Capital Markets report: Megatrends shaping the markets

Living through a global pandemic has seen existing trends in capital markets accelerated.
When considering the global megatrends in capital markets over the past year, few new trends have emerged.

Many of the key trends that were gaining traction prior to or during the pandemic have dramatically accelerated into 2021.

Here is a look at some of the most interesting ones:

A green and ethical recovery

One of the big trends remains the push towards socially responsible investing.

This gained momentum during the pandemic as Covid-19 highlighted how connected humans and society are to each other and to the world around them. Many leading investment firms now consider ESG (environmental, social and governance) performance important to consider alongside traditional financial metrics as a fundamental way of creating value and mitigating risk.

Last year, a study from Morgan Stanley’s Institute for Sustainable Investing showed that US sustainable investment funds focused on ESG factors outperformed traditional funds and reduced investment risk during the pandemic.

Morningstar data shows global sustainable fund assets grew 18 per cent in the first quarter of 2021 compared to the previous quarter to almost $2 trillion, supported by strong inflows from Europe.

Further bolstering this trend is the increased attention combatting climate change is being given by governments around the world. Take for instance the United States, where last month President Joe Biden pledged to cut US greenhouse gas emissions in half by 2030 — more than double the commitment made under the 2015 Paris Climate Agreement by the Obama Administration. He has also begun rolling back some of President Trump’s initiatives that side-lined ESG investment.

This shift is bringing with it dramatic change in many areas that will continue to shape investment activity — with many attractive opportunities in energy, transport, agriculture, and infrastructure.

Earlier this month, Bill Gates-led fund Breakthrough Energy Ventures invested in Ecocem Materials, an Ireland-based firm developing low-carbon cement — a material that currently contributes some 8 per cent of global carbon pollution.

Investors are expecting to see the number of attractive opportunities to become more and more frequent.

The events of last year have also heightened the awareness of inequality — women, minority populations and those on lower wages were most impacted by the pandemic.

There is a growing demand to understand how businesses operate, treat employees and customers, and whether they are engaged ethically with their global supply chains.

Boards and management will be increasingly required to address questions from investors and customers about social purpose, inequality, diversity, pay ratios and executive remuneration.

Technology adoption set to continue

One of the most omnipresent trends over the past year has been the leap forward in the digitisation of the economy. The lockdowns, social distancing, and the inability to travel and shop in traditional ways have acted as catalysts for the digital adoption by businesses and customers.

Capital markets are no exception. The same broad trends are accelerating a push towards digital as well as a new wave of innovation at a pace that was previously only seen in consumer-facing financial services.

While most trading technology architectures remain cumbersome, a recent report by the World Economic Forum suggests distributed ledger technology (DLT) — of which blockchain is the most well-known example — is reaching an inflection point. They say it has the potential to reshape capital markets by simplifying operations for leading players and expanding access to markets for small businesses and retail investors.

The use of DLT is growing in acceptability, due to growing institutional and regulatory comfort with the technology, the potential for central bank digital currencies in several jurisdictions, and commercial dynamics including cost pressures and client service expectations.

As an example, the UK Chancellor Rishi Sunak last month set out proposals to enhance the UK’s competitive advantage in fintech — from regulatory support and reforms to help firms grow, to the establishment of a Central Bank Digital Currency (CBDC) taskforce to coordinate the exploration of a potential UK CBDC.

“If we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial centre,” he said.

In more practical ways, technology adoption across the industry saw acceptability in the industry for remote and flexible working.

Regulators have had to support this and adapt to ensure money laundering, anti-fraud, data privacy and conduct regulations continue to be equivalent whether working from the office or working from home.

But there are still concerns around market abuse and cybersecurity that come with remote working, and whether this trend will persevere long-term following the relaxation of lockdowns around the world remains to be seen.

New Zealand demonstrated that the lack of personal contact after so long working remotely, along with Zoom fatigue, saw most working in capital markets return to the office.

