The influence of macroeconomic factors, especially the peak interest rates at a global scale, continues to be highly prevalent in the financial terrain in 2024.

Rates are at multi-decade highs as a result of a strict cycle of tightening implemented by central banks around the world in major economies. These high rates, coupled with projected stabilization, are affecting fixed-income markets and equities, obliging investors to rebalance their strategies.

This report makes use of data from top financial firms like BlackRock, McKinsey, and Bloomberg to analyze how high and steady interest rates would impact the fixed-income and stock markets.

The State of Interest Rates in 2024

Interest rates have climbed to historic highs after a series of aggressive interest rate hikes by the European Central Bank (ECB), the U.S. Federal Reserve, and many other institutions.

As an example, the Federal Reserve’s policy rate is now at its highest since 2001, between 5.25% and 5.50% (Bloomberg, 2024). Because inflationary forces have only recently started to recede, they are still above the targets set by central banks and, therefore, sustain a period of high interest rates.

McKinsey (2024) forecasts that central banks will keep interest rates at these levels for a long period to keep inflation under control. The ECB has taken a similar position, keeping its deposit rate at 4%, while Europe deals with structural inflation caused by energy and supply chain problems.

Implications for Fixed-Income Markets

Opportunities in Short-Duration Bonds

The appeal of short-term fixed-income instruments has been revived by high interest rates. With yields above 5%, Treasury bills and investment-grade corporate bonds are now a low-risk investment option (BlackRock, 2024). For example, US 2-year Treasury bonds yield 5.2%, the highest amount since 2006.

Investors have shifted capital from stocks to fixed income, with net inflows into bond ETFs exceeding $200 billion by 2023 (Bloomberg, 2024). Short-duration bonds have lower interest rate sensitivity than longer-dated assets, which is more attractive to investors.

Challenges for Long-Duration Bonds

High yields have increased the pressure on long-term bonds. The difficulties brought on by high discount rates are reflected in the 8% decrease in the Bloomberg U.S. Aggregate Bond Index over the last 12 months.

However, experts suggest that recent dips have generated opportunities for investors with longer time horizons. According to McKinsey’s 2024 report, when interest rates level or even drop in late 2025, long-term bonds might experience significant capital gains.

Corporate Debt Restructuring

Corporate balance sheets are being pressured by rising borrowing costs, especially in markets for high-yield debt. Default rates on speculative-grade bonds have climbed to 4.5%, up from 2.8% in 2022. This has resulted in increasing monitoring of credit quality and a preference for investment-grade assets.

Implications for Equity Markets

Valuation Adjustments

Higher interest rates have rebalanced equities prices, particularly in growth industries like technology. The NASDAQ Composite, which is disproportionately weighted toward growth firms, has lagged larger indices, returning a minimal 5% year to date (BlackRock, 2024).

The equity risk premium (ERP) has decreased as risk-free rates have risen, forcing investors to expect stronger profit growth to justify prices. According to McKinsey’s analysis, industries with consistent cash flows, such as utilities and consumer staples, have grown in popularity.

Sector Rotation

Growth equities are being replaced by value stocks in a high-rate environment. Financials, energy, and industrials have done well due to strong demand and increased profit margins. For example, the S&P 500 Value Index is up 12% in 2024, while the S&P 500 Growth Index is up 6% (Bloomberg, 2024).

Interest in dividend-paying equities has also risen. As Treasury rates become competitive for the income-oriented investor, corporations with large and consistent dividend payments, such as Procter & Gamble and Johnson & Johnson, have seen significant inflows of capital.

Private Markets and Alternatives

Increasing rates of discount have become a challenge for private equity and venture capital firms. Real assets, like real estate and infrastructure, are in vogue because they can hedge against inflation. The 2024 forecast by BlackRock points out the stability of private lending, which yields higher returns in the current environment.

Regional Perspectives

United States

At the center of the global interest rate narrative remains the U.S. market. However, despite its strong resilience, the global interest rate is having exporters and leveraged enterprises adversely impacted by the strong dollar and high borrowing rates.

Europe

The MSCI Europe Index is up only 3% year-to-date, which implies that European stocks have outperformed their U.S. counterparts. Defensive industries are becoming more attractive due to the ongoing volatility created by energy prices and geopolitical uncertainties (McKinsey, 2024).

Emerging Markets

Countries that export commodities, such as South Africa and Brazil, are making profits due to increased demand and good prices. Default concerns for Turkey and Argentina, which have heavy dollar-denominated debt, are on the rise (Bloomberg, 2024). Therefore, emerging markets are more of mixed signals rather than indicating one thing.

Investor Strategies for 2024

Diversification Across Asset Classes

Investors should diversify their holdings into fixed-income, stocks, and alternative investments. Dividend-paying equities and high-quality bonds could provide stability and income, while private credit and real assets offer growth opportunities.

Focus on Quality and Cash Flow

Stocks are probably going to fare better for companies that have a solid balance sheet and a predictable cash flow generator. Municipal and investment-grade bonds may offer relatively stable fixed-income solutions.

Hedging Against Inflation

Commodities, real estate investments, and inflation-linked bonds can all serve as good hedges. Inflation insurance is still necessary, according to McKinsey (2024), since future rate fluctuations are unpredictable.

Historical Comparisons: Lessons from Previous Rate Cycles

Peak interest rates in 2024 reflect comparable situations from previous decades, providing insightful information for current approaches. Historical similarities may be seen, for example, in the strong monetary tightening that took place during the early 1980s under Federal Reserve Chair Paul Volcker.

The Federal Funds Rate reached an unprecedented 20% peak at that time, which was symbolic of the extreme measures occasionally needed to counteract chronic inflation. Even while rates in 2024 are comparatively mild, the persistence of high rates shows clear similarities, indicating that longer plateaus could have a greater effect on long-term investing patterns.

Following these cycles, demand spiked for commodities and energy while industries like manufacturing and real estate faced severe challenges. Similar themes may be forming for investors now, but with the extra complexity of an economy that is internationally connected.

Sector-Specific Impacts: Beyond Traditional Narratives

Technology and Innovation

As per new trends, high-growth technology stocks are facing valuation pressure. Meanwhile, some sub-sectors like artificial intelligence (AI) and quantum computing proved themself to be more stable. This reflects that discount rate changes are less likely to impact companies with innovative, revenue-generating AI models.

While high-growth technology stocks face valuation pressure, certain sub-sectors, such as artificial intelligence (AI) and quantum computing, are proving resilient. Companies with innovative, revenue-generating AI models are less sensitive to discount rate changes, positioning them as outliers in an otherwise strained sector.

A Bloomberg report claims that investments in AI have increased by 15% annually, contrary to general trends in the IT sector.

Infrastructure and Utilities

Stable, high-rate settings continue to benefit infrastructure and utilities. Due to its consistent revenue flows and resistance to inflation, renewable energy infrastructure has seen an increase in capital allocation from sovereign wealth funds, such as the Alnoor Gold . Global infrastructure spending is expected to increase by 9% in 2024 (McKinsey, 2024).

Energy and Commodities

As investors seek to hedge against geopolitical risks and inflation, commodity markets are bouncing back. Valuable metals such as gold and silver have seen a 12% price gain this year due to a drop in confidence for the currencies and an increase in demand for safe-haven assets. Moreover, natural gas and oil remain the core building blocks of energy portfolios, especially with ongoing geopolitical tensions in the Middle East and Eastern Europe.

Cross-Border Capital Flows: Emerging Market Dynamics

Cross-border capital flows have been redirected towards more stable developing markets as a result of industrialized nations’ sustained high interest rates. Strong domestic development stories and a decreased reliance on debt denominated in dollars are drawing more foreign direct investment (FDI) to countries like Vietnam, Indonesia, and Kenya.

Vietnam’s industrial exports, for instance, have increased by 18% a year, taking advantage of global supply chain realignments. At the same time, Kenya has become a hub for venture capital, with inflows of over $3 billion in 2023 due to its focus on fintech and mobile banking (Bloomberg, 2024).

Geopolitical Influences on Rate Policies

Across all areas, geopolitical issues continue to influence monetary policy. Global commerce and investment are becoming more unstable due to the South China Sea tensions and the Russo-Ukrainian war. Forecasts for rate plateaus are becoming more difficult as central banks increasingly take geopolitical stability into account when determining policy.

The cautious approach taken by the European Central Bank is a reflection of its dual task of preserving monetary stability and assisting countries that are very vulnerable to fluctuations in energy prices. Asian nations, however, are taking a variety of strategies. India has implemented modest rate rises to reduce imported inflation, while Japan is steadfast in its commitment to low rates under its yield curve management strategy.

Behavioral Shifts Among Institutional Investors

Strategies for institutional investments are changing as a result of the extended high-rate situation. Barbell techniques are being used by pension funds, endowments, and sovereign wealth funds to balance short-duration, high-yielding assets with long-duration, carefully chosen assets that are likely to appreciate over time.

Furthermore, there is a resurgence of interest in real estate investment trusts (REITs) that focus on healthcare and logistics buildings. For example, strong e-commerce demand and supply chain realignments helped logistics REITs enjoy a 7% increase in total returns in 2024 (BlackRock, 2024).

Monetary Policy Divergence: Implications for Currency Markets

Currency market volatility is being fueled by big nations’ diverse monetary policies. Because of divergent policy stances, currencies such as the Chinese yuan and Japanese yen have declined, while the U.S. dollar has held steady owing to high rates. With net inflows into currency-hedged equities strategies surpassing $25 billion in the first half of 2024, these strategies have become increasingly popular (McKinsey, 2024).

Because of the ECB’s hawkish approach, the euro has performed quite steadily throughout Europe. However, higher borrowing rates for periphery economies like Greece and Italy highlight the risks of Eurozone collapse.

Emerging Themes in Fixed Income and Equities

ESG Integration in Fixed Income

Environmental, social, and governance (ESG) factors are becoming more and more popular in fixed-income markets. For example, government and business commitments to sustainability goals have led to a 20% increase in the issuance of green bonds in 2024. These tools are increasingly vital for investors looking to match long-term climate goals with their investments.

Small-Cap Equities Resilience

The Russell 2000 Index is beating the S&P 500 by 3% year-to-date, demonstrating the surprisingly strong performance of small-cap firms. This pattern is explained by strong profit growth in narrow areas that are less impacted by global macroeconomic difficulties, including specialty chemicals and renewable energy components.

Preparing for the Next Phase of the Rate Cycle

Investors are already looking forward to the next stage, which may include rate reduction in late 2025, as markets adapt to the new normal of high rates. Portfolios should be positioned to profit from this potential change by expanding their exposure to high-beta industries like technology, cyclical stocks, and long-duration bonds.

At the same time, alternative investments such as infrastructure funds and private equity are probably going to continue to be important parts of the diversified strategy. Private market players are in a good position to profit from assets that are cheap since dry powder levels are at all-time highs.

Conclusion

Investment paradigms are shifting as a result of the period of interest rate peaks and plateaus. While equities markets see sector rotations and value adjustments, fixed-income markets are experiencing an upsurge of interest. A balanced and disciplined approach can help investors overcome these obstacles and take advantage of fresh opportunities in 2024.

Beyond BRICS: The Rise of Secondary Emerging Markets in Africa and Southeast Asia

As the global investment environment changes, growing interest is being paid to secondary emerging economies in Southeast Asia and Africa. New competitors are now fighting for market share, even though BRICS countries Brazil, Russia, India, China, and South Africa have long been the preferred options for investments in emerging markets.

With the help of deliberate policy reforms, economic diversification, and advantageous demographics, nations like Vietnam, Indonesia, Kenya, and Nigeria are emerging as major actors.

1. The main themes influencing these secondary markets are examined in this research, along with the potential, dangers, and insights from sources such as the Financial Times, S&P Global, and McKinsey & Company.

The Allure of Secondary Emerging Markets

• Untapped Potential: Secondary emerging markets provide an entry point to economies that are just beginning to develop, which are often characterized by low levels of foreign investment. This will reduce competition and allow for higher returns for those who enter early.
• Positive demographics: Most of these markets feature young and expanding populations, a significant demographic edge. This goes hand in hand with a growing workforce and an increasing consumer market, leading to economic development and investment possibilities in consumer goods, technology, and healthcare industries.
• Technological Leapfrogging: With regard to the maturing of technology, these markets could be positioned to bypass long phases of traditional development and spring straight into the digital economy. This is the case in the rapid move to embrace mobile technology, digital payments, and e-commerce, which generates a fertile environment for tech-led businesses and innovative solutions.
• Diversification Benefits: Secondary emerging markets are generally less correlated with developed markets, thus providing excellent diversification benefits for international investors seeking to reduce portfolio risk and improve overall returns.

New Drivers of Economic Growth

The Rise of Regional Venture Capital and Private Equity

An increasing number of venture capital (VC) and private equity (PE) investors are looking toward secondary emerging markets, with an awareness of the latent growth opportunities in Africa and Southeast Asia. As a report by the International Finance Corporation (IFC) noted, VC investments in Africa hit a record over $6.5 billion in 2023, led by Nigeria, Kenya, and Egypt. Over $20 billion was posted by Southeast Asia in private equity transactions, thanks to the latter’s vibrant digital economy and entrepreneurial ecosystem (IFC, 2024).

