The world of investing is all about staying on top of the news cycle to see how the latest bulletin can affect your current and future investment opportunities. A common way to invest in the stock markets is to try to apply those short term news bulletins to a longer term view to try to ride out short term rises and falls in the market and, hopefully, enjoy gains over the longer term – seemingly riding out any near term volatility.

2020 has been quite the year for volatility. COVID has been a difficult challenge for so many companies in so many sectors for so many different reasons. The lack of demand that the worldwide lockdown created was a seismic shock to the global economic system as a whole and was totally outside many traditional economic schools of thought and investment outlooks.

But now, so many months after the initial shock of the pandemic occurred, what potential investment opportunities are now available? Have investment outlooks from a year ago had to materially change or are they actually just as relevant in the long term in these highly unpredictable times?

Here, in this article, we highlight some ideas that could provide some interesting investment opportunities for the latter end of 2020 and beyond.

Global Population Changes

The changes in populations all around the world can help guide investment processes and decisions. Plus the structural shifts that materialize because of those changes cannot be underestimated. In some countries, like Japan for example, populations are decreasing or at the very least aging – which has a significant impact on productivity. Whereas in other countries, populations are growing causing upswings in demand for differing goods and services.

Importantly, depending on the average age of a society, governments allocate their resources in different ways due to the differing needs of their population. The repercussions of political decisions, that affect monetary and fiscal policy as a result, can then affect the global economy – particularly with respect to the largest economies of the world.

However, even before the widely seen lockdown measures, many governments were starting to work on a more national level than an international level. Deglobalisation may well have been exacerbated by the pandemic therefore as the lockdowns forced nations to look internally to protect the lives and livelihoods hoods of their people. The subsequent impact on investments that arise because of these shifts will be of great importance for a long time yet.

China

China is the second largest economic powerhouse of the world. Its influence cannot be underestimated or underplayed therefore. Its impact on the wider world’s economy and the investment opportunities that stem from it as a result require close inspection when making investment decisions.

The rising power of the middle class in China is of substantial significance in terms of demand for differing services and goods. Other issues to contend with in investment decisions with respect to the influence China has on the rest of the world, are the worsening US-Sino relations that give cause for concern on a political level. The difficulties caused with trade war tensions between China and the US has had a rippling effect on companies and businesses around the world and will no doubt continue to do so.

Finally, China, despite its quick rise to no.2 in the world rankings of economies over recent years, is also heavily indebted. While so many economies around the world also have a large portion of debt on their balance sheet, the lack of transparency surrounding the Chinese government’s approach to monetary and fiscal policy must not be overlooked. Making as fully informed an investment decision as possible is hard when so much of the Chinese government’s intervention is shrouded in secrecy.

Reliance on Technology

Until the start of September, tech giants like Amazon and Apple were the shining light of the stock markets. They had done extraordinarily well during the pandemic given that technology was what much of the world relied on during the lockdown as a way to work, shop and socialise. However, despite the mass sell off at the beginning of Autumn, technology should still remain a long term investment opportunity. The stark reason being that the world simply has so much to gain from technology – even when the COVID pandemic is over and lockdown restrictions are a distant memory. So much of what we do in modern life is connected somehow to a device or to the internet. The sheer amount of connectivity in our lives means that technology looks set to be a smart place to put cash.

Responsible Investing

Responsible investing provides an interesting investment idea – more so since the COVID outbreak. Before the pandemic, more and more investment decisions were being made with a preference to companies with a strong ESG framework. Investors themselves were realising the strength of their influence by investing in companies that had green initiatives and strong corporate governance – to name just a few increasingly important factors.

Now, since the pandemic, the world seems more preoccupied with the idea of investing in companies with an almost benevolent ethos due to a shift in outlook on life and society. For example, an awareness of our reliance on those in poorly paid jobs has been highlighted and roles that were previously overlooked are now well revered. Additionally, the fall in demand for air and car travel gave the world a big insight into how we can live without the services that create so many carbon emissions. That insight has made investors look to investment opportunities that are environmentally responsible as well as financially viable. Finally, with governments trying to spend their way out recessions around the world, many are looking to channel funds into greener initiatives to create jobs but also promote more environmentally friendly ways of living.

Investing In A Post COVID19 World

The pandemic acted as a catalyst for so many different longer term investment ideas that seem ever more relevant and pertinent now. Responsible investing in particular gained a lot of traction and coverage by market commentators in the initial wake of the global lockdown that saw planes grounded for weeks on end. Our reliance on technology was also emphasised which, despite some market sell offs in the early Autumn of 2020, seems not to be a trend that is going anywhere fast. Indeed, our reliance on technology only seems set to continue this Winter and beyond as many countries are faced with a second wave of infection, driving us back indoors.

However, it is important not to get distracted by the short term noise that COVID has created. While it absolutely should not be forgotten or ignored, keeping an eye on the longer term investment horizon can help direct investment decisions for the future.