However, the inability to entirely wind back the new remote working culture has made flexible working a likely requirement for capital markets of the future.

Rise of unpredictable retail investors

The past year saw a surge in amateur investors engaged with the stock market. During the level four lockdown, for the first time ever, amateur investors were more active than professional investors in New Zealand.

Services like Sharesies and Hatch have created accessible platforms for retail investors to engage in share trading without needing to go through traditional fund managers. Their rapid growth in interest has been attributed to the pandemic keeping people idle at home, low interest rates limiting savings returns and many people being shut out of the property market.

But recent months have seen another factor come into play — the rise of social media-driven traders. The most well-known example is video game retailer GameStop Corp, where amateur investors worked together to drive its stock price up 1500 per cent over two weeks to take on Wall Street investors who had betted against it. This wasn’t a one-off, with other stocks including BlackBerry and Nokia targeted.

These investors are unpredictable and bullish and have rattled sophisticated professional investors. As a result, the chair of the US Securities and Exchange Commission, Gary Gensler, is considering new rules for apps that “gamify” trading and use visual graphics to reward an investor’s decision to trade.

“The SEC must remain attuned to rapidly-changing technologies with an eye to freshening up our rules,” says Gensler. “If we don’t address this now, the investing public, those saving for retirement, and education, may shoulder the burden later.”

Capital Markets report: Three business leaders on the Government's wealthy investor proposals (NZ Herald)

Capital Markets report: Three business leaders on the Government’s wealthy investor proposals (NZ Herald)

Anna Kominik

Wisk’s Asia-Pacific regional director Anna Kominik leads a multinational team bringing the world’s first all-electric, self-flying air taxi to market.

On the government’s recent announcement about changes to immigration policy she says anything that supports greater investment in New Zealand is useful.

“But we need to do more to amplify New Zealand’s capability and capacity to scale businesses,” she says.

Kominik says we also need people, like current and former chief technical officers and chief operating officers — those people not just with the funds, but also the skills and experience in growing companies and taking them global.

“We need to be really ambitious for the start-ups that have been nurtured over the past decade and who are ready and wanting to take on the world.”

While the announcement came with little detail, Kominik says rather than letting in random high net worth individuals, we must identify the gaps in the New Zealand companies that are scaling fast and/or who need the capital most acutely along with the ability to have the biggest impact both economically and socially.

“This is the perfect time to be focused on building high-value jobs,” she says. “But our Covid advantage won’t last for long and we need to seize it more aggressively.”

Kominik says we need an overarching strategy for how we are planning to grow our trending industries, including digital, creative, gaming, medtech, food and aerospace.

“These are industries that are growing quickly in New Zealand and have the potential to deliver high quality returns — both socially and economically.

“It would be good to see how this scheme was feeding into supporting these sectors and companies to scale up and become even more ambitious.”

At the Auckland’s Future, Now Summit held earlier this month, Kominik told attendees that she is aware of companies with amazing technologies that would love to come to New Zealand right now.

“They want to do due diligence, they want to come through the border.”

She says New Zealand has the opportunity to define what our vision is and attract companies that support it to come and locate themselves here.

“These are billion-dollar companies already that are going to create high-value jobs,” she says. “We could take any kid who likes an engine, and we could turn them into an electric aircraft maintenance engineer — it’s a very, very high-value job right now.”

Early last year, the NZ Government signed a memorandum of understanding with Wisk to support a world-first passenger transport trial of its air taxi.

At the time of the announcement, Kominik said: “New Zealand’s focus on decarbonising its economy as part of the electric transport evolution directly aligns with Wisk’s mission to deliver safe, everyday flight for everyone through effective, accessible and sustainable urban air mobility solutions.”

Caroline Rainsford

Country Director for Google New Zealand, Caroline Rainsford, is pleased to see the Government’s announcement to support targeted, high-quality investment in New Zealand.

“This will lead us in a positive direction toward bringing skills and new technology here,” she says.

