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Markets in 2022: A mean, green, inflation machine?

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By Coutts asset management team

After a strong year in 2021, investors will need to beware of headwinds in 2022. Even though economic growth is poised to continue above its long-term trend, we expect market volatility to remain elevated: a phenomenon we have already noticed in the first month of this year.

Why are markets so volatile? Firstly, there is Covid, but hopefully we all will be able to move beyond it this year. Improvements in treatments and vaccines have been significant in the last year. Attention will increasingly turn to fundamental data and while earnings remain solid, declining consumer confidence and rising inflation have injected uncertainty for the outlook. We believe the ongoing supply chain issues will normalise as 2022 draws on, and inflation should decline as we reach the end of the year.

With Covid-battered countries less willing to use monetary stimulus to deal with these issues, the markets will be extremely sensitive to the possibility of rate hikes, and we recommend investors take a long-term view on their investment goals as the year brings a rollercoaster ride for the markets. Especially as geopolitical events like Russia-Ukraine tend to inject short term angst which historically do not change long term trends.

That said, we believe there are several main themes that investors should be aware of in 2022.

 

Sustainability

COP26 may be last year’s news, but the commitments made in 2021 will drive sustainable investing in 2022. We are expecting governments to come out with increased regulations and standards on net zero and emissions between now and 2025, to hit their COP commitments. This will impact the valuation of companies and funds.

We’re expecting investors to show their green colours more than ever before, forcing votes on climate shareholder resolutions, and insisting on transparency around voting process and engagement.

The UK’s issuance of green gilts, in which Coutts invested £450m, is expected to spawn a number of similar products supported by a diverse range of sectors, issuers and countries. Some will focus on green themes, others on social characteristics.

In this climate, it is more important than ever to incorporate the risks and opportunities arising from climate change into the investment process when managing portfolios for the long term, and this is where Coutts is leading, ensuring ESG criteria is part of our DNA. A certified B Corp, we engaged with more than 500 countries across the UK, Europe and North America on sustainability in 2021, and have decreased the carbon footprint of our equity investments since 2019. This focus will continue in 2022, and we believe will help our clients to do well in the long term, while doing good.

 

Inflation

 The spectre of inflation is a bogeyman spooking the markets, hitting 5.4 per cent in the UK at present and due to rise as the energy price cap is lifted in April. Households are feeling the pinch as everything goes up in price, from petrol, to houses, to coffee, but we’re not as pessimistic as others about the effect of rising prices.

Inflation will likely stay at elevated levels in early 2022 before gradually falling back towards the end of the year, while supply bottlenecks and energy prices, which help to increase costs, should ease gradually. We don’t think that inflation will become unanchored globally and a turnaround in inflation could improve consumer sentiment.

 

Global volatility

 Tensions in the Ukraine are already affecting markets, and we believe that those who give careful watch to global politics will be rewarded. Counterintuitively, though, it is the contrarian investor, not the early exit-er who catches the worm. This year, we maintain our approach of being aware of the nature and financial impact of major geopolitical events but to be ready to go against the noise and the crowd and buy into markets opportunistically.

 

Brexit

On-going tensions between the UK and several European countries, as well as some well publicised labour shortage issues in the UK, have served as a reminder that Brexit as an economic narrative did not end on the 31 of December 2020.

Inflation will affect the UK more than other countries, because of Brexit, because it is likely to accentuate the issues of supply chain disruption. Add to that rising taxes and it makes the Bank of England’s actions hard to call, which may in turn affect sterling and gilts.

While the UK market looks cheaper than some rivals and the economy recovered strongly in 2021, these issues will continue to affect asset prices in the UK in 2022.

 

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Ransomware chokes COBRA: How AI-powered data analysis can support financial services’ plight

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By Toby Butler, Financial Crime Solutions Manager at Ripjar

 

Ransomware attacks are on the increase in the United Kingdom. Most of the British Government’s COBRA meetings have been convened in response to ransomware attacks, showing how cybersecurity breaches are as pressing as national emergencies and crises. The National Cyber Security Centre’s (NCSC) annual review found this year that the country was hit by 17 ransomware incidents that were so impactful they “require a nationally coordinated response”. That extends to the financial services sector, which saw an increase of ransomware attacks with 55% of organisations hit in 2021.

Where does this leave the sector and how can artificial intelligence and machine learning be instrumental in understanding the risks companies face against future ransomware attacks?

Toby Butler

Company information is being stolen and sold to different threat groups, who prey on the individuals in that organisation who are more likely to pay them. The UK is one of the most cyber-attacked countries in the world and the Government has been criticised for being “ill-equipped” to deal with this exponential rise of fraud cases.

 

Ransomware-as-a-Service

Ransomware is one of the most common forms of cybercrime. Fighting it has become one of the biggest problems that organisations today face during their everyday operations. For instance, Malware (malicious software) encrypts the files of a single computer, then works its way through an entire network to reach the server and inflict maximum damage. Company information is being stolen and sold to different threat groups, who prey on the individuals in that organisation who are more likely to pay them.

When these attacks occur the victims, more often businesses, are left with minimal options. If they have substantial backup solutions already in place, they can attempt to restore the encrypted data to their servers. But if that data isn’t already secured elsewhere, they may need to pay a ransom to the criminals behind the attack. Thereby allowing the business to function once again and restoring their reputation. The cost of paying the ransom will feel considerably smaller compared to starting a business again from scratch. Sophos’ State of Ransomware in Financial Services 2022 report found that 52% of financial services organisations paid the ransom to restore their data, the average remediation cost in financial services was US$1.59M.