Since the Brexit vote to leave the EU in June 2016, there has been much done to push through the vote in practice. While the media coverage of Brexit has minimised recently in the shadow of the COVID19 pandemic, the intricacies of the actual withdrawal are still yet to be decided between Britain and the EU. At present, talks are taking place to thrash out exactly how Britain will leave the EU by the end of 2020 – a timeline set by the withdrawal treaty already agreed and ratified by Parliament. 

However, those talks are characterised by a lack of agreement over what the future relationship between Britain and the EU will look like. The closer the deadline looms, the more likely it looks that Britain will leave the EU with no deal in place to frame how it trades with one of its biggest economic partners. Boris Johnson has set a deadline of 15th October for negotiations to come to a viable agreement. If no viable agreement is reached, he seems set to plough on ahead with no deal. 

Here, we look at what the impact of a no-deal Brexit could mean for Britain as well as what it would look like and the practical implications going forward. 

What is a No Deal Brexit in practice? 

Michel Barnier, the EU chief negotiator, has publicly proclaimed that a no deal Brexit is a hard no deal with no side deals to cushion the final exit. However, many political commentators believe that in reality member states will make their own arrangements with the UK. This comes down to the fact that individual countries now, more than ever, have to look out for themselves and their own economies. The result will be, that while a no deal Brexit may not give the hard and fast clarity that so many want after years of negotiations, the UK will still manage to leave the EU and be able to trade with many of its countries. 

In reality, both sides will need to make a series of these mini deals. While the UK’s Prime Minister seems to be playing political hardball by claiming that a no deal Brexit will not spell disaster for Britain, and will in fact be giving the UK control over its laws, rules and fishing waters, the day to day practicalities of what a no deal Brexit means for flying in and out of the country, freight deliveries and other matters like the transference of scientific knowledge are of paramount importance to figure out. 

What seems increasingly less likely is for an extension of the current transition phase. Again, Boris Johnson has emphasised that this is not an option for Britain. Going on his previous reactions to how to move Brexit talks and negotiations along, this has proved fruitful for getting his own way in the past. He managed to pass a deal through UK’s parliament relatively swiftly in comparison to his predecessor Theresa May. 

What would the impact of a no-deal Brexit mean for Britain? 

Economically speaking, a no deal Brexit has significant ramifications. If Britain leaves the EU without a deal, they will do so on WTO terms. This means that Britain will still be able to trade with the EU and be able to access its market for services and goods. However, currently, Britain is widely thought to have better terms than the WTO framework would provide. 

Given that Britain is currently in the midst of a deep recession, brought on by the COVID19 pandemic, it is particularly sensitive to any difficulties that it may encounter that hinders the growth of GDP. Plus, it cannot be overlooked that almost 50% of all Britain’s exports of goods go to the EU. Additionally, as the UK economy is so incumbent on its financial and service industry, a huge portion of its entire economy is reliant on those very exports. On the other side of the coin, it imports a similar amount from the Continent. Not negotiating a favorable deal with its most significant trading partner will undoubtedly act as a drag on its productivity. 

Furthermore, not leaving the EU with a deal has wider implications on the UK’s ability to trade elsewhere. Through the EU, it has trade deals in place for countries outside of it. The result is that trading with anyone – European country or not – is seriously hindered with no individual regulatory framework in place. A framework that the UK has enjoyed, and built a great deal of success on, since it joined the European Union. 

No Deal Brexit Consequences – Key Takeaways

With Boris Johnson announcing that he is against extending the withdrawal transition period at all between the EU and the UK, it appears far more likely than not that Britain will leave the EU with no trade deal after years of negotiations. The impact of that lack of deal will have a serious impact on Britain’s ability to trade with any countries with whom it currently trades under the EU trade laws. The result will be substantial charges and tariffs on many of its exports – just at a time when getting its economy up and running again after the lockdowns of 2020 sent GDP plummeting into the red. 

However, Boris Johnson may well have a method to his madness. The continued uncertainty that lurks with a never ending transition period is arguably just as harmful to the UK’s economy, which has been living under a cloud of uncertainty for so long now. Boris Johnson is aware that action has to be made, even if that action is not the deal he would have wanted in an ideal world. 

In light of the ongoing pandemic, the European Commission has agreed to postpone the implementation of the contentious CSDR settlement discipline regime until 2022. But that still only leaves just over a year for firms to prepare. So what do they need to be considering?

What is the CSDR regime?

The Central Securities Depositories Regime was introduced in 2014 to harmonise the authorisation and supervision of Central Securities Depositories across the European Union. When the regime was introduced, it shortened the settlement time of securities to two days from a trade and ensured all securities were held in electronic form. 

What were the changes due under the CSDR settlement discipline regime?