Rainsford says the targeted investment, coupled with the investment of $44 million to support small businesses through the extension of the Digital Boost Training Programme announced in the Budget — which Google has pledged to support — is critical to ensure the benefits of the growing digital economy are shared widely and equitably.

The Government says the programme will provide up to 60,000 small businesses with digital skills training to aid in “the transition to future ways of working”.

Speaking at the Auckland’s Future, Now Summit earlier this month, Rainsford said she has always believed in the role of digital transformation to support Auckland’s economy — but more so now than ever, and what is important is the uptake of skills.

“We can have all this technology and we can invest in ICT infrastructure in New Zealand, but if we don’t have the digital skills and capability, we can’t realise the benefit of it.”

She says whilst we are not doing a bad job in Auckland of embracing some of these, there is so much more opportunity.

“Every day I get first-hand experience of seeing businesses in New Zealand that over the last year have grappled with the impacts of Covid,” she says.

“I have seen companies embracing technology to reach customers digitally online both here in New Zealand and overseas. I have seen people using AI to really sort out the impacts on supply chain during Covid — but we need to do so much more.”

A report commissioned by Google New Zealand that was released last month calculates that if leveraged fully in the economy, digital technologies could create an annual economic value of $46.6 billion by 2030.

“To put this in perspective, this is equivalent to about 14 per cent of New Zealand’s GDP, or the combined GDP supported by Canterbury and Hawke’s Bay,” it says.

To fully capture the digital economy, the report has identified three main pillars of action the country could take.

This includes supporting the adoption of technologies in key industries, digitally upskilling the current workforce and future talent, as well as promoting digital export opportunities.

Across these areas, Google says it has made significant contributions in advancing New Zealand’s digital transformation journey.

This includes supporting the development of digital skills through programmes like the Google Certification Programme, Digital Fluency Intensive for teachers, and its partnership with Spark to run workshops to support New Zealand businesses in using digital tools by delivering digital skills training for small and medium-sized enterprises (SMEs) at no cost.

Rob Fyfe

The Government has foreshadowed opening the door to some 200 foreign investors through a reset of its immigration settings.

The announcement, made earlier this month by Tourism Minister Stuart Nash, was described by the government as a “once-in-a-generation reset” of the immigration system.

As part of the announcement, Nash — standing in for Immigration Minister Kris Faafoi — said new border exemptions would allow those representing high-value international investment interests to come to New Zealand over the next 12 months to conduct due diligence and transact the sort of deals that will play an important role in supporting New Zealand’s economic recovery from Covid-19.

“We want targeted, high-quality investment that establishes frontier firms, brings skills and technology to New Zealand,” he said.

“We have also created border exceptions for the Innovative Partnerships Programme and New Zealand Trade and Enterprise’s Investor Programme to enable representatives from global companies to come to New Zealand to conduct on-the-ground negotiations with companies that they wish to invest in.”

In making the announcement, Nash said the investment through these programmes will create highly-skilled jobs, enable the valuable transfer of knowledge and technology, and increase international connectivity for New Zealand firms as they allow us to position ourselves globally.

Rob Fyfe, who has been working as business liaison for the government, says he has been highlighting this opportunity since July last year, and the announcement took longer to arrive than he had hoped for.

“In the intervening period, some of the comparative advantage that existed in the back half of 2020 that was motivating interest in New Zealand as a significant destination for investment has probably dissipated,” he says.

That said, he says the opportunity is still significant and New Zealand continues to be an attractive destination for international investment.

“In principle I am encouraged by the announcement.

“As to whether 200 is enough — I have got no idea — a heck of a lot could be achieved by allowing 200 pre-qualified, validated investors into the country.

“I would hope if we exhaust that quota, because there is so much demand and opportunity, the Government would extend the quota.”

There is still little detail so far in the announcement, but Fyfe says it is important we move at speed to get the pipeline flowing.