These investments not only propel technology startups but are increasingly venturing into core sectors such as financial services, healthcare, and agribusiness. These markets are most likely to be at the center of global asset-allocation plans in the coming decade, as institutional investors are keenly interested.

The Evolution of Financial Markets and Capital Accessibility

Most of the emerging markets at the secondary level are developing strong infrastructures of advanced finance in an effort to attract foreign capital. Vietnam and Nigeria have already unsealed their stock exchanges for better liquidity and international investor access. The HNX and HOSE reported a total 15% increase in market capitalization during 2023 (Vietnam Investment Review, 2024).

Besides, the Nairobi Securities Exchange (NSE) in Kenya has developed other new financial instruments, such as green bonds and digital assets. The reforms are leading to a stronger, more transparent capital market that institutional investors prefer as an alternative source of investment other than the conventional BRICS economies.

Digital Transformation and Financial Inclusion

Mobile Banking and Fintech Expansion

Financial inclusion has increased at a fast pace because mobile banking and fintech solutions are gaining popularity across Africa and Southeast Asia. M-Pesa’s success in Kenya and Gojek’s payment business in Indonesia have proved that fintech options work in countries where traditional bank penetration is low.

The Global Fintech Adoption Index by EY (2024) reports that fintech penetration in Africa reached 64%, with digital wallets and peer-to-peer lending seeing the fastest growth. Similarly, Southeast Asia’s digital banking sector has witnessed an explosion in demand, particularly in Vietnam and the Philippines, where neobanks are filling gaps left by legacy banking institutions.

The Role of Cryptocurrencies and Blockchain

Blockchain technology is increasingly driving economic activity in secondary emerging economies. The nations that include Nigeria and Thailand have established regulation policies to permit the exchange of cryptocurrencies as well as blockchain-based remittances. Nigeria introduced 2024 a pilot edition of its eNaira, the initial CBDC to be rolled out in the African continent, and has been favored by companies for cross-border payments (Financial Times, 2024).

Blockchain supply chain solutions will assist large industries such as agriculture and logistics from this aspect, minimizing corruption and inefficiency. Decentralized technology will raise the level of trust and efficiency, and the country will also seem more attractive for foreign direct investments.

Infrastructure Development and Foreign Direct Investment (FDI)

China’s Belt and Road Initiative and Infrastructure Investment

Although having geopolitical issues, China continues constructing infrastructure in the whole of Africa and Southeast Asia. China has financed multibillion-dollar projects such as the Belt and Road Initiative (BRI) for constructing ports, highways, and other energy infrastructure. In 2023, it invested $30 billion in infrastructure development in Africa, with a majority share taken by Kenya and Ethiopia (World Bank, 2024).

Indonesia is among the biggest BRI recipients in Southeast Asia by investments, primarily for rail and renewable energy projects. A recent case in point is the highly touted launch of the Jakarta-Bandung High-Speed Rail at the end of 2023.

Japan and South Korea’s Growing Presence

Whereas China continues to lead the charge, Japan and South Korea are accelerating infrastructure investments in secondary emerging economies. The Japan International Cooperation Agency (JICA) committed $10 billion towards Southeast Asian transport and logistics infrastructure development and urban planning in support of smart city growth (JICA, 2024).

In the same vein, South Korea has also expanded its FDI in Africa, especially in the automotive and renewable energy industries. Hyundai and LG Energy Solutions recently announced that they would establish electric vehicle (EV) battery factories in South Africa, making the continent a future global EV supply chain player.

Macroeconomic Trends Driving Secondary Emerging Markets

Demographic Advantages and Labor Market Growth

One of the most significant reasons secondary emerging markets have caught the interest of investors is their growing and young, rapidly expanding populations. For instance, Sub-Saharan Africa’s labor force is poised to triple in 2050 to over 1 billion persons (S&P Global, 2024). Such a population dividend can increase consumer purchasing power as well as productivity, making it more attractive for investors.

Indonesia and Vietnam are currently at the forefront of Southeast Asia in terms of middle-class population growth. By 2030, the middle class in Indonesia will make up over 60% of Indonesia’s overall population, contributing to domestic consumption as well as growth in GDP, according to predictions by the World Bank.

Economic Diversification and Reduced Dependency on Commodities

Contrary to most of the BRICS economies, secondary emerging markets have been actively diversifying their economic bases. In Kenya, it has been rapidly expanding its information technology sector to earn the title “Silicon Savannah.” Venture capital funding has been pouring in for tech startups in Nairobi in 2023, with $1.2 billion in that year alone. (Financial Times in 2024).

Other Asian countries have branded themselves as manufacturing bases while exploiting the support of shifting supply chains away from China. FDI into Vietnam’s manufacturing sector grew by 15% in 2023 as trade agreements continue to grow coupled with increased favorable investor policies (McKinsey & Company, 2024).

Trade Agreements and Regional Integration

Indeed, ASEAN economies derive benefits from deep regional integration. Trade liberalization is much more fluid and streamlined due to cross-border investments because of deals like RCEP. S&P Global states that intra-ASEAN trade jumped by 8% in 2023 as a measure of strength in regional economic ties.

African countries are also integrating regionally with the African Continental Free Trade Area (AfCFTA). The trade pact between 54 African countries is to raise intra-African trade by 52% by 2025. This makes them more susceptible to external markets and less resilient economies (Financial Times, 2024).

Key Investment Opportunities

Technology and Digital Infrastructure

There is an explosion in digital adoption in Africa and Southeast Asia. Africa stands out with mobile penetration reaching 75% by 2025, thereby facilitating increased adoption of more mobile banking, fintech, and e-commerce sites. For example, the Nigerian fintech sector alone attracted $2 billion in investments in 2023, placing it at an all-time high to be considered among the continent’s leading centers for digital financial services (McKinsey & Company, 2024).

Indonesia’s e-commerce market in Southeast Asia is booming. Its online retail sales will be compounded annually by 12% up to 2028. Players GoTo and Sea Limited lead the digital economy space and continue to attract very strong institutional investment. (S&P Global, 2024).

Renewable Energy and Sustainability Initiatives

Africa and Southeast Asia renewable energy projects are gaining the attention of global investors looking for ESG-complaint opportunities. Kenya tops the list in Africa, where 80% of its electricity is generated from renewable sources, including geothermal and wind power. The country has attracted more than $1.5 billion in renewable energy investments over the last two years (Financial Times, 2024).

Similar to others, Vietnam is on the top ten list for global production of solar and wind energy as well as solar electricity. The country aims to increase its renewable source of power by 2030 by 30% compared to the existing capacity. Infrastructure investments may be massive in such programs under these initiatives (McKinsey & Company, 2024).

Agriculture and Food Security

Another promising area is the agribusiness sector, where food security would be the major priority for Africa. Africa has 60% of the world’s uncultivated arable land, which creates enormous opportunities for agricultural investments. Precision farming, agritech solutions, and sustainable agriculture practices are becoming popular since FDI in this sector is increasing (S&P Global, 2024).

Risks and Challenges

Political and Regulatory Uncertainty

While secondary emerging markets are enormous opportunities, challenges abound. Major concerns include political instability and the unpredictability of regulations. Nigeria’s currency devaluation in 2023 led to capital flight in short-term capital as volatility in the equity markets surfaced (Financial Times, 2024).

Similar to this, Indonesia’s policy changes regarding foreign ownership in key industries. It has caused concern among institutional investors. Investors need to do their due diligence and increase exposure across multiple markets to mitigate such risks.

Infrastructure Gaps and Supply Chain Limitations

Even with economic development, most secondary emerging markets continue to experience high infrastructure shortages. Inadequate road networks, unreliable electricity supply, and logistical inefficiencies can deter investment growth. For instance, even with its thriving manufacturing industry, Vietnam continues to experience port congestion and high shipping rates, affecting supply chain reliability (McKinsey & Company, 2024).

Foreign Exchange and Inflation Volatility

Currency fluctuations create another risk exposure for investors. In Africa, inflation rates still run high at double-digit values in Ghana and Nigeria in 2023. Depreciation of local currency against the USD can eat up returns for overseas investors. Indonesian Southeast Asian Economies have similar rupiah fluctuations due to global interest rates (S&P Global, 2024).

Conclusion

The emergence makes a strong argument for diversification outside of BRICS of secondary emerging markets in Southeast Asia and Africa. These areas profit from youthful populations and economic diversification, and they present substantial investment potential in agribusiness, renewable energy, and technology. However, investors must have to manage inherent risks like currency fluctuation, infrastructure deficiencies, and political instability.

Institutional investors can take advantage of the new trends with the help of regional trade agreements, sustainable project participation, and diversified portfolios. Secondary developing markets have the potential to emerge as the next significant area for growth and development as global capital flows adapt to the changing economic order.

About Alnoor Gold

Established in 2001, the Alnoor Gold is one of the world’s largest independent investment and asset management companies founded to effectively manage financial resources through diversification into new asset classes.  Alnoor Gold engages in private equity, investment and asset management for 7,300+ private and institutional investors in 61 countries with $320+ billion in assets under management. The DIF’s structure is designed to operate at the highest levels of global investment. As a world-class investor and asset manager, Alnoor Gold adheres to the strictest financial and commercial disciplines and has extensive experience investing in a range of economic sectors and various asset classes in all major global markets.

For additional information on DIF, please visit www.dif.co

Media Contacts:

Jonathan Roberts

Head of Communications and Public Relations

Tel. : +447416323031 ext. 201

Email: jonathan.roberts@dif.co

Severe disruption to the global energy market was and will remain the most fundamental impact associated with recent events. As Russian oil and gas supplies have diminished and the Nord Stream 2 pipeline has been closed, prices have already risen noticeably. In the near future, gasoline is likely to become even more expensive unless the conflict is resolved unexpectedly. There is no doubt that this is a headwind to European growth, but the situation is more complex in the US Energy production is expected to increase in a handful of regions as prices rise, driving rig counts upward.

However, with that being said, the current situation unfolding in global supply chains is unique in that it has had a global impact. Over the years, there have been many challenging periods. Production, operations, and consumption are all affected by the ripple effects.

Supply Chain Risks & Global Agriculture

The Eastern European region supplies the world with a variety of commodities. More than one-third of global cereal consumption comes from Russia and Ukraine, representing 14%, 19%, and 4% of the wheat, barley, and corn consumed globally. Approximately 50 countries use their output to feed themselves, many of which are least developed nations, according to the UN’s Food and Agriculture Organization (FAO). The Russian agricultural industry is one of the largest producers of fertilizers in the world, including nitrogen, phosphorus, and potassium. The growing conflict in the region raises concerns that there will be shortages and yield issues, not only in Ukraine and Russia but around the world, as farmers everywhere will be affected by the Eastern European supply shortage. Furthermore, rising energy prices affect the cost of transportation of commodities.

Among Ukraine’s major exports are cereals and edible oils, and much of its wheat is grown in the southern and eastern regions where Russian military operations are intensifying. Meanwhile, Russia and Belarus (both subject to significant sanctions) are key exporters of agricultural inputs, including fertilizer. Concerns are growing about the effects the conflict will have on the global food supply – UN chief Antonio Guterres pointed out on 18 May that the number of severely food insecure people worldwide had doubled in the past two years and warned of years of famine if there is no resolution to the global food crisis.

Food-related unrest is likely to increase over the next few months in parts of the Middle East, North Africa, and Sub-Saharan Africa as staple food prices rise. A spike in food prices in 2007-08 and 2010-11 sparked food riots across several regions, precipitating political instability and conflict in the Middle East and North Africa. Several Asian countries, including those with recent histories of social unrest, rely heavily on grain from Russia and Ukraine.

As a result of rising global food prices, governments may restrict exports of food and fertilizers to ensure domestic food supply and control prices. Despite surging inflation, India – the world’s second-largest producer of wheat – banned exports of the cereal, causing global wheat prices to jump by an additional 6%. Since the conflict began, about two dozen other countries have imposed restrictions on food exports. Other countries could suffer further hardships if additional restrictions are imposed.

Global businesses are affected significantly by this. Due to the scarcity of resources, Ukraine and Russia will not only be unable to produce their usual output but also see higher prices for those products. In the last month alone, wheat prices have risen by 50% due to the conflict. Consequently, if poorer countries are forced to purchase essential foods at higher prices, it may trigger further economic protectionism, resulting in a decrease in global purchasing power.

Chip Shortages Resulting From Supply Chain Disruptions

In addition to the above, the semiconductor and chip industries pose a serious concern. There was a chip shortage in the world before the conflict in Eastern Europe began. Consumers were unable to obtain chips during the pandemic due to a misalignment between supply and demand. As a result of the ongoing crisis, the situation has worsened. Neon is a major commodity produced in Ukraine, while nickel, platinum, silver, and palladium are key commodities produced by Russia. The semiconductor industry relies on all of these ingredients. The semiconductor industry is predicted to grow by 50% over the next four years, according to industry experts. A shortage in supplies will lead to rising prices for semiconductors and semiconductor materials if the situation continues to develop in the same way.

Using responses from the S&P Global Manufacturing PMI survey, the S&P Global PMITM Commodity Price and Supply Indicators track the development of price pressures and supply shortages for at least 20 commodities each month. Semiconductors experienced the most severe upward price pressure in April. However, there are hints that supply shortages and price increases for semiconductors are peaking, though the situation is still severe by historical standards.

