Megatrend Illustrations Reshaping the Capital Market Sector

With the pandemic and inflation scenario piling threats in the capital market space, financial institutions in the arena ought to adopt critical transformation factors to stay on top of the competition table.     

FREMONT, CA: The advent of the pandemic scenario, followed by an inflation period, has elevated challenges in the capital markets, underscoring the crucial need to strengthen the capital market horizon of businesses, which has become a demand rather than a necessity. Additionally, supply chain uncertainties are further triggering deglobalisation, due to which implementing new developments has become a dire necessity for organisations. These pivotal transitions, often referred to as megatrends, will likely dominate capital markets in the future, favouring effective market developments in addition to boosting individual players and receptive business models in the arena.

Commonly referred to as large structural changes, megatrends hold irreversible global consequences in the capital market space and are anticipated to remain so in the future. Hence, these trends are critically focussed on the economic power, natural resources, technology, and society of the economic climate rather than opting for mutually exclusive factors. These configured megatrends deliver an increased range of security in the capital market industry per the long-standing data and its unpredictable developments and implications. This, in turn, may trigger chances for uncertainties, due to which implementing megatrends often requires distinct consideration practices.

Similarly, megatrend installations are observed on an increased scale in the capital markets space, which leads to a refined dynamic environment that influences decision-making on macro- and micro-economic scales. Hence, identifying potential megatrends in the capital marketing arena opens up seamless opportunities for businesses in the sector to thrive with improved efficiency and a reduced range of risks.

One such approach for equity capital markets is the rise of exchange-traded funds (ETFs), inconsiderate of the fall that prevails in the assets under management (AUM) space owing to geopolitical conditions. Hence, with an average compound annual growth rate (CAGR) of 12 per cent, the European ETF market will likely emerge as a global sustainability leader in the future throughout the entire market value.

Exchange-traded funds are generally managed by investors on digital investing platforms as a typical wealth transfer from boomers and Gen X to millennials and Gen Z. The latter generation typically grew up with digital technologies and thus anticipated digitisation-driven simplified solutions for their processes with a critical consciousness on topics like global warming and sustainability. Hence, enterprises aiming to establish their presence ought to meet the desired needs of the target audience by providing suitable investment solutions. It aids in retaining the required client base on an efficient scale, be it for medium- or long-term practices. It helps incumbent players emerge as potential leaders in the capital market space by developing their area of service offering. This consumer-focussed megatrend is critically mirrored on the corporate client side, per an unprecedented rise in digital advisory practice, as operational efficiencies gained from investment advice are often expedited by digitisation and play a crucial role in serving corporate clients.

Distributed ledger technology (DLT) facilitates increased security and decentralised methods of sharing data. This very approach aims at transforming the administrative infrastructure of capital markets, as banks developing pilot solutions with conventional and new asset classes often reflect a clear and distinct traction towards technology. Hence, the European Commission has introduced the DLT Pilot Regime as a part of the Digital Finance Package to test the central bank's digital currency (CBDC). It enables eligible businesses in the arena to harness a primary DLT-based trading facility and financial instrument settlement systems within a flexible regulatory environment and under the closed observation of amendments enforced to the EU regulations for DLT.

With distributed ledger technology soaring critically in recent times, the finance sector has undergone an exclusive transition to crypto investing. That is, financial institutions, on average, are expanding their service offering to trade crypto with their respective banks for clients, which may require the initiation of more than a regular new product process (NPP). The process simultaneously ensures a thorough understanding of the technology and provides adequate technical infrastructure and processes for financial enterprises, from order acceptance, routing, and execution to settlement and custody. Implementing crypto products and harnessing decentralised finance (DeFi) has been observed with reservation since the initial period to mitigate the possible risks and compliance issues related to the process. Hence, innovation frontiers in the capital market space are leveraging state-of-the-art technology for a full-fledged, compliant financial system transformation.

Alongside this, a sustainability-driven investment and environmental, social, and governance (ESG) framework is also aiding in making environmentally conscious investments and informed decisions in the capital market space. For instance, nearly 270 asset managers have already signed the asset managers' initiative of net zero portfolio emissions with 60 trillion AUM, which is aimed to achieve increased efficacy in 2050. Similarly, the digitisation era, which is accelerating with seamless technologies, is further enforcing regulations in the capital market to allow it to thrive exponentially and thus increase the economic growth of nations. One such approach is the automation of procedures, where deploying artificial intelligence (AI) and machine learning (ML) capabilities emerge as effective alternatives and game changers in the capital market sector.