Moody’s Ratings has upgraded its outlook for the global asset management industry from “negative” to “stable” for 2025, citing a combination of positive macroeconomic factors, coupled with sector-specific ones, as key drivers behind the decision.
“Lower interest rates from easing monetary policy should continue to support global economic growth in 2025, while improved economic conditions throughout North America as well as Europe and the UK, including lower inflation and a strong labor market, provide a solid backdrop for growth in the respective regions’ economies,” Moody’s said.
“Additionally, the resolution of elections in many regions throughout the world in 2024 has given markets more certainty that governments will pursue growth-oriented policies now that inflation has largely been tamed.”
According to Moody’s, the positive momentum in equity markets is expected to help expand managers’ assets under management (AUM), strengthening both their top and bottom lines.
“Equity products are attractive to investors in a bull market and also generate higher fees than products such as money market funds that were popular in a rising rate environment,” it said, noting that additional revenue should also help asset managers offset ongoing investment outflows from actively managed funds.
And with central banks in the US, UK and Europe cutting short-term policy rates, fixed income markets are also expected to benefit.
“In the past two years, higher interest rates attracted both institutional and retail investors into safer fixed income products like government money market mutual funds,” the company said.
“Even if a drop in short-term rates causes investors to rotate out of these cash investments, longer-term fixed income funds stand to benefit in a falling rate, higher-growth environment.”
Nonetheless, Moody’s noted that there’s still a case for the outlook for asset managers globally to be upgraded to “positive”, or on the other side of the coin, flip to “negative”.
Regarding the former, the ratings agency will be looking at whether asset managers are beginning to play a greater role in the larger wealth management industry.
Moreover, sustained organic growth in higher value-added products and services, coupled with rational consolidation that removes “industry redundancy” and “fosters economic scalability”, could change the tide into positive territory.
However, several risks remain. Slowing economic growth, alongside stubbornly high inflation and interest rates, could threaten the industry’s performance.
Additionally, Moody’s will be closely watching signs of reduced earnings potential and asset outflows, especially for traditional asset managers. Similarly, alternative asset managers may face challenges with fundraising and investment realisations.
Despite these challenges, the global asset management industry’s AUM has steadily recovered over the last two years on the back of strong financial market performance.
“Although traditional active managers’ operating performance continues to be weakened by rising operating costs and the ongoing shift in industry assets from mutual funds to lower-fee vehicles, such as exchange-traded funds, the big increase in AUM over the last year will boost revenue and margins heading into 2025.”
“In response to loosening financial conditions and the removal of election uncertainty, investors will likely re-risk, increasing investment flows and moving asset allocations to higher-risk classes like equities and alternatives, which pay higher fees and will boost asset managers’ earnings as a result.
“However, there are some potential risks to this optimistic scenario,” Moody’s said.
“If growth were to slow because of rising geopolitical tensions in Europe, Asia or the Middle East; if the inflation outlook were to suddenly stall or reverse and move higher again, preventing further rate cuts; or if global trade tensions were to materialise, it would lead to more difficult market conditions that would cause investors to seek safer havens again.”