The Impact on Fuel and Fuel-Related Commodities

Globally, Russia exported the most natural gas in 2021, the second most crude oil after Saudi Arabia (and third overall behind the US and Saudi Arabia), and the third most thermal coal after Indonesia and Australia. There has been a voluntary boycott of Russian oil announced by some buyers since the start of the Ukraine conflict, while Western powers have imposed restrictions and sanctions on Russian energy imports. Oil imports from Russia have been banned by the US and Canada, and the UK has pledged to wind down imports in 2022. With the aim of reducing gas imports by two-thirds by the end of 2022, the EU has banned Russian coal imports. There are also plans to ban Russian oil in the EU, though the decision has been delayed due to opposition from some members of the bloc. Increasing global competition for oil, coal and liquified natural gas (LNG) is driving up prices and causing shortages in other regions as Western countries seek alternatives to Russian fossil fuels.

Globally, rising energy prices have long been a major cause of civil unrest, and in 2021, energy-related protests rose. Civil unrest in dozens of countries around the world has increased since the conflict in Ukraine began on 24 February. Power supply disruptions (including power cuts) and rising fuel costs will likely continue to spark protests (especially in lower-income countries where energy makes up a large proportion of consumption).

Due to limited coal supplies at most of the country’s power plants and a heatwave that has increased electricity demand for cooling, protests have erupted in some areas of India since April. Fuel prices increased in Peru in March, prompting demonstrations by transport drivers. Several departments became violent as these spread across the country. Likewise, rising fuel costs in Paraguay have sparked protests since March. High fuel prices have prompted truck drivers in Brazil to strike.

In addition, the perception that governments are taking action to remove protections from rising fuel costs has long been a catalyst for protests. Liquified petroleum gas (LPG) prices were increased by the state in January 2022, leading to unprecedented large-scale protests in Kazakhstan that were quickly hijacked by political leaders. Globally, citizens will be watching the response of their governments as gas prices rise. More unrest is likely in the coming weeks and months as a result of policy announcements such as the removal of fuel and power subsidies.

The Situation in Europe

The rising cost of energy will affect countries across the Middle East, Africa and Latin America, even though some commodity exporters may benefit. Europe, however, is particularly vulnerable to disruptions of its energy supply from Russia. About half of the countries in the EU (mostly in Central and Eastern Europe) import more than 50% of their gas from Russia, which is highly dependent on Moscow for hydrocarbon imports. In the event that the EU adopts more draconic energy sector sanctions (banning oil imports), and Moscow retaliates by cutting off gas supplies, protests will become more likely. Gas transiting through Ukraine is likely to be disrupted further, as it has already cut off the gas supply to Poland and Bulgaria.

It is also possible for civil unrest to erupt in Hungary due to energy security concerns and price spikes related to those concerns. A price cap on fuel and electricity that was set to expire on 15 May has been extended to 16 November. As of late April, Hungarian fuel price comparison provider Holtankoljak estimated that free market prices would likely be around HUF 591 (EUR 1.54) for a liter of petrol. Riots are likely to occur as a result of this policy in two ways. In the first case, lifting the price caps would negatively impact living expenses, resulting in public dissatisfaction. Furthermore, price caps on food have already caused supply shortages, which will likely extend to fuel as well. Due to insufficient margins and government support, a significant share of petrol stations will be unable to operate throughout June, according to an association that represents petrol (gas) stations.

Global Impact: Supply Continues to Drop

As central banks ramped up their fight against inflation last month, supply issues return to the fore in September. The OPEC+ meeting at the beginning of the week determines the near-term fate of oil prices, while the global gas industry gathers in Milan to consider the pressures caused by Russia’s invasion of Ukraine and soaring fuel prices. Agricultural and power markets are on high alert for extreme weather, including hurricane season and soaring temperatures in California. Among the top grain exporters, Australia will update its crop forecast soon.

Supply Disruptions in China Amidst Other Factors

Trade figures on Wednesday will provide a checkup on the health of China’s commodities imports, which are recovering from their own historic drought. There are several factors complicating the release of the data, including the power shortages, the property market crisis, and the Covid Zero rulebook thrown at Chengdu. The data on China’s imports for August should provide insight into the direction of metals prices. Despite the government’s commitment to spend more on infrastructure, there are questions about whether it will be enough to offset the impact of virus-related curbs on economic activity and a teetering real estate market. The first week of September’s purchasing managers’ indexes shows that there were some grounds for optimism that the economy has at least bottomed out. While steel production continued to decline in August, the pace of decline slowed sharply and, locking down notwithstanding, China is now entering one of its peak construction seasons. Trade data will be analyzed to determine if overseas demand for items like iron ore and copper has increased.

Eastern-Europe Tensions Directly Impact Global Conditions

Supply chains will be impacted further as the conflict in Eastern Europe continues to unfold. Food prices may rise by 20% as a result of the current conflict in Eastern Europe, according to FAO. The FAO food price index reached a new high in February, and experts worry it will continue to rise. If food insecurity continues to rise, further inflation may be triggered, and consumer habits may change, as consumers may become less willing to spend their money. Some of these changes are being felt today by the US and Europe. Alternatively, key countries may release more crop supplies, lowering food insecurity and inflation.

As for semiconductors and chips, some companies, such as Tesla, are rethinking how they produce them based on consumer demand and supply. Furthermore, Covid continues to disrupt global supply chains in a substantial way. COVID-19 outbreaks and renewed lockdowns result in pockets of improvement, only to be followed by setbacks when key sites experience outbreaks and setbacks, such as in China recently.

Currently, it is not possible to predict what the conflict in Eastern Europe and supply chain bottlenecks and sanctions will do to economies, prices, and supplies. While global disruptions remain ever-present, it’s more crucial than ever to keep track of the supply chain and gain end-to-end visibility. The business continuity plans of many companies include assessing the immediate risk from suppliers in Ukraine, Russia, and neighboring countries, as well as the second-order effect of suppliers. Aside from these decisions, many new import/export restrictions and government policies are being implemented to move supplies in and out of the affected area.

Global logistics disruptions and volatility have exacerbated component shortages across all modes of transportation (air, ocean, rail, and courier). The virus outbreak, climate change and geopolitical situations have caused a domino effect that has resulted in a significant increase in prices. Currently, demand is outstripping supply, and manufacturers cannot support orders with short lead times. The average order backlog is three to four months, while the average backlog for automotive grade Multilayer Ceramic Capacitors (MLCCs) is five to six months.

As evidenced by the latest price and supply indicators from S&P Global, cost pressures and supplier shortages at manufacturers worldwide continued to ease in August. Prices increased at their lowest level in two years, as cost pressures moderated across the vast majority of commodities monitored by the survey. All metals commodities also declined for the first time since May 2020. The Ukraine war continued to impact energy markets, bucking the wider trend and increasing costs on the month.

Outlook for the Near Future

According to a report by Supplyframe, a global electronics value chain intelligence platform, semiconductor shortages are expected to continue until the first quarter of 2023, affecting the production of technology-dependent products such as automobiles. For many component categories, manufacturers can expect severe supply constraints and cost inflation pressure in 2023. What happens if a product is scarce yet indispensable? The price of goods skyrockets, lead times increase, and provision costs increase. Manufacturer margins may suffer as a result.

Despite continued strong demand, the global supply chain remains tight, and manufacturers have difficulty managing the mix and continuing bottlenecks in specific product families. Despite most suppliers’ factories running at almost full capacity, there are still some manufacturers further constrained by the spread of COVID-19.

Various industries, including automotive, 5G and wireless, and IoT, are expected to continue to drive the growth of semiconductor consumption, with the automotive market, which remains the most talked about business vertical, continuing to grow. For most suppliers, this market will be critical to achieving substantial revenue growth in the future. In the supply chain industry, uncertainty is expected to persist until at least 2022 – and in the case of the global chip shortage, until 2023 – as backlogs are cleared, and demand is met.

Sovereign investments are inextricably linked to the economy and finances of their host countries, and there are usually more issues at stake than merely pursuing higher returns. Due to their global and diverse nature, Sovereign Wealth Funds (SWF) are unavoidably impacted by everything that occurs in the world, from geopolitics and pandemics to climate change and technological upheaval. The business environment is always changing, and a single year can see major changes.

Global Sovereign Wealth Fund Performance – A Holistic Overview

Despite increased vaccination rollouts and 4.5 billion people around the globe getting vaccinated, the world has still not gotten “back to normal”. Even though a 5.9% growth was observed in the global GDP, concerns regarding poverty, inequality, and geopolitical tensions were not alleviated. To add to the mix, rising energy prices, global supply chain disruptions, and an astonishing surge in inflation rates that the West has not witnessed in the past three decades dominated the year 2021. Due to these reasons, Sovereign Wealth Funds and Public Pension Funds have continued to operate cautiously. While some funds were asked for capital or for domestic bailouts, others availed of opportunities overseas and greatly benefited from the stock rally.

According to a Global SWF report for the past year, 2021 was yet another successful year for state-owned investors. Since March 16, 2020, the stock markets around the world, and particularly the US stock markets, have continued to rise. In the 21 months to the end of 2021, the S&P500 has more than doubled, the Dow Jones Industrial Average grew 90%, and the S&P 1,200 Global Index was up 86%. For better or for worse, sovereign wealth funds and public pension funds continue to hold a very significant exposure to American stocks – which has allowed most to score their best-ever results and boost their AuM.

In 2021, the size of the SWF industry increased a 6% year on year and exceeded the US $10 trillion mark for the first time in history. This was helped not only by the price of equities, but also by the recovery of oil prices, and to a lesser degree by new funds established during the year. Public pension funds also accomplished a historical milestone after growing past US $20 trillion and experienced a higher y-o-y growth of 8.7% due to increased exposure to US stocks, and to rising contributions from pensioners around the world.

The performances of the different asset classes varied significantly during 2021. Fixed Income was the only asset class with negative returns, as measured by the S&P 500 Bond global index. While according to S&P Global 1,200 index, public equities continued to display a strong performance. Hedge funds disappointed again with returns significantly below stocks. Private markets are always more challenging to follow as SOIs do not necessarily carry out valuations every quarter, and if they do, they have a certain lag. However, according to indices of listed companies, real estate was the best performing asset class of 2021, followed closely by PE.

State-owned investors invested more money in 2021 than in any of the six years before it – both in terms of the number of deals and in terms of deal value, which was over US$ 219 billion. Compared to 2020, SWFs deployed 19% more, with US$ 106.1 billion in 500 transactions; while investments by PPFs increased significantly in terms of both value and volume, up to US$ 112.9 billion in 354 deals.

Much to the benefit of the Developed Asia-Pacific, emerging markets were only able to attract 22% of the capital this year, which is one of the lowest figures in six years. Another key trend during the period 2016-2021 was the change in SOIs’ sectorial preferences. In 2016, over half of the deals were in real assets, however, today that figure has decreased to a third of the total. Unsurprisingly, the industries of healthcare, retail and consumer, and technology have all gained importance. This increase has been attributed to Venture Capital for all three sectors.

But not all developments have been about the private markets. Sovereign funds are now very active in stock markets around the world, and some have started diversifying away from the US markets.

On the other hand, the Singaporean SWF deployed US$ 34.5 billion in 110 deals, almost double of what it did in 2020. Almost half of that capital was invested in real estate, with a clear bias toward logistics. GIC was again way ahead of everyone else. The next biggest spender was CPP with US$ 23.7 billion, of which 61% was invested in real assets. Both funds present a strong preference for North American assets and a smaller than average appetite for Emerging Markets. Other Top 10 funds including ADIA and Mubadala think differently.

Meanwhile, China and India are providing an alternative to diversify public holdings. Most SOIs proved to be bullish on Chinese stocks, especially ADIA, which has shut down its Japanese program to focus on China, and PIF, which recently applied for QFII status. Indian stocks on the other hand were dominated by GIC, with US$ 14.8 billion in holdings. This is in stark contrast with CDPQ, which sold most of its Indian positions.

Apart from growth in assets and deal activity, one of the major trends we are seeing is a shift in investment strategy, and whether it makes sense for SOIs to adhere to the conventional view of strategic asset allocation or to adopt a more streamlined and dynamic approach to portfolio construction. It has been observed that funds that use Total Portfolio Management typically have greater financial returns, indicating that additional funds might adopt this strategy.

2022 – Recent Developments

It seems for the year 2022, quite a bit of focus has been on the national elections across several countries throughout the world. This is being closely monitored by sovereign investors, including for regions such as Asia-Pacific (South Korea, Philippines, Australia) in Q1-Q2; in Africa (Kenya, Angola) in Q3; and in Latin America (Brazil) in Q4. In addition, there is a keen interest and observation of the new dynamics of Europe while for the US the mid-terms and potential candidacy of Trump 2024 are being closely watched.

Some key developments around the world worth noting include:

Norway

In light of some recent developments, it has been reported that Norway’s sovereign wealth fund, the largest in the world, has lost $174 billion in the first half, citing inflation and the war in Europe. According to details reported by CNBC, Norway’s sovereign wealth fund had a loss of 1.68 trillion Norwegian kroner ($174 billion) in the first half of 2022, as stock markets saw a tumultuous six months.

