central bank digital currency (CBDC), such as e-HKD, in the future. 

In testing its solution, Mastercard simulated a full lifecycle of the hypothetical e-HKD, from minting and distribution to spend and redemption within its sandbox environment. In addition, the pilot simulated conditionality to ensure the quality and successful delivery of the physical item purchased using smart contract functionality, which reduces risk for all parties involved in the transaction.  

The pilot leveraged two pillars of the Mastercard Multi-Token Network, which the company introduced in June 2023 as a set of foundational capabilities designed to enable more efficient payment and commerce applications using blockchain technology. This includes Mastercard Crypto Credential, which offers a set of common verification standards and infrastructure to enable trusted interactions using blockchain networks, in addition to interoperability to offer capabilities across all supported payment tokens and networks in a scalable manner.  

“What’s exciting about this pilot is that it demonstrated the ability to use digital currencies across multiple platforms, as well as the potential to utilise existing commercial bank rails to drive overall adoption,” commented Sandeep Malhotra, executive vice president, products & innovation, Asia Pacific, Mastercard. “It also showcased how aspects of the Mastercard Multi-Token Network could potentially be used to solve real-world pain points. In this case, we explored the safe and secure purchase of a physical luxury item with an associated NFT that represents its certificate of authenticity from an unknown party.”


Financial institutions scramble to streamline trade processes ahead of T+1

The fast-approaching switch to a T+1 settlement cycle is intensifying concerns about potential breakdowns caused by firms still relying on manual and inefficient processes for essential middle- and back-office functions.

The U.S. Securities and Exchange Commission has set 28 May 2024 as the date that financial markets will move to next-day settlement on trades. Meeting that deadline will require sell-side and buy-side firms to work together to accelerate trade reconciliation and other parts of the trade lifecycle. However, new data from Coalition Greenwich and Xceptor highlights potential risks stemming from the fact that most market participants are still conducting up to 20% of reconciliations offline using systems and processes built in-house. Meanwhile, pockets of firms have even higher percentages.

A combination of influential trends forces both buy-side and sell-side firms to make increasing efficiency and accuracy throughout the trade life cycle a top strategic priority. Exponential growth in data volumes, particularly the massive increases in unstructured data, and new regulatory requirements around data management and governance have prompted market participants to invest in technology that can facilitate those improvements by cleansing, standardising and automating data as it moves downstream from the front to middle and back offices.

Due in large part to these investments, a majority of participants in a new research study felt their organisations were on track to begin settling securities on T+1. However, less than one-third of respondents felt they could achieve T+1 settlement in every asset class. Furthermore, 20% of respondents are also concerned that the market as a whole will not be ready for the new T+1 requirement, particularly the longer tail of smaller institutions.

“Many of these firms are struggling to streamline workflows due to a lack of data standardisation, particularly with unstructured data such as faxes, emails, PDFs, and data scraped from screens,” commented Audrey Blater, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Data Automation: The Workflow Efficiency Game Changer. “For these firms, a lack of automation to cleanse and normalise data could result in missed settlement timelines, inaccuracies in books of record and possible losses.”

The move to T+1 could put additional pressure on firms using in-house systems. Users of proprietary platforms have higher rates of offline reconciliation than peers using a single third-party solution. Users of proprietary systems are still often turning to spreadsheets and database software as their “solution”. The proliferation of data and process silos can also create barriers within organisations. Due to these factors, exception management within the settlement process is more likely to be a struggle as settlement times shrink.

“Firms that have traditionally relied on proprietary systems will find that ‘throwing bodies’ at data challenges becomes less effective as the trade cycle compresses,” added Blater. “As a result, we could be in for a perfect storm of smaller buy-side and sell-side firms scrambling at the last minute to meet T+1 requirements by upgrading to more streamlined technology processes."


Basware teams up with Microsoft to enhance customer support with ChatGPT

Basware has partnered with Microsoft and Zure to announce the launch of its generative AI tool, which uses Microsoft Azure OpenAI ChatGPT. The tool, named AskMary, integrates ChatGPT technology to help Basware draft responses to customer inquiries. AskMary should help Basware’s customer support team to deliver a more accurate and faster support function for its customers.

The collaboration with Microsoft and Zure will see Basware leverage ChatGPT technology through Microsoft Azure’s OpenAI service within Basware’s own Microsoft Azure environment. This is designed to ensure the highest level of customer data security.

Customer inquiries in financial management can be complex and varied. AskMary uses Microsoft Azure OpenAI ChatGPT to provide tailored suggestions on engaging with customers, delivering fast and helpful resolutions for customers. The tool works by Basware's customer support team inputting customer inquiries via ‘prompts’ within the AskMary platform. The tool then returns detailed suggestions for customer responses. AskMary is named after communication expert Mary Gober, who has developed renowned methodologies around customer satisfaction and service excellence.

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