Under the CSDR settlement discipline regime, which was originally due to come into force in September of this year, a raft of measures were being introduced to address settlement fails. The regime is intended to ensure the safety of settlement through compulsory enforcement of the original agreement. One of the key points is the introduction of mandatory financial penalties when settlements fail within the prescribed time period. As a further measure, if a transaction still hasn’t settled by the end of a prescribed extension period, a buy-in process is initiated by the receiving trading party, with the counterparty having to meet all costs.

An extension to the September deadline was proposed, initially because the regime was dependent on modifications to the Target-2 Securities (TS2) system run by the European Central Bank and as these overran, implementation was pushed back until early 2021. This, and other IT project upgrades that the regime depends on, have become casualties of Covid though, and consequently the European Commission has pushed the deadline back again to February 2022. 

Obviously, this is good news but there is still some opposition to the settlement regime, with many arguing that the costs of compliance could outweigh the benefits of a reduction in settlement fails. The implementation delay could be an opportunity to iron out some of these concerns, particularly with regard to the mandatory element of the buy-in regime, and a public consultation on the regime is expected to begin in the next few weeks.

What to prepare for – financial penalties

The financial penalties associated with the CSDR settlement regime have attracted some controversy. The responsibility for calculation, collection and payment of financial penalties falls to the affected Central Securities Depositories, who are expected to adopt the methodology set out in ECSDA’s CSDR Penalties Framework   

The full extent of such penalties is difficult to predict – essentially penalties are applied each day a transaction fails to settle until a mandatory buy-in process is completed and they are calculated by adding a proportionate charge to the securities value, ranging from one basis point to a tenth of a basis point.

Preparing for the implementation of the financial penalty regime is likely to be costly for firms in terms of both money and time. Some of the necessary steps to consider include investing in people and systems to improve the efficiency of settlement instructions, and reviewing the settlement fail rates of the firms used by clients.

What to prepare for – mandatory buy-ins

The mandatory buy-in regime means that if a settlement fail is prolonged beyond a defined extension date, a buy-in process should be initiated. This takes place on the business day following the end of the extension period – which is defined as four business days for liquid shares, 15 days for securities trading SME growth market and seven business days for all other securities. Consequently, mandatory buy-ins are expected to increase significantly after the CSDR settlement regime is implemented – in fact an ESCDA analysis estimates it could rise to 1.8 million buy-ins a year.

There are exceptions where the buy-in process would not be invoked – if illiquid shares cleared by CCP’s remain at four business days, a buy-in agent could be appointed, the failing party may be required to pay cash compensation or in some circumstances, an additional deferral period may be permitted.

Like the financial penalty regime, the mandatory buy-in process has met with some opposition, especially as some definitions are still to be finalised and there are concerns about potential shortages of buy-in agents.

Opposition and preparedness

The CSDR settlement regime has come up against opposition from the offset, with industry groups persistently lobbying to extend the implementation deadline even pre-pandemic. The mandatory buy-in regime is particularly problematic – industry groups have frequently suggested that it will significantly damage market liquidity. 

To complicate matters further, the UK regulator has confirmed it will not be onshoring the CSDR settlement regime when the Brexit transition period ends on 31 December. Although the FCA is aiming to apply general equivalence between ESMA’s requirements and its own post-Brexit version, keeping up with the inevitable divergence is likely to present additional challenges for UK firms.

There are fears, though, that extending the deadline again means that industry preparedness is slowing down too much. Many firms are taking a ‘wait and see’ approach amidst expectation that EU regulators will review the framework, especially the buy-in rules. According to an audience poll at the Network Forum Autumn Meeting, almost a third of participants wanted buy-ins removed while nearly 40 per cent said they expected the scope of penalties and buy-ins to change. However, panellists voiced fears that waiting for changes means many firms will not be compliant, even by the new deadline, and as a minimum CSDs should begin end-to-end testing.

Whatever the outcome of the framework review, preparing for the CSDR settlement regime is likely to incur significant costs and time for firms, so it seems prudent to take some steps towards compliance now even with the extended deadline.

The FCA launched its much-lauded updated Financial Services register in July, which aims to offer better protection and transparency for consumers. The register allows customers to see details of anyone involved in regulated activities, and the latest updates will make some key information more prominent, including previous actions against firms and individuals.

The changes to the register, which had more than seven million unique users last year, were intended to offer enhanced visibility to customers, making it easier to avoid scams and unauthorised firms. The updates were also a key part of the latest Senior Managers Certification Regime legislation, as financial services firms were given a deadline of December 2020 to submit information.

However, Covid-19 has disrupted the UK regulator’s plans and that deadline may be extended until 31 March 2021.

What do the Register updates entail?

Last year, the FCA faced a backlash after it removed all the customer-facing roles at advice firms from its register and it received a barrage of complaints about the inability to check credentials. Subsequently, the regulator has spent around £6.5m on a new register which promises to make transparency and accessibility better for customers. 