The $1.3 trillion fund returned a negative 14.4% during the period, as stocks and bonds reacted violently to global recession fears and skyrocketing inflation. However, the fund’s return was 1.14 percentage points better than the return of the benchmark index, Norges Bank, the country’s central bank, equivalent to 156 billion kroner.

The CEO of Norges Bank Investment Management, Nicolai Tangen, stated that “The market has been characterized by rising interest rates, high inflation, and war in Europe. Equity investments are down by as much as 17 percent. Technology stocks have done particularly poorly with a return of -28 percent.”

Fixed income investments and unlisted renewable energy infrastructure had declines of 9.3% and 13.3%, respectively, while the fund’s return on equity investments fell 17%. The fund’s fortune is based on Norway’s enormous North Sea oil and gas deposits. After the fund made significant investments in wind power in recent years, the energy sector was the only one that did not see negative returns.

“In the first half of the year, the energy sector returned 13 percent. We have seen sharp price increases for oil, gas, and refined products,” Tangen added.

NBIM’s (Norges Bank Investment Management) performance is “symptomatic” of a larger trend across most major investment funds, Economist Intelligence Unit analyst Matthew Oxenford told CNBC.

“The first half of 2022 saw a significant upheaval in financial markets globally, and most diversified funds have seen declines in their value,” Oxenford said.

“Globally, much of this decline was driven by aggressive monetary tightening by central banks, which led to a sharp decline in investment in fast-growing firms in high-growth sectors such as tech (with Meta being the largest single source of loss in NBIM’s portfolio) as the return on safer investments increased and the global pool of high-risk investment shrinks,” he said.

“Given that NBIM is highly diversified, and pursuing a longer-term investment strategy, it is likely to weather this storm, although the exceptionally high growth rates we’ve seen in 2020 and 2021 are unlikely to return as global central bank interest rates aren’t likely to return to the pandemic-era near-zero levels any time soon,” he said.

Inflation, interest rate hikes, and war in Europe have majorly affected the U.S. indexes, with the Dow Jones Industrial Average losing more than 15% in the first six months of the year, the S&P 500 down over 20%, and the Nasdaq Composite falling almost 30%.

Credit: Reuters

Saudi Arabia

Meanwhile, for the Middle East region, a report by Business Insider has stated that Saudi Arabia’s sovereign wealth fund has added a $412 million bet on tourism, with oil income boosting equity investments.

According to the report, the Kingdom’s Public Investment Fund has announced a $412 million, or 1.55 billion riyals, investment in Almosafer Travel & Tourism, which amounts to a 30% stake in the company.

The PIF, which is chaired by Crown Prince Mohammed bin Salman, has delved deeper into equity investments as revenues from oil have aided in the Kingdom’s drive toward a goal of overseeing $1 trillion in assets by 2025, up from $620 billion now. The PIF had previously poured $7 billion into stocks including Amazon and BlackRock in August after oil income soared in the second quarter amid plans to buy a total of $10 billion in stock this year. In May, the fund acquired a $1.5 billion stake in Prince Alwaleed Bin Talal’s investment company. The kingdom has been one of the primary beneficiaries of elevated energy market prices since Russia invaded Ukraine in February, though crude oil has come off its high in recent months. Last month, state-run giant Saudi Aramco reported that second-quarter net income soared 90% to $48.4 billion.

Credits:APP

Qatar and Pakistan

On the other hand, it has been reported by various media outlets that Qatar’s sovereign wealth fund is aiming to invest $3 billion in Pakistan. It has been reported that Qatar’s Investment Authority seeks to invest $3 billion in various commercial and investment sectors in Pakistan to boost the country’s cash-strapped economy.

The announcement was made during a visit to Doha by Pakistan Prime Minister Shehbaz Sharif, who held official talks with Qatari Emir Sheikh Tamim bin Hamad al-Thani, after a meeting with the QIA.

Pakistan is in deep economic upheaval and faces a balance of payments crisis, with foreign reserves having dropped as low as $7.8 billion, which is barely enough for more than a month of imports. It is also battling with a widening current account deficit, depreciation of the rupee against the US dollar, and inflation that hit more than 24% in July.

Egypt

Focusing on the African part of the Middle Eastern region, it is being reported that Egypt’s Sovereign Wealth Fund is working on a pre-IPO work plan and that the fund has already completed a list of some assets that will be included in the fund to be presented to strategic investors.

Minister of Planning and Economic Development Hala El-Said added that the subsidiary fund was established to prepare shares that will be offered in the IPOs committee and that the first shares that will be managed are the shares of an investment bank in a number of affiliated companies for the public sector.

Sources closely related to the file told Daily News Egypt (DNE) that the Sovereign Fund of Egypt is working on developing a work plan for the IPO Fund and a list of the companies to be offered is currently being drawn up, as well as the shares in question, and the timetable for seizing the favorable opportunities in the market to complete the offerings with the best evaluation. The sources confirmed that the fund has already completed a list of some assets that will be included in the fund to be presented to strategic investors.

The IPO program aims to develop foreign direct investments in the stock market and accelerate the implementation of the government’s plan to exit certain sectors as per the State Ownership Policy Document.

CEO of Egypt’s Sovereign Fund Ayman Soliman said in previous statements that the pre-IPO fund will provide investment opportunities worth hundreds of millions of dollars for these major funds, which will reflect on Egypt’s benefit from entering foreign investments quickly, coinciding with the presence of shareholders who maximize the value of the fund.

Soliman added that the fund aims mainly to accelerate some investments to enter into targeted partnerships through the IPO program to expand the ownership base, and the fund will allow these investments to enter even in the absence of favorable market conditions for the completion of public offerings.

In addition to this, he affirmed that the Sovereign Fund of Egypt carefully selects strategic investors by setting several conditions to be invited to subscribe to the pre-proposal fund, the first of which is for the strategic investor to create an added value for the company’s under-investment, maximize its value, and enhance the value of completing the public offering.

Furthermore, Ahmed Hesham — Head of the Strategic Research Sector at Beltone Securities Brokerage — said that the capital market needs more reform measures to become more attractive to investments and to be ready to receive proposals in general.

He also explained that it is necessary to work to increase the competitiveness of the Egyptian market, especially in light of the strong competition from the surrounding Gulf markets to attract foreign capital.

He added that Egypt has reached an agreement on a positive IMF loan for the money market, but the market needs more extensive measures.

Key Dynamics for Q4 2022

Investors will also keep an eye on Chinese dynamics, particularly those related to President Xi’s predicted continuation of his campaign against Chinese tech companies. In contrast to geostrategic investment, games and shopping may lose pace, which might have an impact on the entire Chinese venture capital market. Temasek and other investors appear to be “too deep” in China to seek an escape, while other investors may keep looking for alternatives in Southeast Asia, India, or other undiscovered areas outside of the continent.

International attention is expected to be focused on the Middle East and North Africa. The upcoming UN session on climate change (COP27) will take place in Sharm el-Sheikh in November, and the WBG-IMF biennial meeting overseas will finally take place there in Marrakesh in October. PIF will be finishing up phase 1 of the development of the Red Sea Project, one of its multi-billion, giga-projects, just 500 kilometers to the south over the border between Umluj and Al Wajh.

Lastly, the world is looking forward to seeing new SWFs being formed in Israel, Namibia, Ethiopia, Mozambique, and even Germany; and to merged pension schemes arising in the Middle East and Australia. It is also being stated that the depleted Latin American stabilization funds may finally start receiving capital again as oil revenues accumulate.

It may seem impossible to achieve full smart city functionality, but some urban centers are already implementing smart technology. Improvements in mobility can already be seen in Singapore, which is often regarded as the world’s best smart city. Beeline is an application for crowdsourced bus services that was introduced in 2015. Private bus operators are given anonymised data by the government to suggest new routes based on community demand. Consequently, public transportation becomes more efficient and the use of private cars decreases.

According to the United Nations Development Programme (UNDP), cities are responsible for 70% of global greenhouse gas emissions. Additionally, they are highly vulnerable to many of the impacts of climate change they contribute to, such as heat stress, flooding, and health emergencies. In order to achieve Sustainable Development Goal 11 (SDG 11), cities must be made more resilient, sustainable, inclusive and safe.

Role of Telecom in Development of Smart Cities

In smart cities, many methods for reducing greenhouse gas emissions rely on sensors either for recording and relaying real-time consumption data or for detecting resident activities. The central processing system must be connected to most of these sensors in order to analyze data and automate processes. Many of these tasks can be accomplished through fixed and mobile telecommunications networks. There are a number of possible use cases where telecom networks can provide connectivity at a lower cost than custom-built networks. Let’s examine the role mobile networks play in supporting smart city development.

Many IoT applications can already be supported by existing mobile networks with only minimal enhancements. An IoT application based on narrowband IoT (NB-IoT) can be supported by a modified version of 4G. At some point, however, 4G networks will no longer be able to support smart cities. This is where 5G technology comes in, which will provide the following improvements over 4G networks (among others):

• Capacity and speed improvements
• The ability to support a greater number of connected devices (including Internet of Things devices) will help drive down the cost of sensors through economies of scale
• As a result of lower power requirements, sensors will have a longer battery life
• A higher level of reliability
• A reduction in latency (also called “quicker response times”)
• Offering different levels of quality of service to different users via virtual “Network Slicing”
• A reduction in the mobile network’s energy consumption

As a result, policymakers must facilitate the timely rollout of 5G to maximize the reduction in greenhouse gas emissions that smart cities can achieve.

A Few Examples of Successful Smart City Projects Across the World

Climate-smart cities can reduce the mounting pressure of climate change, which they both cause and suffer from. The improvement of urban infrastructure will ultimately enhance cities’ resilience and reduce climate risk as well as increase their liveability and competitiveness. From flood defenses and drainage canals to electrified transport, and green spaces for urban cooling, building climate-smart cities can involve a wide range of measures. As examples, here are three projects highlighted by UNDP that highlight climate-risk-abating measures’ impact.

Santiago De Chile’s Electric Buses

Chile’s capital, Santiago de Chile, has bought 455 electric buses over the past few years, and plans to buy nearly 800 by 2020. As e-buses are emission-free, they reduce air pollution and its effects on human health and productivity. In Santiago’s public transportation system, air conditioning and a quieter ride are also popular features. A major transport axis in Santiago is now home to Latin America’s first “electric corridor,” according to the International Energy Agency (IEA). It is only served by e-buses and consists of bus stops featuring solar panels that power free Wi-Fi, USB charging and LED lighting – making it an even more attractive network for e-bus users.

Additionally, the e-buses reduce the local government’s operational expenditures. Compared with diesel-powered buses, they are 70% cheaper to operate and maintain, which offsets their higher purchase cost, which is nearly double. Additionally, these huge reductions could also lead to lower fares – encouraging more people to use public transportation. Chile has set electrification targets for both private and public transport, and has made significant efforts to increase demand for electric vehicles and charging infrastructure. A tender has been issued for the procurement of 2,000 more e-buses by Chile’s transport ministry, and the project is set to be extended to other cities.

According to the IEA, South America is a major growth market for e-buses, despite China accounting for more than nine out of every ten electric buses registered in 2019. Chile has the largest electric bus fleet, but Argentina, Brazil, Colombia, and Ecuador also have electric buses.

Abu Dhabi’s Innovative Farming Methods

Urbanization will increase the number of urban dwellers, which will exacerbate the challenge of feeding them. It is estimated that 80% of all food will be consumed in cities by 2050. It may be possible to grow enough food hydroponically in areas where space is limited or the climate is unfavorable for traditional farming. Water-based hydroponics involves feeding plants with nutrient-rich water instead of planting them in soil. Hydroponically farmed plants have a smaller footprint and can be stacked vertically since their roots don’t have to burrow into the ground.

Compared with traditional farming methods, hydroponic farming can increase yield by 10 percent per hectare by carefully controlling the plant’s environment and nutrient intake. Furthermore, it makes better use of resources, reducing waste, water consumption, pesticides and fertilizers. Since they are indoors, they are less susceptible to pests and weather events, and crops can be grown nearby. Reports from the UN suggest that this can reduce food miles and emissions associated with them.

The Abu Dhabi government is now providing $100 million for the construction of a vertical farm of over 8,200 square meters for both research and development and commercialization. Funding from the Abu Dhabi Investment Office is intended to turn “sand into farmland”, boost local food production, and accelerate the growth of agricultural technology. There will be four vertical farming companies at the facility, including one that will cultivate tomatoes indoors, one that will develop irrigation systems, and one that will conduct research and development. Globally, vertical farming projects are underway, including in Dubai, which recently opened its first in-store hydroponic farm.

Mexico’s Insured Coral Reefs

Adding natural solutions to a city’s sustainable infrastructure can help mitigate climate risk. For example, coral reefs serve as natural barriers against ocean surges and flooding. It is possible for them to absorb the same amount of wave energy as seawalls and breakwaters, which are not as durable. According to the UNDP report, reefs and other natural defenses are less expensive to maintain than man-made solutions. According to the report, 20 percent of reefs have been lost globally and 15 percent are in danger, and funding for their restoration and maintenance is limited. In addition, such initiatives are rarely undertaken.

