Today’s geopolitical landscape is rapidly becoming more complex, creating significant risks and opportunities for financial services players around the world. In this article, we explore three of the big geopolitical trends that are likely to impact the financial services sector today and in the future.
Geopolitics and macroeconomics go hand-in-hand; as geopolitical risks rise, macroeconomics often become more uncertain. So it is not surprising that today’s financial services firms are grappling with unavoidable challenges in the global macroeconomic landscape, including higher costs of capital and persistent inflation, which have hampered growth and performance.
In KPMG’s Top risks forecast, the authors take a close look at some of the many geopolitical risks that threaten the world order. Here are the three that are most likely to impact the financial services sector today, along with some recommendations for what financial services organizations can do.
Ungoverned AI
Developing a strategic AI framework — one that comprehends both the technical and ethical risks of AI — should be a top priority for financial services firms in 2024, particularly because of AI’s rapid advancement.
The implementation of AI in operations means firms must be more vigilant about cybersecurity threats. And the use of AI in customer-facing processes (like, for example, loan approvals) will require financial services firms to make every effort to eliminate bias or discrimination in the models and the data. Any governance strategies need to be global in scope and should be developed from an ecosystem perspective.
China’s slower growth
China’s challenges to relaunch after the Covid 19 pandemic have impacted the country’s economy. And that, combined with geopolitical competition, is having knock-on effects across the global financial services sector.
For example, the Evergrande debacle signaled problems with the real estate sector and shook investor and consumer confidence in China. In addition, a few governments — led by the US and the EU — have started placing restrictions on China’s outbound investment in the name of national security and strategic competition. At the same time, China’s slowing growth and demand has had an impact on those markets supplying into China. All of these factors have been pushing down in-bound FDI significantly.1
While China’s main banks remain stable, there are some concerns (particularly for those with large exposure to real estate and construction) about their ability to manage growing books of Non-Performing Loans during a period of slow growth and global economic instability.
China’s financial sector is the largest in the world, with US$60 trillion in assets, equating to 340 percent of GDP. Chinese banks are among the largest financial institutions, with increasing connections with the rest of the global financial system.2 Given the global economic clout of China, any significant failures in the country’s financial services sector could well spill over into other markets.
For now, China's economic growth is projected to remain resilient at 5 percent in 2024 and slow to 4.5 percent in 2025, according to the latest IMF projections. Promisingly, these have been revised upwards on the back of strong Q1 GDP data and recent policy measures to tackle financial security risks.3
If the vulnerability of the property sector is addressed, the bank resolution framework is strengthened and the economy is successfully rebalanced towards consumption, there will be reason for optimism.
Persistent global economic headwinds
Banks, insurers and asset managers can deal with economic headwinds and cycles. What they struggle with is uncertainty. And uncertainty abounds in the current geopolitical climate.
There is the interest rate uncertainty as central banks take a wait-and-see approach to fiscal policy. There is uncertainty around growth as many markets flirt with persistent inflation and recession risk. There is debt uncertainty — both from a household and a sovereign perspective. Trade uncertainty, political uncertainty, market uncertainty — seeing through the uncertainties to chart a path to growth will become increasingly challenging for many financial services leaders.
The IMF expects the average rate of global inflation to reach 5.9 percent by the end of 2024 and 4.5 percent in 2025, from 6.8 percent in 2023.4 Sticky inflation means that interest rates will likely remain relatively high for a few months — even if they have likely peaked in some major markets, such as the US and the EU.
Higher interest rates have negative implications for business confidence. Higher rates raise borrowing costs, especially for higher-risk investments. This could have adverse impacts on frontier and emerging markets, as well as on investments in the energy transition and emerging technology.
The most significant threat to investment growth and lower inflation in the coming months and years is the fragile state of geopolitics. Geopolitical competition is inherently inflationary because it shifts the focus of investment from efficiency to resilience.
Several trends sustain considerable risks for the global investment climate. These include persistent conflicts, notably the wars in Ukraine and Gaza; a contested election in the US; the changing investment approach by China on the back of reduced domestic growth; and broader geoeconomic fragmentation, closely associated with supply-chain localization trends.
Financial Performance Indicators (FPI) analysis
What does this mean for the performance of financial services organizations around the world? To find out, we analyzed KPMG’s Financial Performance Index which distills a range of market and financial performance indicators into one index, covering nearly 40,000 public companies worldwide.
Globally, the FPI scores of businesses in the Financial Services sector have remained steady the last few years, with some exceptional results announced across the sector in recent months.
Despite the overall steadiness, some subsectors are starting to show signs of struggle. Consumer finance companies in most countries have fallen behind their retail and investment banking counterparts. The insurance sector has also had depressed FPI scores.
Banking businesses linked to correcting real estate markets, like in Sweden and some parts of the US, have shown signs of stress — even distress — in their FPI scores. The FPI team expects to see pressures continue at banks with significant exposure to residential lending in markets where prices are correcting.
The FPI team predicts that the discernable and readily available data related to the commercial real state sector will help prevent extensive spillover effects throughout the US landscape. Unprofitable consumer lending companies that positioned themselves as “tech” in late 2020, that have not already folded, will find it hard to weather the storm.
What Financial Services firms can do
Embrace AI responsibly
Financial services firms should ensure they have the right infrastructure and strategies in place to embrace AI responsibly. This includes building trust and transparency among employees and consumers, who prioritize personal data security and privacy. Financial services firms are the first line of defense in ensuring AI is used to benefit all, rather than adding new layers of ethical and financial risk.
auto_awesome Be strategic
Though several subsectors show signs of struggle, firms that address these challenges head on can find opportunities. High interest rates are driving returns for banks; new risks are creating product opportunities for insurers; market volatility is creating investment opportunities for asset managers. Additionally, strategic competition trends and domestic incentive programs can offer firms growth prospects in targeted industries and supply chains. A reorientation of trade and investment along national interests will offer opportunities to firms who understand geopolitical trends and can pivot quickly with their investment strategy.
Future proof against risk
Business leaders could be implementing three key steps amid the pressing need for a new reality of geopolitical risk management. First, they could be screening for relevant information and facts, defining their response scenarios and establishing guidelines for effective risk management. Next, they could be reinforcing their capabilities in the existing toolbox of appropriate and proven methods for effective risk management. Third, they could be developing an informed strategy that combines an outside view and an informed inside view to objectively assess which strategies to implement.
Read Managing today’s geopolitical risks: A financial services guide for more on risk-proofing steps firms can take.
How KPMG can help
As a global leader in professional services, KPMG firms can provide valuable assistance in navigating geopolitical risks. Here are some ways KPMG can support financial services firms:
Our People
Karim Haji
Global Head of Financial Services, KPMG International, Head of Financial Services, KPMG in the UK
KPMG International
1 Nikkei Asia, “China foreign investment inflow sinks to lowest since November“ (May 24, 2024).
2 Bruegel, “China’s new regulator hints at a major clean-up of the world’s largest financial sector” (March 13, 2024).
3 IMG, “IMF Staff Completes 2024 Article IV Mission to the People’s Republic of China” (May 28, 2024).
4 IMG, “World Economic Outlook, April 2024: Steady but Slow: Resilience amid Divergence” (April 2024).