What is SM & CR, and what impact will the new Register have?

The Senior Managers and Certification Regime was implemented for banks, building societies, credit unions and PRA-regulated investment companies in 2016, and brought into force for solo-regulated firms at the end of 2019. It is essentially a code of conduct, which aims to strengthen market integrity and ensure that all senior managers are accountable for their conduct and competence. 

The latest requirements of the regime, which concern the new register, called for solo-regulated firms to carry out an assessment of the ‘fitness and propriety’ of their Certified persons.

The task was multi-faceted for solo-regulated firms – the first part involved preparing and submitting detailed reports on every Certification employee and non-SMF director within the firm. If this sounds onerous, the good news is that the regulator has proposed extending the deadline for assessments and submissions till March 31, and it has just closed the public consultation on this proposal which might buy solo-regulated firms extra time.

The second part of the task was to check that the FCA register had been correctly updated and to report any inaccuracies by Jan 16, although if the reporting deadline is successfully extended, this will have to be pushed back too.

How are ‘fitness and propriety’ assessments conducted?

The regulator has published guidance to help firms undertake a thorough assessment of fitness and propriety that can be used as a ‘benchmark’ to assess suitability rather than just a checkbox exercise.

Some of the guidance includes assessing specific suitability for the role that is carried out, amending existing performance management processes to integrate ‘fitness and propriety tests’ and obtaining satisfactory regulatory references. Senior managers should also be trained on assessment and reporting and be prepared to sit on fitness and propriety panels for ‘borderline cases.

The assessment of fitness and propriety is based on the criteria set out in the Financial Services and Markets Act 2000, and it specifies that the individual has obtained a qualification, undergone training and has the personal characteristics required by ‘the general rules set out by the FCA.’ These characteristics are broad in criteria but are stated as honesty, integrity and reputation, competence and capability and financial soundness.

While the guidance is not prescriptive there are some general rules for each category. For example, honesty, integrity and reputation encompass examining whether the person has been convicted of a criminal offence, subject to adverse findings in civil proceedings or the subject of any disciplinary offence. Competence and capability involve investigating the individual’s training and experience, and whether they have adequate time to fulfil their responsibilities. To fulfil the financial soundness criteria, firms must examine whether the individual has outstanding debt or judgements against them and whether they have filed for bankruptcy or entered into arrangements with creditors.

What feedback has the FCA’s new register received?

Despite the proposed delay in submission deadline, which the FCA states is largely to give firms the extra time they need while the current pandemic rolls on, the register will begin to be populated on an ongoing basis. Reactions so far have been mixed – some have criticised the £6.5m spend saying the register is incomplete. Its critics have suggested that the money could have been better spent on devolving power to professional bodies to manage their own registers instead. The previous register came under fire for its lack of usability, however, so some have argued that it’s money that needs to be spent. Either way, though, the process of certifying staff is time-consuming, so solo-regulated firms need to make sure they are starting the process in preparation for the potentially postponed March deadline.

While the whole world has seen its own individual economies falling into a hard and fast recession in 2020, it is perhaps the US’s recession that catches the most market interest. The US has the largest economy in the world so the focus on its GDP is to be expected. So, what prospects does it have at the moment for a recovery? What are the current drags on its economy that will slow any growth? And, what are the factors which could promote a better than expected recovery? 

The Drags Which Will Slow The Us Recovery

Despite a Twitter mad president that is only happy to share economic good news, there are a number of crucial forces at play that will act as a significant drag on the US’s economy and its productivity. They are:

Political Instability

With a looming election that is too tight to call, the political instability that characterises the US at the moment should not be overlooked in terms of its effect on the economy. When political instability looms, capital investment tends to slow which curtails the amount the businesses can consequently grow. While it is difficult to say outright whether Biden and the Democrats will successfully oust Trump and the Republicans from office, what is clear to see is that political differences in the country are rife. That can be seen in the civil unrest caused by racial outcry in addition to the divisive rhetoric that surrounds much of both side’s election campaigns. The lack of stability has larger ramifications on the potential of the economy. 

Stimulus Package Uncertainty

In addition to the election campaign causing a huge unknown for the future of the US and its economy as a consequence, is the fact that congress is slow to act when it comes to implementing new laws and policies. Of particular importance to the economy, as well as the wider population, is Congress’s inaction in passing the latest stimulus package bill which will affect so many. While it cannot be underestimated how much the first COVID stimulus package supported the economy in the first half of 2020 and stopped it from plummeting to unprecedented levels, the virus is still present in the population. Substantial parts of the economy have not been able to open fully again, causing a huge drag itself on the economy, so that the slow reaction from Congress only seeks to exacerbate the situation. 