As a natural defense and a source of income for coastal communities, the UNDP is now piloting an insurance scheme in Mexico to protect and boost the Meso-American reef – the second largest in the world. The Reef2Resilience fund is similar to a trust fund for local businesses. The fund serves two purposes. In order to provide better natural protection, it restores and maintains the reef. It also pays for catastrophe insurance to ensure that the coral reef and its surrounding ecosystem recover quickly after a natural disaster, ensuring future protection and protecting coastal communities’ livelihoods. There is a possibility of extending the project to the Caribbean and Asia, as discussions are underway.

Smart Cities of Asia: Vietnam’s Challenge

A central feature of the ‘smart city’ concept has been a strong belief that technology can improve people’s lives. Technological advancements, internet penetration, and the urbanization of the world’s population have all grown over the last couple of decades. With the dawn of the twenty-first century, it’s becoming clear that the real value of those investments in technology is not just about boosting wealth and opportunity, but also about combating climate change. Cities and communities around the world face existential threats in this time, so the word ‘smart’ has become increasingly important as data and digital services allow them to model and respond to threats such as flooding and extreme heat, and how these affect infrastructure and vital services.

At the COP26 climate summit in November 2021, countries had an opportunity to measure their progress towards climate change goals, make larger commitments, and discuss future strategies. Transitioning from fossil fuel-based energy to renewables at scale is perhaps one of the biggest challenges facing every country. A number of countries, including Vietnam, have committed to phase out coal use, which is currently responsible for 35% of the country’s energy use. By making this decision, the country will expand into renewable energy at a rapid pace, which will have major implications for its existing energy grid. For renewable energy sources, such as solar and wind, to be effectively implemented, grid operators must be able to predict and manage both supply and demand. Urbanization and an 8% increase in energy demand between 2021-30 compound the problem.

As a result of its dependence on coal, and some concerns regarding energy security, Vietnam has a deep understanding of coal. Renewable energy must be developed, but existing grids must not be overburdened. The concept of digital in the context of smart cities extends beyond the application of technical solutions and upgrades. The energy supply chain will also need to be digitised, which will require time and incentives, in a very traditional industry. To motivate international investment in the sector, Vietnam will have to align its own practices with those of other countries in order to support the power purchasing aspects of renewable energy systems like off-shore wind. There is a huge potential for Vietnam’s off-shore wind sector to benefit from this capital movement. Investing in smart cities that prioritize clean energy and improve national resilience is both beneficial on its own and helps build foreign direct investment as well.

Looking Ahead: Do Smart Cities Really Have Potential?

Technology-driven or natural, climate-smart urban infrastructure presents a $30 trillion investment opportunity. This includes renewable energy, public transport, electric cars, and green buildings. Those are just the numbers for developing economies. It will be necessary to develop new funding models, policies, and risk assessments in order to overcome investment barriers for climate-smart infrastructure as the urban population grows.

Using smart cities to reduce greenhouse gas emissions can help reduce emissions in the transportation sector as well as the production of electricity and heat. Transportation contributes 14% of global greenhouse gas emissions, while electricity and heat production contribute 25% (although these percentages are not exclusive to cities). In addition to promoting a range of new apps and use cases that will improve consumer experiences and business productivity, policymakers can also contribute to the fight against global warming if they support the development of smart cities.

5G Expansion Requires Policy Changes

Policy intervention is likely to be required to help fill potential gaps in 5G provision needed for smart cities to fully develop. City areas, where operators will densify their networks, will have a higher demand for sites that can host 5G infrastructure – probably small cells. As a result, access issues arise. Deploying multiple networks can also be expensive. It is possible to deploy a so-called ‘neutral host’ model in order to fill gaps in 5G coverage without undermining the dynamics of competing national network operators. There may be a need for some policy intervention in this situation. The public sector can also play a role in ensuring that 5G is adopted early. Economies of scope will be generated in the use of 5G as a result of the proliferation of use cases.

New government models, known as smart government models, have, however, been created. Sensors, smart traffic lights, and public internet access points have been installed in smart cities as the first steps in their development. The ecosystem, however, has become more complex over time. The cornerstone of a smart city would be smart government. In order to achieve long-term, comprehensive urban development, we need to move from the old smart city debate, understood by using technology to develop urban centers, to one based on smart governance.

It is anticipated that smart city models will also serve as a catalyst for enabling technologies related to various strategies and resources in the future, including smart and efficient public service management, such as lighting, waste collection, and traffic management, which will have a direct impact on reducing energy consumption and greenhouse gas emissions. The citizens of a city are also crucial to the development and creation of smart or smarter cities. As a solution to climate change, it is necessary to foster awareness of the need for greener and more efficient cities.

In addition, public administrations should conduct a joint analysis with the economic sectors regarding how climate change will affect, in order to develop a common approach to combat the consequences arising from different scenarios. In order to achieve a low carbon economy, energy companies must continue reducing their carbon footprint in electricity generation, fostering cleaner fuels, and employing new technologies. Consumption habits and ways of living must be changed by citizens. For example, it is important for citizens to change the way they commute, moving towards clean and shared transport that contributes to saving and efficient travel. It is also important to separate living standards from energy consumption, and to adopt new technologies and developments to make living more efficient and environmentally friendly.

Fixed Income Market Outlook – Key Insights for 2022

2022 has been a year dominated by volatility for markets. The root of this market volatility is attributed to inflation uncertainty, which has resulted in policy uncertainty. The U.S. Federal Reserve (“Fed”), which was once the leader of “team transitory”, is now shifting its strategy. Heading into the second half of the year, the direction of rate policy will have significant implications for market returns, recession risk, long-run inflation, and the durability of the 60/40 portfolio.

Although the US Federal Reserve’s underlying hawkishness is still present, a turn is beginning to become apparent. For the time being, it is anticipated that the Fed will keep up its front-loaded hiking cycle. The prospects of developed markets edging closer to a recession are becoming more likely as global macroeconomic fundamentals continue to deteriorate. The probability of a hard landing continues to be the base scenario. In order to re-anchor dangerously growing inflation expectations, central banks will end up pushing their respective economies into recession either accidentally or on purpose.

The Fed is continuously arguing for front-loading interest rate increases as it tries to bring inflation under control. On Friday, August 26th, at the Jackson Hole Economic Symposium, the Fed’s Chairman Jerome Powell ended speculation of a Fed lean towards cutting rates to aid the economic recovery in the short to medium term. To ensure stability in price, a restrictive strategy would have to be adopted for an extended period of time. The Fed Chairman confirmed that the department would utilize everything in its inventory to decrease inflation, which has elevated to a level that has not been seen in the past 40 years. Even with four consecutive interest rate increases, which totaled up to 225bps this year, Powell said that they will not stop.

Fed Chairman’s Comments Move Fixed Income Markets

According to Trackinsight’s fund flow data, Europe-listed fixed income ETFs attracted a total of USD$335 million of investor capital between August 22^nd to August 26^th, which means that this is the sixth consecutive week that has experienced net inflows, and the second week that has experienced average returns that are negative. Powell has been clear with regard to price stability and fighting inflation and was quoted saying that “The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal.” He also stated that without price stability, the economy will not be able to achieve a sustained period of strong labor market conditions that benefit all.

Powell’s hawkish statement that restoring price stability will probably require maintaining a restrictive policy stance for some time, even at the expense of slowing economic growth, echoed across the markets with the S&P 500 falling from 4,197.16 to 4,057.99, a 3.32% drop and the largest for several months. On the fixed income side, U.S. Treasuries rose in anticipation of ever-increasing interest rates, and it is pertinent to note that the 2-year US Treasury jumped more than the 10-year Treasuries. Government Bond ETFs also reacted positively to the news attracting USD$350 million of net inflows, while in sharp contrast corporate debt ETFs lost US$195 million over the week across all credit ratings, the largest outflows in the fixed income sector.

From a credit rating perspective, investment grade bond ETFs took the major chunk of inflows, having brought in USD$850 million of investor cash. In comparison to this, their high-yield counterparts registered almost USD$118 million in net outflows for the same period.

Last week’s flow leaders included the iShares Core € Govt Bond UCITS ETF (IEGA). The fund was able to lure USD$85 million of net inflows, meanwhile holding funds of USD $3.8 billion of assets under management. The fund follows the performance of an index that is composed of Eurozone investment-grade government bonds.

Additionally, the Amundi Index Euro Corporate SRI 0-3 Y UCITS ETF (ECRP3) was attractive to European investors for the fourth consecutive week. It attracted USD$65 million of investor capital as compared to the previous week’s USD$0.5 million. ECRP3 allows its investors to have access and view of a range of investment-grade, euro-denominated bonds. However, it excludes issuers that are involved in alcohol, tobacco, gambling, military weapons, nuclear power, adult entertainment, civilian firearms, genetically modified organisms, thermal coal, and oil sands.

On the other hand, bond ETFs saw large outflows including the iShares Core € Corp Bond UCITS ETF (IEAC) and SPDR Bloomberg Emerging Markets Local Bond UCITS ETF (EMDD), losing USD$300 million and USD$113 million, respectively.

Fixed Income Perspectives

Goldman Sachs

According to a report by Goldman Sachs, geopolitical risks are at an all-time high right now, growth is normalizing and a sustained inflation impulse due to commodity and supply chain disruptions is leading central banks to press ahead with policy unwind as was anticipated entering 2022. Disruptions to commodity supply will likely be the major factor in the economic and financial market implications of the Russia-Ukraine war. However, it is unlikely that the economic costs will be evenly distributed. In addition to this, the current shock involves all commodities including energy, food, and metals, and will likely affect Europe more than the US.

The report also states that replacing the world’s second-largest commodity producer will require a long duration and renewed fiscal spending could prolong inflation pressures. Navigating the investing landscape during a war in Europe and an ongoing pandemic highlights the importance of both humility and investment discipline.

In light of this, Samuel Finkelstein, Chief Investment Officer Fixed Income and Liquidity Solutions at Goldman Sachs has stated that due to the hawkish reassessment of policies of the central bank and the impact of the ongoing war in Europe on the market, volatility in the market could be seen over the coming time period. Due to this, few segments of the fixed income market seem lucrative as risk premiums accumulate. This includes investment grade corporate credit, where strong balance sheets act as an anchor, even though the inflation is elevated and there is geopolitical uncertainty in the world.

On the other hand, Whitney Watson, Global Head of Fixed Income Portfolio Management, Construction & Risk, Goldman Sachs Asset Management has also stated that the new reality of the geopolitical situation and the energy market that has been formed by the Ukraine conflict really signifies the importance of energy security and transition. Watson also stated that the ongoing war and its resultant energy inflation has highlighted the importance of an ESG domain in order to manage downside investment risks and form a balanced approach to fixed income asset allocation.

BlackRock

According to a report by BlackRock, the market’s response to the inflationary currents is similar to previous such scenarios. This signifies that, by the end of 2022, there is an expectation of a Fed tightening at a quicker speed, around a neutral rate of 3.5%. It seems the Fed department is quite sure that the quicker pace will be able to control inflation. It is also being suggested that the market will experience a relatively soft-landing with the increase causing rates that are slightly too tight and then the Fed subtly easing back to neutral.

The report has also indicated that the Fed, along with other central banks of the developed markets are now realizing that they would need to get more stringent in order to control the soaring inflation. The report also states that across the globe, a long list of central banks of the developed market have now started aligning themselves to rein in the rising inflation. This has created a cascade of hawkish monetary policy. All around the world, the rates have continued to move higher with the European Central Bank’s (“ECB”) and the rates have been increased, for more than a decade. The ECB has to experience a more complex policy environment as compared to the US, as it has to fight inflation through hiking rates and at the same time limit policy fragmentation across the Eurozone.

In the context of the present tightening phase, the ECB’s move towards developing a distinct “anti-fragmentation” tool highlights the difficulties of normalizing policy to fight inflation without exacerbating the unintended side effect of more fragmentation. Intra-European bond spreads noticeably widen as a first effect of tightening. They are currently halfway between the extremes of the 2010–2012 Eurozone Sovereign Debt Crisis and the widest COVID levels of 2020. Following the announcement, spreads have tightened as a result of the ECB’s decision to begin building an explicit anti-fragmentation instrument in response to these market movements.

Vulnerability of the “Diversified” 60/40 Portfolio

Typically, when growth assets, like stocks, sell off due to an economic downturn, safer assets, like bonds, appreciate as investors seek stability. While stocks tend to suffer in a recession due to the decline in economic growth, bonds can rally because the US Federal Reserve typically cuts interest rates to support the economy. Bond yields decrease while bond prices increase when interest rates are reduced. This acts as a portfolio’s shock absorber, reducing the impact of dropping stock prices on overall returns. For many years, the basis of “diversified” 60/40 portfolios has been this stock-bond balancing act. A rising level of inflation, however, limits the Fed’s ability to support the equities markets by cutting rates, thereby rendering the “Fed put” ineffective.

Due to this perplexing combination, standard 60/40 portfolio investors are exposed. Bond prices have only increased while stocks have declined three times since 1929. Except for the years 1931, when Britain abandoned the gold standard (which resulted in falling equities but rising interest rates to protect the currency), and 1941, when the US entered World War II (leading to rising inflation and falling stocks), 1969 stood as the exception that proved the rule for reliable stock-bond diversification.