Cybersecurity Ventures estimates that ransomware is set to cost global businesses more than $256 billion by the end of 2031. By that token, organisations need to be extremely mindful of the potential threats they may face. Businesses need to understand the methodologies these hackers use, to address the weaknesses within their domain and take measures to isolate and prevent further ransomware attacks from happening again.

 

The rise of WAMs

According to a recent report by security firm CyberSixgill, 19% of the 3,612 cyberattacks that took place in 2021 were traced back to Wholesale Access Markets – or WAMs for short. WAMs are, in essence, underground internet flea markets. These markets are where aspiring attackers come to purchase network access from threat actors – the individual or entity involved in carrying out the cyber-attack. Types of threat actors include insiders, cybercriminals, rival organisations, or even nation states stealing data.

WAMs sell access to multiple compromised endpoints (or pathways) for around 10-20 dollars. Researchers found that WAMs listed access to approximately 4.3 million compromised endpoints in 2021, which include access to both provider and enterprise software (for example, an organisation’s Slack channel) up to 180 days before the attack itself took place. This shows how long these compromised endpoints remain undetected without proper internal analysis.

 

How can Financial Services stay ahead of the curve?

The use of Artificial Intelligence (AI) and machine learning is undisputed across modern businesses and sectors, and continues to revolutionise processes across the board. AI is a significant player in the financial services industry, building the ‘cyber-wall’ against nefarious users. It gives organisations optimal insights into reducing the likelihood of a ransomware attack in the future.

Namely, AI and machine learning collects and analyses vast amounts of messy (structured and unstructured) data from disparate sources. The challenge for the sector is to understand the volume and variety of the raw data collected from any source to build better protection in the future.

Structured information could be best understood as the clear data we see in a table. For example, the following attendees made a business meeting: first name – Joan, surname – Smith, age – 46. But unstructured information is information presented in a complex manner. For example, ‘there were five people who attended the business meeting, one of whom was forty-six and called Joan Smith’. Naturally, due to the complex nature of the prose, it would be more difficult for a machine to process that data into a digestible format for further risk analysis. This is where AI continues to prove invaluable.

AI uses natural language processing to understand the information provided on the web. As the software continues to evolve, natural language processing reads the information in a way a human would to extract the key information from the text. By incorporating AI and machine learning within an organisation’s IT infrastructure, companies operating within financial services can be better equipped to handle cybercrime.

These tools are flexible and adaptable, they can be configured to analyse different types of data from different sources to curate key insights. This collated information provides a better analysis of the organisation’s exposure, allowing them the opportunity to get upstream in preventing future attacks. This kind of approach is essential to processing listings on WAMs.

The power to analyse data to identify weakness is vital in the battle against cybercrime. It gives organisations a better understanding into what they could expect to see in the future. Hosting the correct data, and with the analytical skills, financial organisations can gain a better understanding of the methodologies and weaknesses in-house that attackers use and exploit to hold them to ransom. Organisations can then use this as a reference to pinpoint compromised endpoints, giving them a chance to reduce access before this route can be exploited and ruin their business.

With cybercrime and ransomware continuing to remain prevalent, it’s vital that financial services companies understand how they can get ahead of the curve and build a robust security platform within their IT infrastructure that can withstand an attack. In 2022, a ransomware attack occurred every 40 seconds. The mindset for the sector needs to be one of when, not if.

Organisations need to be thinking about an attack now – before it’s happened. Pre-planning and preparing for the worst possible outcome from future threats and adversaries. The introduction of AI and machine learning in the fight against cybercrime is a must, and the sooner the industry gets behind in implementing AI, the safer it will be through the next decade.

 

 

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SVEA BANK ACQUIRES AREX’S FINTECH OPERATION IN FINLAND

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AREX Markets, the data-driven FinTech company that drives financing costs down for SMEs and enables them to get paid quicker, has announced the sale of its Finland operations to Swedish payment and financing institution Svea Bank.

With the deal, Svea will further strengthen its position as a corporate financier, as AREX’s c.1200 Finnish customers and partnerships in the areas of financial management and financial management software will be transferred to the bank’s portfolio. The Finnish operation of AREX has financed over EUR 500M worth of invoices.

AREX’s Spanish and UK operations remain unaffected and remain focused on building embeddable financing products for third party platforms. Customers in Finland have been informed of their transition, and their contracts and service details will port across to Svea.

Svea is reshaping the playing field of corporate finance in Finland, and taking on the operations of AREX in the region is a natural step to strengthen their own business and at the same time offer AREX’s partners and customers an easy path to a wider range of services than before.

“Over the years, Svea has grown a lot also through business transactions, therefore acquiring AREX’s business operations in Finland was a good and natural solution for us. In addition, the deal is pleasant for us at Svea because the focus of our activities is to help partners and customers succeed – offering AREX’s partners and customers a wider range of services is exactly that,” says Pasi Väre, country manager of Svea in Finland.

The deal also brings new opportunities for AREX to focus on the UK and Europe in its roll out of embeddable financing products, which can be white-labelled by neobanks, ERPs and accounting software alike. The business is seeking to bridge the liquidity gap faced by most small businesses in the face of a recessive economic climate.

UK SME’s can continue to access AREX’s core invoice financing product through the Xero marketplace.

“For us at AREX, this is a great step: we are developing a stronger presence in the field of embedded finance, which is underpinned by our sophisticated marketplace software, our strongest point,” says AREX’s CEO, Airto Vienola.

“For the AREX team it was extremely important that we find the best possible corporate financier to take care of the business’ customers and partnerships in Finland. Svea convinced us with their customer and partner-centric approach”, adds AREX’s co-founder Perttu Jalkanen.

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