Widespread COVID

As briefly alluded to, COVID19 is still prevalent in many towns, cities and states in the US. While numbers are finally starting to subside, it must not be forgotten that they are falling from a huge height. The virus is still at large in the community and that materially affects the population’s ability to return to work or to activities that help boost the economy. Until a vaccine is found or the authorities have the virus under control, it will continue to plague the country’s GDP and its ability to be at pre-pandemic levels. 

Permanent Job Loss

The virus also sought to quicken the pace of job loss in some industries that were arguably still struggling. Importantly, the result of this is permanent job loss in some industries that will not return once COVID19 is under control. Recent job numbers, according to the Economist, pointed out that 3.4milliion jobs were cut permanently. As a matter of comparison, that was more than the amount of permanent jobs which were lost in the wake of the financial crisis of 2008, just after Lehman Brothers went bankrupt. Unemployment numbers are always faster to rise and slower to fall, so permanent job loss cannot be turned into job reallocation at pace, acting as a significant drag on overall GDP growth. 

Reasons The US Economy Can Recover Quickly

There are a number of reasons to be hopeful however about the chances of a V shaped recovery in the US. They are:

Natural Disaster

COVID19 was a natural disaster. It was not one borne out of systemic problems or bad policy decisions by the government. Why is this important? Well, historically, recessions that were caused by natural disasters in the past are followed by a much quicker rebound than those that require structural shifts – like times after the Great Depression or the aforementioned financial crisis. 

Flexible Labour Market

One of the most encouraging points to note around the US recovery is the fact that the country as a whole has one of the most flexible labour markets in the world. For that reason, it is far easier for the economy to rebound as jobs are not only created more easily than in other countries, jobs are also found more easily. While some of the permanent job losses are not to be dismissed, it is important to remember that COVID19 may have simply sped up the jobs that were always going to be lost anyway. Conversely, it has also sped up job reallocation too. Much of the jobs data coming out of the US points to the fact that falls in unemployment rates from its 2020 highs have come from new job creation. 

Newly Motivated Fed

The Fed has recently taken action that made its reaction to the financial crisis in 2008 look half-hearted. They undertook a large securities purchase program, in addition to lending to securities firms and encouraging banks to lend to ensure liquidity was never an issue – amongst many other economic stimulus tactics. Plus, they have additionally changed their approach to hitting a 2% inflation target by allowing inflation to rise above 2% at times if needed. Prior to this, the Fed would have taken measures to ensure that inflation did not rise above this point. In conjunction with their other actions in the first half of 2020, the newly motivated Fed can be seen as a big force that will help the US economy reach higher productivity sooner than some market commentators would have previously thought. 

The Future Of The US Economy

There is much to be said about the good news coming from the US with respect to its economic prospects. Better than expected employment numbers are reasons to be optimistic about its future. However, the drags on its economic growth cannot be underestimated. Plus ultimately, it should not and cannot be forgotten just how far the economy fell in the first place. The recession caused by the pandemic has been deeper and faster than any seen in since the Great Depression. While any growth is therefore welcomed, it will still be a long while yet until the economy is back at pre-pandemic levels. 

Humanity’s technological innovation has been a constant ever since we have discovered fire. However, it really started speeding up in the last several centuries. From the discoveries of things like the printing press and steam engine to modern technologies, the innovation has been moving faster and faster.

It continues to progress even to this day, and it is rather obvious, when you think about it. The last 20 years have brought more innovation than the previous century, while the previous century brought more of it than the past 1,000 years.

In other words, our technical innovation is speeding up, and will likely continue to do so for quite some time more. But, for the moment, you could say that it is at its current peak, with the hottest technology right now being decentralized ledger.

The solution lies in decentralization

Decentralized Ledger Technology (DLT) is a technology that was brought in response to centralization. Just think of it like this — if you have a bank account in which you have stored all of your money, that money is barely yours at this moment. Your bank has full control over the account in which the money lies, and therefore, it has full control over that money. It can freeze it or lock you out of your own account at any time.

Of course, due to the established trust — necessary in order for the bank to stay in business — that money is technically yours, with the bank acting as its guardian and manager. It will handle transactions for you and keep your account safe, but it wants a fee for providing such services. 

With no other way for you to send payments, apart from giving someone else an envelope full of cash, you pretty much have no alternative but to pay these fees and keep working with the bank.

This is where DLT enters the picture. 

What is Decentralized Ledger Technology?

Decentralized ledger technology acts as just that — a decentralized ledger upon which you can make payments directly to receivers, and have all the transactions stored on the ledger.

With it being decentralized, you have no institution, or centralized authority to answer to. You are in control of your money on a network maintained by the community of users. This community is the entity responsible for processing payments by contributing computing power to algorithms that do all the work, instead of relying on a centralized bank that would use a room full of servers to do it on its own.

The community also gets rewarded for doing so, and as a result, you get to cut the banks out of the picture entirely.