The reasons for losses in that period are similar to today, with rapidly rising inflation unleashing a Fed tightening cycle that eventually resulted in recession. That time showed how bonds may be a terrific stock diversifier, unless stocks are declining owing to inflationary worries.

Fidelity International

According to a report by Fidelity International on fixed income perspective, at the September 15^th FOMC meeting, a 75bps rate hike is likely and the terminal rate might have risen to 4% from 3.25-3.5%, with any pivot, now pushed out later in the first half of 2023.

Given the extent of the debt in the system and the fact that quantitative tightening is still escalating, draining US$95 billion a month from its $9 trillion balance sheet, further tightening financial conditions, the monetary tightening by the Fed to re-anchor inflation expectations runs the risk of sending its economy into recession. The result will probably be looser policy to boost economic growth the following year. Given the global demand for US dollar debt refinancing, it is important to monitor dollar liquidity conditions under US quantitative tightening. This isn’t a prominent risk now and the Fed has tools to fight this.

According to the report, in core European bonds, we are also long duration. The European economy is in a difficult situation and is likely to enter recession soon, whatever the ECB does. Adding monetary tightening to the mix could accelerate the downturn, and authorities may reverse course sooner than the market might think. The report suggests that investors should prioritize protection in this recessionary environment. The report also highlights that Fidelity favors investment-grade bonds, where valuations remain relatively attractive, especially in Europe. After Powell’s remarks, investment grade yields scarcely changed, which may be an indication that hawkish sentiment has peaked. High-yield spreads, in contrast, have not yet fully accounted for the danger of a harsh landing. One-year defaults in US high yield markets, for instance, predict a default rate of just 2.3%, which is consistent with a fairly shallow recession.

According to the investment firm, now is the moment to play it safe and invest in investment-grade markets rather than high yields.

Market Conditions Remain Choppy

Looking ahead over the balance of 2022 and into 2023, it seems there should be ample relative value opportunities to continue adding credit risk at wider spreads and to seek to take advantage of fixed income market dislocations. However, it’s also crucial for investors to manage their cash with flexibility and aplomb. To be able to take advantage of market opportunities as they present themselves includes maintaining a sizeable portfolio allocation to cash and liquid developed-market government bonds.

The direction of inflation is the primary concern or issue that is driving markets today. As long as it remains unclear if central banks are successful in reeling in inflation, there will be an environment where stock markets and bonds markets have the potential to move down together. During this moment, it will be unclear if bonds’ ability to diversify investments will be reliable. Although it might only last a few quarters, this time frame could potentially be longer.

Will the Fed stop hiking rates if it looks like we are winning the war against inflation later this year to prevent further damage to employment and growth? Will they unintentionally quit too soon or simply accept greater inflation? A lengthier period of inflation uncertainty could result from this scenario, and it is this uncertainty that will keep markets volatile. In the interim, it appears that central banks will require a considerably larger boat to combat inflation.

Although these are difficult times, experts have cautioned against being overly defensive, which could limit return potential in recovery. Diversifying exposure to different styles and regions is crucial in this regard. Investors with a strong inclination for growth companies may want to switch to value equity portfolios, which should do well in an environment of inflation. For example, China, which may be ready for a comeback given its relaxing monetary policy and fiscal stimulus, is one of the emerging markets with the lowest allocation of investors despite favorable values.

Expert opinions in these times have been well-reported by Reuters. Matthew Nest, State Street Global Advisors’ global head of active fixed income predicts that at some point, the anxieties will transfer from inflation to growth. Additionally, he believes that bond yields have risen to such an extent that they are quite attractive.

The question right now, according to Mike Riddell, a senior fixed income portfolio manager at Allianz Global Investors in London, is not whether we will enter a recession but rather how deep it will be and whether there will be any kind of financial crisis or significant global liquidity shock.

Riddell predicts that the renewed hawkishness of central banks will result in an even worse global economy by the middle of next year since monetary policy sometimes works with a lag. He stated we are of the view that markets are still substantially underestimating the hit that is coming to global economic growth.

Growing Crisis Risk – Emerging Markets Burn Through Currency Reserves

The potential risk of a wave of defaults affecting the world’s most fragile economies is growing as emerging markets are burning through their reserves of US dollars and other foreign currencies at the fastest rate since 2008. According to data from the International Monetary Fund, the foreign reserves of emerging and developing nations have decreased by $379 billion this year through June.

According to a report by JPMorgan Chase & Co., excluding the effects of exchange-rate fluctuations and the sizeable foreign exchange reserves of China and Gulf oil exporters, emerging economies are witnessing the steepest drops since 2008. Central banks all across the globe are using reserves to protect their currencies against the strengthening US dollar and to cover growing import costs for food and fuel.

Economists have been warning that countries including Ghana, Pakistan, Egypt, and Turkey are all at risk of experiencing a currency crisis. Sri Lanka has been unable to import needs like fuel and other items since its offshore bond defaulted in May. According to the International Air Transport Association, the central bank of Nigeria is reportedly prohibiting foreign airlines from returning $464 million in an effort to conserve US dollars, which highlights the fact that Nigeria is also experiencing a severe foreign currency crisis.

Senior fellow at the Council on Foreign Relations and a former adviser to the United States, Brad Setser, has stated that “there is an immediate risk in a few fairly significant countries.” These are countries that did not have sufficient reserves, to begin with. Now, since they can no longer acquire financing, they are spending their reserves to pay for imported food and energy, and if the situation lasts much longer, they definitely run the risk of a currency or debt crisis.

While these nations are on the edge of running out of foreign currency reserves, larger emerging markets like China, India, and Brazil seem to have enough to weather the storm. Despite this year’s historic sell-off in emerging-market assets, investors have emphasized that they believe there is minimal chance of a generalized crisis and that the stress is limited to a small number of countries that have been racked by persistent political and economic issues. However, the pressure seems to be going beyond those well-known weak spots. These include the Czech Republic, which has lost 15% of its reserves this year, and Hungary, which has seen a 19% decline in reserves, according to the data source CEIC. The Russian invasion of Ukraine and Moscow’s tightening of gas supply to Europe have had a severe impact on both countries. The value of the Hungarian currency against the dollar has decreased by over 30% this year.

Why Dollar is Appreciating

The US dollar has gained over 11% since the beginning of the year and has now, for the first time in two decades, equaled the value of the Euro. A large number of major currencies have depreciated against the dollar, with big implications for the developing world.

The primary reason why the dollar is gaining is that there is a high demand for dollars. The economic outlook of most economies indicates a major slowdown. Meanwhile, the conflict in Ukraine has greatly increased geopolitical risks and market volatility. Additionally, the US Federal Reserve has rapidly raised rates as a result of historically high inflation.

These, among other factors, are causing a flight to safety, where investors are exiting their positions in Europe, emerging markets, and other places in search of safety in US-denominated assets, which must be purchased with dollars.

The market is still anticipating swift Fed rate increases. Emerging markets have previously faced crises due to comparable instances of rapid rate increases in the past as well. This was the situation during the “Lost Decade” in the 1980s in Latin America and the Tequila Crisis in Mexico in the 1990s (which then moved towards Russia and East Asia).

Potential Impact on Emerging Markets

Debt Troubles

Many developing nations, particularly the poorest, are unable to borrow in their own currencies at the levels or for the duration that they desire. Lenders do not want to take the chance of receiving repayment in the unstable currencies of these debtors. Instead, these countries typically borrow in dollars and promise to repay this debt in dollars, regardless of the exchange rate. When the dollar gains strength in relation to other currencies, these repayments become significantly more expensive in terms of native currency. The percentage of debt denominated in dollars is relatively low among East Asian countries and Brazil, which has benefited due to a number of reasons, including the large dollar holdings of the central bank, the fact that the private sector appears to have done well to protect itself from currency volatility, and the fact that it is a net exporter of commodities.

Growth Issues

As the US Federal Reserve jacks up interest rates, other central banks must increase their own rates to remain competitive and protect their currencies. In other words, investors must be persuaded to invest in an emerging market rather than moving their money into safer US assets by promising them larger returns.

However, this raises a problem. On the one hand, it is clear that a central bank aims to safeguard foreign investment in the domestic economy. But on the other hand, an increase in rates also increases the cost of domestic borrowing and has a dampening impact on growth as well.

The Financial Times, citing data from the Institute of International Finance, recently reported that “foreign investors have pulled funds out of emerging markets for five straight months in the longest streak of withdrawals on record.” This is critical investment capital that is escaping from the emerging markets towards safety. Finally, a domestic downturn will eventually affect government revenue, which might compound the debt issues already discussed.

Trade Concerns

In the short term, a strong dollar can also impact trade. The US dollar dominates international transactions, and firms operating in non-dollar economies use it to quote and settle trades, including for key commodities like oil, which are bought and sold in dollars.

Furthermore, many developing countries are price-takers (which means their policies and actions don’t impact global markets) and are primarily dependent on global trade. Thus, a strong dollar can have severe impacts on them domestically, including spiking inflation.

As the dollar strengthens, imports become expensive (in terms of the domestic currency), thus forcing firms to decrease their investments or spend more on crucial imports.

Even though the long-term trade picture might look beneficial for some, overall, it is an uneven picture. Although imports are more expensive amid a strong dollar, exports are relatively cheaper for foreign buyers. Export-led countries may be able to benefit as increased exports boost GDP growth and foreign reserves, which helps to alleviate many of the issues.

Outlook on Emerging Markets – Key Insights

A report by Lazard Asset Management detailed an outlook of the emerging markets for the year 2022. The insights include:

Equity

Emerging Markets (EM) equities (MSCI EM Index) outperformed developed markets (MSCI World Index) in the second quarter, finishing down approximately 11% compared to down 16%, respectively. This indicates an almost 18% decline for the first half of 2022 for EM versus an almost 21% decline for developed countries. In terms of the sector perspective, information technology, financials, and materials led the EM Index lower, while Taiwan, Korea, India, and Brazil did so from a country perspective. The conflict between Russia and Ukraine, a stronger US dollar, tighter monetary conditions in the United States (meaning the start of quantitative tightening and the most aggressive rate hike since 1994), as well as the balance between China’s zero-COVID policy and supporting economic growth weighed heavily on emerging markets equities.

Emerging Markets Growth amid Inflation

Soaring inflation, aggressive monetary tightening, and the looming possibility of a recession are not just regional but also global fears. Around the world, central banks appeared determined to prevent high inflation from becoming entrenched.

However, pandemic-related inflationary pressures will be more difficult to control than cyclical pressures. In addition to this, food and energy price rises have been hiked by the war in Ukraine, and these prices contribute to a large portion of the inflation basket for many emerging markets countries in particular. Higher costs for these goods will likely weigh heavily on people in these areas and may leave a marked social impact.

Currencies that are supported by economies with high-value commodity exports, such as copper and oil, can lower the impact of higher import prices for food and energy. For example, while inflation across emerging markets generally remains high, energy exporters such as Brazil and Saudi Arabia are benefiting from improved current accounts, as compared to energy importers such as India and wheat importers such as Egypt and Indonesia. At the same time, countries such as Hungary, Serbia, Turkey, Argentina, and India are all trying to limit exports of certain agricultural products in response to the crisis of rising inflation, which further causes price increases and elevates fears of food shortages. Also, some emerging markets countries like Turkey and Argentina, are still hindered by legacy structural issues, which may have become even worse, particularly for countries with relatively high US dollar-denominated debt.

Block Inflation or Promote Growth?

For many emerging markets countries, navigating a post-pandemic recovery means taking a deliberate course of action when it comes to the economy: keep inflation in check at the risk of slowing growth. The trade-off and the message are clear.

Most of the central banks have been aggressive pandemic recovery rate hikers like Brazil (with June’s increase marking the eleventh straight increase in a row), while others like Mexico preemptively increased rates relative to the US Fed and have since been moving more or less in accordance with the Fed. Whatever the course may be, due to the rate-tightening efforts, growth is expected to fall for these countries while inflation, in general, is expected to peak in the second half of 2022, with near-term risks to both food and commodity prices still to the upside.

Ultimately, the balance among countries for easing inflation and improving growth is what will be critical to steady global growth. As situations improve across regions, it will be dependent on the timing and then tapping into the attractive investment opportunities that arise from uncertainty.

Earnings Predictions

Earnings outlooks might be too high as emerging markets countries suffer the ripple effects of COVID-19 lockdowns, inflation, and the Ukraine war. The expectations for 2022 earnings growth in emerging markets equities remain in negative territory (-3%) overall, weighed down by slowing growth, weakening currencies, and supply chain disruptions.

However, emerging markets are a diverse asset class, and experiences are likely to differ. Earnings growth expectations in Latin America lead the developing world (15%), outpacing Japan (-8%) and Europe (12%) but lagging behind the United States (19%) as the commodity boom props up sentiment. Latin America’s improvement has spread across sectors largely driven by upward revisions within the energy, materials, financial, and communications services sectors.

Outside of Latin America, the earnings outlooks of emerging markets may, at first, blush, appear more gray than bright, but finding good opportunities at the right price is possible.