He says we should be prioritising investment that stimulates either demand or supply of high value jobs in the economy and/or investment in technologies and capabilities that will enhance our global competitiveness and the advancement of our green economy and sustainability ambitions.

Competition, IP, and confidentiality issues mean that officials will need to be the decision-making authority to determine which investment interests are allowed to proceed, but Fyfe hopes they will consult with business leaders and academics to identify areas of focus and opportunities.

But he notes that any international investment needs to be supported by domestic investment in education and skills, and skilled migration to ensure we can provide the workforce to support inbound investment and the relocation of high-value businesses to New Zealand.

Green Building: Interview with Minister James Shaw (NZ Herald)

Green Building: Interview with Minister James Shaw (NZ Herald)

“When the Climate Change Commission released its draft advice in January 1, I said that I had never felt more confident that a climate-friendly, prosperous future for New Zealand was within reach,” says James Shaw. “But that will only possible if we take action to cut emissions right across the economy — including buildings.

“Right now, our homes and buildings are currently responsible for around 20 per cent of New Zealand’s carbon footprint.

“Emissions from the construction sector have increased by two thirds over the past decade. If we continue on this path and don’t change the way we build, the risk is that we lock in higher emissions for decades to come. That will only make it harder to meet our emission reduction targets and take us further away from fulfilling our commitment to future generations that we will pass on a cleaner, more stable, and less polluted planet.

“So what we need to be doing is rethinking the way we design, build and use our homes and workplaces so they have a positive impact on our climate and natural environment.

“Our Government has made a great start on this. For example, we are making sure all new Kāinga Ora public homes are energy efficient.

“We have also launched the Building for Climate Change programme to improve how we build while reducing carbon emissions.

“As my colleague the Minister for Building and Construction, Poto Williams, said in her piece for this business report, the change “envisaged by the programme is significant.” But it’s not only climate outcomes: the programme will also improve the energy efficiency of housing, meaning lower electricity bills, warmer, drier and better ventilated homes, and improved health outcomes for New Zealanders.”

The Herald asked Shaw, What is your vision for new builds?

Shaw: I think most people around the country want to know that their homes, and the places they work and spend time in at the weekends are part of the solution to climate change. Put simply, that’s my vision. I want people all over Aotearoa living, going to work, or socialising with friends in highly energy-efficient buildings powered by clean energy.

Changing the way we build to be more climate-friendly will be a huge part of this, but the truth is, most of the buildings that will be in place in 2050 — the date by which Aotearoa will need to be net-zero carbon — have already been built. So we also need to be thinking about how we reduce emissions from existing buildings.

In their draft advice the Climate Change Commission said that we need to improve the energy efficiency of buildings, alongside decarbonising the energy used for heating, hot water and cooking.

Once the Commission’s final advice is released at the end of May we will start work on an Emissions Reduction Plan setting out how we intend to meet our targets. That plan will need to cover every part of the economy — including, but not limited to, new and existing buildings.

Herald: What do you see as the biggest challenge for the industry to transform the built environment?

Shaw: I might not be the best person to explain the challenges of cutting emissions from buildings. What I’d most like is for the industry to share those challenges with us so that we can look at possible solutions.

I would imagine though that one of the main challenges is integrating low-carbon design principles right from the start. In other words, getting the engineering, technology, and design experts around the table right from the start.

Building emissions are primarily due to heating, cooling, and lighting, though the embodied emissions in materials are also significant. Decisions about all of these aspects of a building tend to be made fairly early in the process. If they could be made from the point of view of thinking about what can be done to reduce emissions, then that would make a huge difference. The Building and Climate Change Programme that I mentioned earlier will help with this, as it does set targets for new buildings to reduce embodied and operational emissions.

Herald: Building companies, real estate firms and others in the industry have urged the Government to speed up action on fulfilling its pledge on environmental standards in government buildings. Why are you not moving faster?