Decentralized ledger technology is also immutable, meaning that no one can change and modify data that is already stored on top of it. Any data is stored or changed only if more than half of the network agrees that the change is valid. 

That means that you would need to hack half of the network’s participants in order to control all of their devices, make the change, and then approve of it by using more than half the network, which is pretty much impossible on larger networks.

So, you have the security of funds, the removal of middlemen, immutability of stored information, and all of this is only scratching the surface of what DLT can offer. In fact, its full potential remains unknown to this day. But, researchers and entrepreneurs keep coming up with new ideas, and new methods of applying this technology are being discovered with every passing year.

DLT is the future

Over the past decade, the world has learned of this technology, which has since come to be known as the blockchain. By recognizing its potential, people started to use it more and more often, thus bringing new users to it. 

As it was recognized as a better, faster, and cheaper method of sending money than what the banks had to offer, traditional financial institutions realized that they are becoming unnecessary. If they do not bow to innovative methods, their existence will become obsolete.

And so, today, most major banks are looking into blockchain technology, trying to adopt it and start using it as part of their own systems.

They did not have much choice in the matter. But, then again, the banks were the ones who were indirectly responsible for the creation of this kind of technology. Due to some of the banks’ abuse of power and control over the people’s money, as well as corporate greed, banks were conducting credit schemes which backfired and led to a financial crisis back in 2008. 

Naturally, the people who trusted them with their money were not pleased, and eventually, an alternative to centralized systems was invented. 12 years later, this technology is far more advanced, but still based on the same idea of decentralization, sharing, and giving the power to the people, rather than having it in the hands of a handful of major companies. 

As a better system, it aims to take the power away from all companies, including those who would log your data for their own purposes, advertisers, and others.

Since then, blockchain technology has entered every other industry around the world, as well. It can be found in gaming, supply chains, content creation, healthcare, identity management, data collecting, and much, much more.

However, its main focus, as well as the area in which it progressed the most, remains decentralized finance. This technology is changing the world one day at a time. At first, changes were small and unimportant. Today, massive, industry-changing deals that include DLT are happening every other day, once again proving the rapid development of technological innovation and financial revolution.

Conclusion

With the speed at which these changes are now happening, it is next to impossible to predict what the world might look like in the next several years. However, from everything that we can see, it is likely going to move towards its safer version, with fast payments, secure data sharing, and greater security of information.

Centralized systems will likely never fully go away. However, there will be a choice for you to make, whether you wish to give control over your money, information, and identity to companies and the government, or to keep it for yourself, and use a community-managed system that has proven to be better and safer even in its early days.

Towards the end of August 2020, the long time Prime Minister of Japan, Shinzo Abe announced his resignation from his role. He claimed that ill health was the root cause for leaving his position. While some commentators argue it was a decision borne more from getting out while the going was as good as it was going to get, he still arguably did what many Prime Ministers had not managed before him. He revolutionised the Japanese economy that had been struggling for years with deflation through the use of his Abenomics approach to the economy.

But what exactly is Abenomics and what did this approach to the Japanese economy really achieve? Here, we look to investigate what one of Japan’s longest-running Prime Ministers did for the country and its finances.

Abenomics

Given the tumultuous position that the Japanese economy was in when Mr Abe took office, the Prime Minister needed to employ some radical and innovative monetary and fiscal policies to bring about the changes needed. The result was the school of Abenomics that was used by the Government and the BoJ to promote growth in the economy. But how did it do this?

It employed several tactics. It sought to reduce real interest rates and even, at one point, introduced negative interest rates in an effort to get inflation to that haloed 2% point that the US Government targeted for so long. While this target was never achieved during Mr Abe’s time in office, the Yen certainly weakened which gave Abenomics a helping hand. A weakened Yen helped boost the economy by increasing exports and business investment could thus improve. Additionally, Mr Abe sought to change the culture surrounding corporate governance to further improve outside investment opportunities. Boards of companies now have more independent directors than ever before.

Mr Abe also took on other cultural reforms to help the structural side of the economy. With an ageing population, he knew he had to get the most out of the workers the population did have to help boost productivity. As a result, he implemented many policies to encourage women to go back to work and enter the workforce. As a result, free preschool childcare was provided amongst other subsidies to help encourage women to find jobs.

Additionally, he signed up to the TPP or the Trans-Pacific Partnership, which America has now pulled out from. However at the time, it meant that Mr Abe took the politically tough decision to cut tariffs and increase the import quotas for many agricultural goods. Given that his party, the LDP, once counted the farming community as some of its biggest supporters, this was a difficult decision to make.

Finally, Abenomics was perhaps most characterised by its vast amount of public spending and investment. The amount of public debt that Japan now sits on is around 238% of its GDP which is nothing short of huge. While the large spending sprees that the Japanese government went on has yet to be reflected in markets, some commentators fear for the real long term effects that such mountains of debt can have on the prosperity of an economy.