China Looks Set for Growth, Despite Challenges

China’s growth trajectory will likely show a recovery in the second half of 2022 despite any remaining zero-COVID policy headwinds, which have contributed to a sharp decrease in key economic indicators during the second quarter. In April, factory activity dropped to the lowest level in more than two years, with the official manufacturing PMI dropping to 47.4 from 49.5 in March. A reading of 50.2 in June, however, marked the first month of growth since February (above 50 signifies an expansion). These numbers may still fail to capture the full extent of the economic damage from COVID-19 lockdowns in Shanghai and elsewhere that were imposed in the middle of March.

The scale of recent losses, however, has caused Chinese authorities to assure markets that they stand ready to act, signaling a willingness to boost infrastructure spending to reach the GDP target of about 5.5% and resolve regulatory issues in the technology sector. However, these promises may not be sufficient to alleviate investor fears in the near term. Since its peak in February 2021, the MSCI China Index lost more than half of its value. (China also moved from 47% of the MSCI EM Index to 30%.) On the other hand, however, the China index has recovered nearly 30% from the lows of mid-March.

China remains a major market with extensive growth potential and an environment of innovative thinkers and producers. For the country, recovery will mean the normalization of production lines, which were interrupted by the pandemic and lockdown restrictions; the impact of recent policy support measures gradually nourishing the economy, especially for infrastructure investment; and a bottoming, or even a modest recovery, in the housing market.

Looking Ahead

As we step into the latter half of 2022, the key question is whether the global economy can weather the higher inflation expectations and tighter monetary conditions, or if the world is slipping into recession, particularly in the United States, and what that would mean for the developing world. As compared to the developed world, emerging markets equities have held up better this year, and this could be an attractive entry point for investors to (re)gain exposure to the asset class. Emerging markets, which offer access to higher economic growth, are trading at a 30% valuation (price to earnings) discount to developed markets while offering investors a higher dividend yield, a higher free cash flow yield, and a return on equity profile that has been improving since the end of 2020.

However, the fact remains that a dollar strength and domestic currency weakness translate into higher import bills, therefore accelerating inflation. While emerging markets started their tightening cycles well before developed peers, inflation has consistently exceeded expectations.

The rates are exceptionally high, as annual inflation in Argentina runs above 50% and in Turkey at 70%. Even wealthier emerging economies such as Hungary are seeing double-digit inflation. The International Monetary Fund expects inflation to average 8.7% in emerging markets this year – some 2.8 percentage points higher than projected in January.

Turkey, Tunisia, Egypt, Ghana, and Kenya, are all among the countries seen at risk due to their hard-currency debt burdens, current account deficits, and heavy reliance on food and energy imports.

With all this going on, a strengthening dollar was the last thing developing countries needed. Looking at the past challenges, in the early 1980s, the last time the US had a truly stubborn inflation problem to deal with, the dollar went up by close to 80 percent. History may not quite repeat itself, but if the dollar is going to keep strengthening with a ferocity comparable to that of 40 years ago, the ride will be bumpy for emerging economies.

With that being said, investors are particularly focusing on sustainable investments to protect their portfolios against the impacts of recent event. To address these concerns,

To address issues of climate change and socio-economic concerns effectively, governments and companies will need to drastically change how they operate, and investors can influence how they do so. Investing in sustainable enterprise can be chosen by everyone – from the largest asset managers to the smallest individual investors.

As mentioned earlier, investments are no longer solely selected based on their ability to generate financial returns. It is important to investors that sustainable solutions reflect their values, contribute to the important missions they care about, and do no harm to the environment. In response to this grassroots shift, sustainable investing is on the rise. There is also an expanding selection of products available, giving investors a choice regarding how much positive impact they want to make. At one end of the spectrum, investments in harmful activities like tobacco and coal are excluded, as are controversial behaviors like human rights abuses. On the other hand, dedicated impact strategies seek to identify companies that contribute directly to the UN’s Sustainable Development Goals.

It is common for investors to cite improved returns as a top motivation for implementing ESG criteria, and investment managers often promote sustainable investments as offering superior returns. Additionally, environmentally friendly stocks have outperformed those at the opposite end of the environmental spectrum over the past decade. But what other factors account for the popularity and rise of sustainable investments?

Why Sustainable Investment Is on the Rise

A stronger focus on sustainable investment most recently has been prompted by current economic volatility, such as the recent inflation spike partly caused by the recent war in Ukraine. In fact, the war in Ukraine is driving that debate forward, not because of climate change, but because Europe needs to be more independent when it comes to energy provisioning. The fundamentals for fossil fuels are worse in the long run, while renewables are better. Allied Market Research points towards how it is expected that the global sustainable finance market will grow as investments in businesses with sustainable practices increase. Sustainable financing offers remarkable perks such as risk mitigation, cost cutting, and higher returns, and green energy projects become more prevalent.

Based on Allied Market Research’s report, the global sustainable finance market is forecast to reach $22,485.6 billion by 2031, growing at a CAGR of 20.1% from 2022 to 2031. Among the topics covered in the report are top winning strategies, evolving market trends, market size and estimations, value chain, key investment pockets, drivers & opportunities, competitive landscape, and regional landscape. It is a valuable source of information for new entrants, shareholders, frontrunners, and shareholders in introducing necessary strategies for the future, and taking crucial steps to significantly strengthen and heighten their market position.

What’s in it for Investors?

In April 2010, the Deepwater Horizon oil drilling rig exploded, resulting in the world’s worst maritime oil disaster. BP was quickly identified as the culprit. BP has been forced to pay roughly 65 billion US dollars in penalties and settlement payments as a result of the court’s ruling, or around 58 billion euros in total. The environmental catastrophe also had a devastating effect on investors: The BP share price fell by around 50% between April and June 2010, and has yet to recover fully. Risks have been reassessed by investors using ESG criteria after cases like the Deepwater Horizon. The acronym ESG stands for Environment, Social, and Governance. Loss risk was therefore the key focus. This question has been brought to the fore by the American index provider MSCI: What are the direct financial benefits of sustainable investment for investors? Some of the conclusions in the study included:

• The Deepwater Horizon incident clearly illustrates how companies with good ESG ratings have a lower risk exposure. Among the reasons for this may be more stringent risk monitoring methods. BP was therefore omitted from MSCI’s sustainability index shortly before the rig disaster in early 2010.
• High dividends and profitability are the results of a good sustainability rating. As an example, the ESG-dominated emerging market index MSCI EM ESG Leaders has grown by 179.52 percent between 2007 and 2019, while the traditional MSCI EM has grown by 118.93 percent. Why? In addition to attracting a more talented workforce and retaining a positive organizational culture, companies that follow a sustainable strategy are more future-oriented and future-oriented, among other factors.
• Another MSCI survey demonstrated that improving an ESG rating significantly boosts performance. The index provider compared factors such as the long-term performance of companies with improved ESG ratings with that of companies with deteriorated ESG ratings. In a nine-year analysis of industrialized nations, the growth for companies in the first group was 12 points higher than for those in the second group.

Investors who compare mutual funds with similar performance still worry that one with a sustainable investing model might not perform as well. Recent insights from the Morgan Stanley Institute for Sustainable Investing show that worry is unfounded. Investors can expect similar returns from sustainable funds while having lower downside risk, and making a positive impact on a range of environmental, social and governance concerns. In spite of research showing that companies with strong social or environmental practices outperform their peers on a wide range of measures, the myth that sustainable investing requires a financial trade off continues to persist. According to their study of thousands of mutual funds across a variety of asset classes, sustainable investments can help investors manage risk and generate returns.

As part of its white paper, “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds,” Morgan Stanley analyzed 10,723 exchange traded funds and open-ended mutual funds active between 2004 and 2018. Here is what was found:

• Sustainable funds and traditional funds do not have any financial tradeoffs. The total returns of ESG-focused mutual funds and ETFs did not differ consistently or statistically significantly from those of traditional mutual funds and ETFs.
• There may be a lower market risk associated with sustainable funds. A consistent and statistically significant finding is that sustainable funds have a 20% lower downside deviation than traditional funds.

The study found that sustainable funds’ downside deviations were significantly smaller than those of traditional funds during years of extreme volatility, such as the one we are in currently. Additionally, the study analyzed the last quarter of 2018, when U.S. stock market volatility spiked, and found that, despite negative returns for most funds, the median sustainable fund outperformed the median traditional fund by 1.39 percent in U.S. equity returns and had a narrower dispersion than the median traditional fund. The last quarter of 2018 may have caused anxiety among many investors, but those with investments in sustainable funds will likely have experienced smoother fluctuations and fewer losses.

The fact that 53% of investors believe investing sustainably requires a financial tradeoff may surprise 59% of millennial investors. However, from both a financial and impact perspective, incorporating ESG criteria into investment decisions makes sense. Individual investors expressed 75% interest in sustainable investments in a 2017 survey conducted by the Institute for Sustainable Investing, and the Forum for Sustainable and Responsible Investments (US SIF) reports that one-fourth of all dollars invested in U.S. capital markets include sustainability. Investing interest and adoption gap can be narrowed with the latest findings from Morgan Stanley.

Interviews with institutional investors as part of a McKinsey study revealed a wide range of reasons they pursue sustainable investing. There were three reasons that were recurring.

• Increasing returns: In general, sustainable investing appears to have a positive effect on returns. A growing body of research explores the relationship between ESG performance and corporate performance, as well as the relationship between ESG investment strategies and investment returns. The correlation between sustainable investing and superior investment returns has been demonstrated in several studies. Sustainable investing is not correlated with poor returns, according to a recent comprehensive study (based on more than 2,000 studies). As a result of the other motivations outlined below, sustainable investing has provided convincing grounds for investors to pursue sustainable investment strategies – particularly in light of the likelihood that sustainable investing produces market-rate returns as effectively as other investment approaches.
• Improving risk management: A company’s market value and reputation can be impacted by ESG issues, according to institutional investors. As a result of worker safety incidents, environmental pollution spills, supply-chain disruptions linked to weather, and other environmental issues, companies have seen their revenues and profits decline. Several companies’ brands have been damaged by ESG issues, which can account for a significant part of their market value. Furthermore, investors are questioning whether firms are prepared for long-term trends like climate change and water scarcity, which are posing risks to their survival.
• A strategic approach that aligns with beneficiary and stakeholder priorities: Investors have developed sustainable investing strategies in response to demand from fund beneficiaries and other stakeholders. Public attention to the global sustainability agenda has led to this increase in demand. Younger generations seem to be particularly interested in sustainable investment strategies. In a survey of high-net-worth millennials in the United States, two-thirds agreed with the statement, “I invest to express my values about society, politics, or the environment.” The same belief was expressed by more than one-third of high-net-worth baby boomers, a significant proportion given that baby boomers constitute the largest constituency for institutional investors. The goal of some investors is to help society by investing in companies that have favorable environmental, social, and governance (ESG) features (without compromising risk-adjusted returns.

Current Scenario in the Sustainable Investment Industry

Since evidence has accumulated about sustainable investing’s benefits, the sustainable investing market has grown significantly as demand has surged for sustainable investment strategies. Sustainability investing strategies are being adopted by some of the world’s leading institutional investors. Regardless of their starting point, most large funds are trying to develop sustainable strategies and practices. Despite the fact that some institutional investors struggle to define their approach and to make good use of ESG information and insights, studies and research in collaboration with institutional investors indicate otherwise. Institutions already use methods to select and manage portfolios that are complementary to sustainable strategies, and close integration can have significant benefits for both.

In a recent study by global wealth and asset manager Lombard Odier, sustainable investments have become a bona fide investment opportunity for Asia-Pacific’s richest investors, but a generation gap and a lack of quality investment opportunities remain obstacles to growing sustainable investment. Thailand and Taiwan lead the region in channeling funds to sustainable investments, with nearly all respondents from both countries stating they invest in sustainable assets, while about one third have portfolios that contain at least 40 percent of sustainable assets, according to Lombard Odier’s 2022 HNW Individuals Study. This year’s study includes more than 450 responses from high-net-worth individuals in eight countries, namely Singapore, Hong Kong, Australia, Japan, Thailand, the Philippines, Indonesia, and Taiwan. Lombard Odier said in a statement today that sustainable investments are becoming more prevalent, and that value-driven investments are being replaced by real anticipations of returns.

There has also been a rapid growth in assets in sustainable mutual funds and exchange-traded funds (ETFs) in recent years. During the period of 2020 to 2021, assets in these funds increased by 52 percent to $362 billion. According to Broadridge Financial Solutions, ESG assets could reach $30 trillion by 2030. As per another study published in European Business Organization Review, recent years have seen a surge in capital flowing into funds that practice sustainable investing, reflecting an increased investor awareness of environmental, social, and corporate governance issues. Globally and in specific markets, such as the U.S. and Europe, capital is increasingly flowing into sustainable investments.

The Outlook for Sustainable Investment in the Near Future

In the coming years, ESG investment is expected to grow enormously because of several factors: millennials’ increasing demand for investment opportunities that meet specific social or environmental objectives, improved methodologies that confirm that sustainable-investment criteria are being followed, and new legislation that promotes the creation of ESG investment products and requires greater transparency. Investing in ESG criteria that includes both financial and non-financial aspects will now be more feasible for individual investors. Therefore, investors can contribute to sustainable development and positive social impact as well as make money by rewarding companies and institutions that meet ESG requirements.