Shaw: The first thing to say is that I welcome the fact the building and construction sector want us to speed up action. It’s a positive sign of the part the sector sees itself playing in helping to meet our climate change targets.

There is no question that Aotearoa New Zealand’s future is low carbon. How quickly we get there will, of course, depend a great deal on the decisions we take over the next few years. And so if the sector does want us to move more quickly, I would encourage them to keep demanding more of us,

particularly as we start to think about what goes in the Emissions Reduction Plan. I would also encourage the sector to share their journey with New Zealanders more broadly so that everyone can see just how important this sector is to the future of Aotearoa New Zealand.

But that’s not all. The sector can also go further themselves. As I have said, the low carbon direction we are heading in is clear. And so, there is much the sector can do to generate new ideas, set industry ambition, and establish New Zealand’s building and construction sector as a global leader.

The Government does have a role to play in this and can lead by example.

As part of the recent commitment we made to require the public sector to achieve carbon neutrality by 2025, a new energy efficiency rating standard is being applied to government offices. Work is also under way on reducing embodied carbon in Government buildings and I have been leading an initiative to transition schools and hospitals up and down the country to clean energy. By making these changes we can harness the power of government procurement to lead by example and create opportunities for new skills and technologies to emerge.

Herald: Finally, what role do you hope the Government’s Emissions Reduction Plan will have in decarbonising buildings?

Shaw: The building and construction sector can, and should, play a key role in helping create a low carbon future for Aotearoa New Zealand.

Draft advice from the Independent Climate Change Commission says the same. In their report they identified some of the opportunities in this area, particularly around energy efficiency and construction materials.

Action to reduce emissions from all buildings will form a key part of the Emissions Reduction Plan which will be published later this year, after the Commission publishes its final advice.

Getting the Emission Reduction Plan right will be crucial. It is going to determine the direction of climate change policy for at least the next 15 years, so I would encourage the building and construction sector to input to that process.

Can the team of five million now apply its mind to the economy it wants to become in the future?

Tim McCready

Professor Sir Peter Gluckman told attendees at this morning’s ‘Kickstarting the New Zealand Economy’ session from the Trans-Tasman Business Circle that we won’t go back to ‘business as usual’ following the pandemic:

“New Zealand needs to grow its R&D strategy, which is still designed for the 1980s and not for the 21st century.” He said our two biggest industries – tourism and agriculture – won’t be the same in the future due to the impact of Covid, along with climate change and other factors.

The panel, moderated by Fran O’Sullivan, all had a part to play in New Zealand’s success over the past year: former PM Helen Clark, Sir Peter Gluckman, and Rob Fyfe. They suggested there is a risk that New Zealand’s success in responding to the pandemic could very easily become an Achilles heel for the next phase of the recovery. “That safety can deal complacency and result in us being slow to move,” said Rob Fyfe. “That is a risk and a real challenge to move the mindset of the population to look to the future and will need a different risk profile.”

Engaging New Zealanders in a conversation about the future will be an important part of this, said former Prime Minister Helen Clark, in a similar way that New Zealanders pulled together to eliminate Covid and keep it out.

“Can the team of five million now apply its mind to that? This is what needs to happen now – engage New Zealanders in this conversation with as much as can be put on the table on what the scenarios are and confront the future.”

Said Gluckman: “We need to get beyond New Zealand’s traditional ‘she’ll be right’ approach – where we live off traditional sectors – to the point where we start to live more off our brains and innovation skills. That needs a fundamental shift.

It is the tenth anniversary of Sir Paul Callaghan’s keynote address at ‘StrategyNZ: Mapping our future’, where he challenged New Zealanders to think about the type of country we might like New Zealand to become. From today’s session, it is clear that more than ever there is a strong desire to rise to that challenge and ensure New Zealand has its say in planning for the economy it wants to become in the future.

Project Auckland: Covid 19 coronavirus: Project Auckland: Auckland deserves a ‘fair share’ of Government funding (NZ Herald)