Did Abenomics really work?

While it definitely was not perfect, there are many facts that cannot be argued with which point to Mr Abe’s policies as being successful. Firstly, he managed to turn inflation positive for the majority of the time he was in office. As previously mentioned, he never quite managed to hit the 2% he so wanted in terms of inflation, but the economy did enjoy one of the longest recoveries ever seen in since the Second World War. Additionally, productivity of the country has even beaten the likes of America.

However, there are a couple of negative factors to take into account. Mr Abe, in reaction to the huge public debt that the economy was under, took the decision to raise sales taxes. Economists claim that this decision was ill-timed and one of the biggest causes behind the short recessions that Japan did see in Mr Abe’s tenure.

Ultimately, though, Abenomics managed to reduce unemployment while the Nikkei grew thanks to many of Mr Abe’s policies. Corporate taxes saw a reduction and the aforementioned corporate governance meant that Japanese companies were now bankable shares. Additionally, the weaker Yen also improved outside investment no end as well as helping to boost the profits of many Japanese businesses.

Outlook for Japan’s Post COVID Economy

While Abenomics was arguably fairly successful, the Japanese economy is still beset with problems. The issue of a diminishing population is still present and Japanese culture still has not properly addressed gender roles in business. While women have reentered the workforce on a scale not seen before, they are not taking the top jobs that men enjoy. Additionally, the labour market is largely seen as being fairly inefficient due to the culture of staying at one company for the entirety of a career or being a part-time worker. Plus, the country as a whole has some pretty archaic practices when it comes to technology as well as not employing many greener initiatives that other governments around the world have.

However, the political landscape was definitely steadied by Mr Abe. Previous to him, Prime Ministers of Japan did not stay in power for long and thus could not see out any of their policies. He has therefore undoubtedly managed to make huge inroads into some of the issues that previously plagued the economy for a long time. Additionally, his diplomacy has meant that he not only has the American government on side, he also has the support of the Chinese as an ally, which is a tricky matter to have achieved.

Ultimately, however, commentators fear for the future of the Japanese economy given that COVID19 has wiped out all of the gains that Mr Abe has managed to achieve during his time in office. The economy shrank by 7.8% in the second quarter of 2020 when the pandemic took full force across the world. Given that the pandemic is still with us, and does not look to be going away any time soon, the heavily indebted Japanese economy along with its low inflation may find it difficult to achieve any form of growth. Arguably though, it is still in a much better position than it would have been without the intervention of Mr Abe’s Abenomics.

The Wirecard debacle back in June was one of the biggest financial news stories of the year so far. It emerged that the payment processor had ‘lost’ around $1.9 bn in trust accounts just before it collapsed into insolvency, sending shockwaves around the sector.

It became clear that the stock market darling was heading for trouble when it delayed its latest financial results for the third time on June 18, and subsequently it came to light that the missing funds were probably down to fraud rather than an accounting error, leading to the arrest of former CEO Markus Braun.

A huge number of fintechs were affected by Wirecard’s collapse, including Pockit, Curve, FairFX, Soldo and ANNA, and although customers were swiftly reassured that their funds were not at risk, many were unable to access money for some weeks.

At first glance, the Wirecard scandal looked like a regulatory issue but as the situation unfolded, it started to look a bit more like a straightforward case of accounting fraud. Having said that, some regulatory weak points have emerged, and they have prompted the German regulator, BaFin, to take action.

What action is the German regulator taking?

BaFin has come under fire for allegedly failing to follow up on numerous media and analyst reports about suspected fraud at Wirecard. Prosecutors suspect that the fraud could date back as early as 2015 when the payment processing firm’s revenue was artificially inflated to try and deceive investors.

In response to the criticism, the German finance ministry has put forward a plan to beef up BaFin’s powers and those of APAS, Germany’s auditing regulator. The proposal would give BaFin ‘sovereign powers’, so that it could intervene ‘directly and immediately’ in public companies. In a statement, the Germany ministry said: “BaFin should have the right to carry out special audits of all capital market-oriented companies, including the right to access information from third parties, the ability to carry out forensic investigations and the right to inform the public about its auditing of balance sheets earlier than is currently the case.”

Part of the proposal also includes bolstering the powers of APAS, so it can impose tougher sanctions on any firms breaking the rule and forcing companies to replace their auditor every ten years.

The German ministry has also cancelled its contract with private sector body FREP, which was previously responsible for monitoring the financial reporting of the country’s listed companies. The new proposal also calls for BaFin to examine its organisational structure and review the way it is protecting consumer and shareholder rights.

Should other countries take action?