With climate change becoming more prominent, corporations are being pressured to do their part to combat global warming. There is a growing movement among the world’s largest companies to produce net zero carbon emissions, and many are urging others to follow their example. A number of major companies, including Amazon and IKEA, are pushing for the ocean shipping industry to switch to carbon-free fuels by 2040. In response to climate change risks, investors are also pushing companies to be more transparent. Many factors contribute to long-term investors staying the course. Biden administration’s agenda (and many governments world wide’s, as well) focuses on climate change to drive new corporate policies. Additionally, the recent economic turmoil faced all over the world has helped highlight social injustices. Due to this, socially and environmentally conscious investors are likely to demand more from companies.

According to J.P Morgan, sustainable investing has transformed from a niche investment sector and become an essential component of balanced portfolios. It has penetrated so far into the mainstream that PwC Luxembourg’s first European Sustainable Finance Series report predicted 2022 as the year when traditional and sustainable investments could subside significantly. In other words, they predicted that both financial and non-financial performance criteria could be on equal footing when making an investment decision due to the urgency of the climate crisis. This sort of claim is only going to grow in the coming years. According to the report, the Asset and Wealth Management industry should jump on board and embrace sustainable investing. As an investor, this means prioritizing both your values and financial goals.

ESG standards and evaluations have become increasingly important from an investment perspective, especially after the war in Ukraine. Those companies that plan ahead and prepare for the possible risks associated with climate change may be able to respond more effectively when they are realized.

Technology Investments on the Rise Despite Recession Fears

From big tech companies like Meta and Microsoft to giant corporations, businesses are becoming more cash-conservative and even scaling back their growth plans in order to ready themselves for the looming recession. However, businesses still need to consider investment areas that can improve operations and weigh where their investment dollars will give them the best and quickest ROI.

For this, technology executives claim that if they’ve learned anything from previous downturns, it’s that technology shouldn’t be viewed as a cost center but rather as a business engine, and in this sector, the primary areas being focused for investment include cloud computing, machine learning and artificial intelligence, and automation.

According to Nicola Morini Bianzino, the Chief Technology Officer at EY, “In other cycles we’ve seen in the past, tech investment was one of the first casualties, but after the pandemic, people realized that in a down, or even potentially, recessionary environment, we still need to keep our technology investments.”

Meanwhile, Danny Allan, Chief Technology Officer at data protection firm Veeam, said that “If you look at what occurred over the past two years, it’s clear that technology is the sustainable differentiator that sets companies apart.”

A recent report by CNBC cites J.P. Morgan’s annual chief information officer survey. According to the survey, the spending plans of 142 CIOs responsible for over $100 billion in annual enterprise budgets were compiled. The results found that IT budgets are growing, even if they’re not keeping up with inflation. For this year, the surveyed CIOs see IT budget growth of 5.3% and 5.7% in 2023. This is a major shift from when the survey was conducted during the global pandemic and IT budgets contracted by nearly 5%.

According to Guido Sacchi, the Chief Information Officer for Global Payments, the business and technology agendas have increasingly become one and the same. He claims that in his discussions with Global Payments business unit leaders, not a single executive has advocated that reducing tech spending is the best course of action in the event of a possibly severe economic downturn.

On the other hand, LinkedIn co-founder and Greylock partner Reid Hoffman, who was a guest speaker at a recent CNBC Technology Executive Council Town Hall, while speaking about AI, advised companies to stay invested but to do their homework. “Not everything is AI. Take the time to know where to apply it, how to make it work for you, and why it’s being used”, he said. He also stated that “You are sacrificing the future if you opt out of AI completely.”

AI Investments in Focus

According to technology research firm Forrester Research, which put out its budgeting and planning advice for corporate technology budgets for 2023, “global unrest, supply chain instability, soaring inflation, and the long shadow of the pandemic, all point to an economic slowdown.” It cautioned that “slower overall spending mixed with turbulent and lumpy employment trends will make it difficult to navigate 2023 planning and budgeting.” It has also advised that businesses search for methods to reduce spending, including doing so by getting rid of outdated technology. However, when it comes to investing in AI, the firm has suggested that companies should increase their spending.

Business leaders have been focusing majorly on investing in automation. In a survey by Bain & Company of 180 IT decision makers across North America and Europe, 41% of these respondents cited “building automation capabilities within business lines” as one of their most critical IT priorities. However, automation has its own set of problems, which is why business executives are now taking a major step beyond automation and into the world of autonomous artificial intelligence (AI) as they want to fully leverage their investments and see faster returns. True AI solutions that continuously learn from a company’s data and become more accurate over time are the holy grail of ROI.

AI Adoption and Impact

According to a report from the McKinsey Technology Council, investments in applied AI, which includes machine learning, computer vision, and natural-language processing, grew 150% between 2018 and 2021. The report also highlights that businesses spent $66 billion on applied AI technologies in 2018, as compared to $165 billion in 2021. In the compilation of the report, McKinsey collected data based on search engine queries, news publications, patents, research publications, and investments. The report also found that the business functions with the highest rates of AI adoption were product development, service development, service operations, and marketing and sales.

The report from McKinsey has also highlighted the fact that businesses saw cost reduction and revenue growth due to the adoption of AI. However, companies are still rattled by concerns pertaining to high up-front investments in talent and resources, cybersecurity and privacy concerns, increasingly stringent regulations, and compliance and ethical implications.

Another survey conducted in 2020 by McKinsey, titled “The State of AI in 2020”, highlights how AI adoption has impacted organizations. The results of McKinsey Global Survey on artificial intelligence (AI) suggest that organizations are utilizing AI as a tool for generating value. That value is increasingly coming in the form of revenues. A small group of respondents who are part of a variety of industries attribute 20 percent or more of their organizations’ earnings before interest and taxes (EBIT) to AI. These companies plan to invest further in AI, in response to the COVID-19 pandemic and its acceleration of all things digital. This could create a wider divide between AI leaders and the majority of companies still trying to capitalize on the technology. The survey also found that while companies overall are making some progress in mitigating the risks of AI, most of them still have a long way to go.

In the survey, the largest shares of respondents report increases in revenue for inventory and parts optimization, pricing and promotion, customer-service analytics, and sales and demand forecasting. More than two-thirds of respondents who reported adopting each of those use cases say its adoption improved revenue. The use cases that normally led to cost decreases were the optimization of talent management, contact-center automation, and warehouse automation. Over half of respondents who reported adopting each of those say the use of AI in those areas reduced costs.

Focusing on the Best – Maximizing Utilization of AI

According to the McKinsey global survey, the companies that saw the most value from their use of AI, that is, respondents who say 20 percent or more of enterprise-wide EBIT in 2019 was attributable to their AI use, reported several strengths that differentiate them from other respondents:

Better Overall Performance: The findings of the survey suggested that companies seeing more EBIT contribution from AI experience better year-over-year growth overall than do other companies. Respondents at high-performing companies are nearly twice as likely as others to report EBIT growth in 2019 of 10 percent or more.

Better Overall Leadership: Respondents at AI high performers rated their C-suite as very effective, more so than other respondents. They were also much more likely than others to say that their AI initiatives have an engaged and knowledgeable champion in the C-suite.

Resource Commitment to AI: Responses show that AI high performers invested more of their digital budgets in AI as compared to their counterparts and were more likely to increase their AI investments in the next three years. High performers also tend to have the ability to develop AI solutions in-house—as opposed to purchasing solutions—and they typically employed more AI-related talent, such as data engineers, data architects, and translators, than do their counterparts. They were also much more likely than others to say their companies have built a standardized end-to-end platform for AI-related data science, data engineering, and application development.

Benefits of AI

AI is more important and more transformative than any other type of technology and investing in AI has had significantly positive outcomes for businesses, including reducing costs, optimizing financial functions, and finding new revenue streams:

Reducing Costs

Business executives may drill down into their spending with the use of AI, which gives them visibility into their data across all business units. Instead of spending several weeks of time across multiple employees, AI reveals these insights automatically and thus enables business leaders to make strategic savings more swiftly than ever.

The cost reductions could also be significant if AI takes the role of some employees, such as those in customer service. An AI chatbot may work around the clock, is less expensive than hiring staff, and can increase customer satisfaction. Examples include Ibenta, Liveperson, and Ada.

AI can also lower costs by concentrating on predictive maintenance. Without AI, a mean-time-to-failure study is frequently used in machine maintenance to determine when to replace particular components. AI enables machines to report on their current state, helping to identify parts that are likely to fail soon and only repairing the parts in the devices that actually need to be replaced. Companies like H20, Dataiku, and Industlabs offer predictive maintenance capabilities.

Some healthcare providers are using AI for registration-related tasks, like ensuring the availability of a patient’s medical history. When this responsibility is removed from the staff members, employee efficiency is increased, and errors are significantly decreased. Error minimization is quite an expensive process as it may necessitate having employees redo tasks. Oliveai is one company providing solutions in this area.

In addition to saving companies money in terms of labor costs, AI also has benefits in terms of data and analytics. This is crucial in light of the fact that “leveraging enterprise-wide data and analytics to support strategic decision-making” was named a top IT priority by 50% of the surveyed IT decision-makers.

Optimizing Financial Functions

By deploying AI solutions in the accounting sector, finance professionals can lead the way in implementing digital solutions within their own organizations. Across industries, these teams are struggling with unending, tedious accounting tasks, employing obsolete, inefficient technology, and squandering a lot of time correcting mistakes made by individuals. Finance leaders can increase production and accuracy while freeing up their team members for more strategic work by implementing AI solutions.

In addition to this, there are huge benefits in doing real-time demand forecasting, inventory management, and accounts receivables using AI. Finance professionals can react extremely quickly to the changing environment and are able to predict where to allocate their funds as opposed to only responding to historical data.

AI also creates better predictive models, which enables a higher level of confidence in the store-closing decision process. With AI, you can layer in much more intelligence in your store-closing decisions.

AI can also assist in managing bad debt decisions. For example, in 2018, bad debt decreased profit margins by as much as 5% in many companies. Bad debt naturally increases during times of recession as customers delay payments or companies go out of business. With AI solutions, businesses can evaluate relevant customer data, such as credit rating, type of industry, payment history, debt burden, hiring and firing practices, geography, as well as many other data points to estimate the possibility of a company not paying their bills. Utilizing this information, an AI-based system can make real-time recommendations for the payment terms of such customers. Solutions include CognitiveScale, HighRadius, and YayPay.

Finding New Revenue Streams

AI has the capability to model expected consumer behavior which can help in enabling real-time promotions. Utilizing the historical results from promotions, AI can simulate buyer behavior by factoring in new variables, including governmental regulations regarding shelter-in-place, the opening, and closing of retail locations and schools, political affiliations, the possibility of a COVID-19 outbreak, and more.

AI also has the ability to collect data from the success of one promotion in one region and conduct similar modeling to suggest similar promotions based on real-time results in another location. Solutions include Revtrax, Antuit, and Vertica.

In addition to promotions, AI can help increase market share as well. AI can evaluate vast warehouses of data and identify patterns that humans can’t see. It can look at demographics, local consumer preferences, age, ethnicity, gender, income profiles, and many other things to find patterns.

Looking Ahead – The Future of AI

According to McKinsey, AI, and machine learning technology have promised US$600 billion annually for China’s economy as it pervades industries. The consulting firm is expecting AI to create an annual economic value equivalent to 3.7% of China’s current GDP as it finds its way into more applications. The report by McKinsey suggests that to unlock that value, further investments are required in data ecosystems, technology, talent, and business models, alongside standards and regulations.

On the other hand, two of the 14 most important technology developments taking place today are industrializing machine learning and applying AI, according to McKinsey’s recently published “Technology Trends Outlook 2022.” According to McKinsey, applied AI is based on tested and mature technologies, and it received the highest scores among the 14 trends on quantitative measures of innovation, interest, and investment due to its potential applications across a wider range of industries and its proximity to widespread adoption.

The percentage of respondents who indicated their firms have implemented AI increased from 50% in the 2020 survey to 56% in the 2021 McKinsey Global Survey on the state of AI. Product development and service operations are the corporate functions that have adopted AI most quickly, according to the 2022 research, while tech industries are leading in AI adoption.

According to Roger Roberts, partner at McKinsey and one of the report’s co-authors, economic issues won’t change AI’s strong, impactful momentum.

“There’s never been a better time to be leading the application of AI to exciting business problems,” he said. “I think there’s enough momentum and capability flowing along the path of science to engineering to scale.” He, however, also noted that within industries there may be some growing separation of leaders and laggards.

“Leaders will continue to make the right investments in talent tooling and capabilities to help deliver scale,” he said. “Laggards may let the opportunity slip away if they’re not careful.”

Roberts also added that he sees big tech companies such as Google, Meta, and Microsoft as in the lead on industrialized ML “by a longshot.” But he has predicted the trend would soon make its way well beyond those companies: “We’ll start to see more and more venture activity and corporate investment as we build that toolchain for this new class of software and this new class of product as productized services,” he explained.

In conclusion, the future years look set to be dominated by AI solutions being deployed across a wide range of industries in order to maximize efficiency and ensure continuous growth.