BaFin wasn’t the only regulator to come under fire about Wirecard – the FCA froze the accounts of the firm’s UK entity, leaving many consumers unable to access funds on a Friday afternoon. Some critics think that the UK regulator should have been placing closer scrutiny on Wirecard long before the situation came to a head and have called for a tightening in regulation. The FCA has prioritised regulation for fintechs, challenger banks and cryptocurrencies in its 2020/21 business plan, setting out intentions to engage with industry about artificial intelligence and strengthen anti-money laundering regulations, but is that enough?

Given that up to 90 per cent of card payments in the UK are served by just two merchant acquirers, some commentators have questioned whether the country needs a payments equivalent of the EU Bank Recovery and Resolutions Directive.

Is EU reform necessary?

In the wake of the scandal, there is a growing consensus that bulking up German regulation is not enough and a full EU reform is needed especially in terms of the supervision of financial reporting. In fact, the proposal from the German ministry calls for a transformation for the EU’s financial oversight body, ESMA, into a ‘European Securities and Exchange Commission’, which similarly to the Securities and Exchange Commission in the US, would have greater powers to demand information from listed companies.

Alternatively, a new specialised entity could be created to supervise financial reporting and placed under the direction of ESMA – similar to the way the Public Company Accounting Oversight Board operates under the SEC in the US.

There will always be objections to EU-wide reform as opposed to national supervisory changes, particularly where private companies and auditing are likely to come under greater scrutiny. 

However the $2.2 billion Wirecard scandal, has revealed some major gaps in the EU and German financial reporting and auditing processes – as well as demonstrating how quickly a fall from grace can happen. Major reform across most jurisdictions is probably important to restore and maintain faith in the burgeoning fintech sector, and the way that EU-wide legislation has been successfully applied to anti-money laundering regulation shows that is possible in other areas too.

At the end of August, the Fed announced that it will have a different approach to inflation. In direct comparison to how the Fed has actively fought inflation in the past, it will now tolerate inflation when it rises above 2% for short amounts of time. In fact, they will look at target inflation in terms of averages. In practice, this may actually mean that they actively try to push inflation above 2% when thought necessary.

So how will the Fed’s new average inflation affect the US economy and the global economy as a whole? And why have the Fed chosen to change its approach to inflation? What effects does it seek to achieve in doing so? 

How The Fed’s New Average Target Inflation Could Affect The US Economy

It should not be dismissed or downplayed how substantial a shift the Fed has taken in its approach to inflation. While some may not see it as enough, by announcing that they are no longer following a policy that targets 2% inflation and instead will, at times , tolerate periods where inflation is above this, the Fed is demonstrating their want to accelerate economic growth. They are doing so by employing a method that has been actively avoided in the past. 

However, will it be effective? Or, indeed, can it be effective when interest rates are so low? What exactly is the Fed trying to achieve by amending their approach in this way? Cynics will argue that some of this action will be a direct response to negative commentary lamenting the Fed’s very inaction in recessions of the past. 

But beyond that, Jerome Powell’s announcement can be viewed as one asserting the Fed’s wish to help achieve full employment within the economy. The Fed’s average inflation target will hopefully give the Reserve the freedom with which to move to attain improved employment rates. As a result, many commentators claim that we can expect the Fed to actively target inflation rates much, much higher than 2% in an effort to kickstart elements of the economy that will in turn produce job growth. 

Importantly, the markets can also determine from this announcement that the Fed does not want to enter the remit of negative interest rate. This was also an option, but one that they chose to eschew in favour of chasing higher inflation instead. Additionally, it is perhaps an admittance that the huge financial stimulus packages that they have delivered so far this year, may not be enough to support the economy and its recovery. We have also seen many disinflationary forces in play during the pandemic including low productivity and continued, persistent unemployment. 

What Can We Expect From The Fed’s Changed Approach To Inflation Targeting

So what can we expect in practice from the Fed’s changed approach to inflation targeting? We can learn a lot simply from the intention of the Fed’s changed approach – even if an average 2% is not achieved. Firstly, it shows that the Fed is comfortable with maintaining unprecedented levels of stimulus in the face of the pandemic. The fact that markets reacted positively to the announcement shows that this flexible monetary policy is viewed as a good thing. Secondly, the Fed and Jerome Powell were noticeably vague in what they considered to be an inflation rate too high which would trigger tightening of monetary policy. 

The announcement was not without its detractors however – despite the markets reacting positively to the news. Some say that the wrong sort of inflation may be achieved due to the drivers that help reach those higher inflation rates. For example, supply shortages and higher costs will drive up prices as opposed to inflationary forces coming from positive demand. Additionally, high unemployment in the US will mean there is low wage acceleration which is needed as a major driver behind inflation. 

However, ultimately, the Fed is arguably targeting higher inflation to help tackle the high unemployment rates in the US. Additionally, it gives the Fed the ability to maintain low rates which is essential to help support riskier assets, both domestically and internationally. In doing, equity markets have the ability to achieve new highs and help fuel growth both in the US and beyond.