Strategic Investment Forecast For The Year Ahead

Björn Ebert, Financial Services Leader at PwC Luxembourg (Photo © Olivier Toussaint)

Björn Ebert took on the role of Financial Services Leader at PwC Luxembourg on 1 July 2023. With his colleague Sandra Paulis, Audit Partner and Client experience leader, he will soon be launching a new monthly podcast series: “Financial Services: What’s Up”.

What’s your vision for the financial services sector in Luxembourg in 2024 as the new Head of Financial Services at PwC?

The Financial Services sector is close to my heart, as I have been part of this sector for nearly 25 years, gathering experience in Banking and Capital Markets, Asset & Wealth Management, and Alternatives.

A case for cautious optimism can be made regarding the future of Luxembourg’s financial services sector. Among the several shifts currently taking place within the broader sector, Luxembourg is well-positioned to benefit from two in the long run: the green transition and the general pivot towards alternatives and private markets in the asset & wealth management industry. PwC Luxembourg aims to be at the forefront of these shifts and will help maintain and expand the Luxembourg financial centre’s leadership position.

As the second largest fund domicile in the world, and as one of the leading global hubs for sustainable finance, the green transition will reinforce Luxembourg’s standing as Europe’s asset & wealth management capital. By harnessing the financial services sector’s agility and expertise, Luxembourg stands to assume an influential position in Europe’s transition towards a sustainable future, further cementing its importance to the European project.

The Luxembourg financial services sector also has a tremendous amount of experience in alternatives. Given Luxembourg’s small size, stakeholders of all stripes are intimately connected and can work closely together. The ease with which all stakeholders—from industry professionals, to regulators and policymakers—can share ideas and best practices helps form a uniquely effective financial services sector.

Luxembourg needs to be agile and use its expertise to be part of the massive growth and tectonic transformations taking place in the world of finance. By doing so, the Grand Duchy and PwC Luxembourg will become catalysts for change and continue to excel in the global financial services sector.

What are the main challenges and opportunities you foresee for the financial services industry in Luxembourg this year, and how does PwC plan to tackle them?

Over the past years, the financial services sector has demonstrated its ability to successfully navigate unprecedented levels of uncertainty.

Now the sector faces a confluence of near-term geopolitical and economic challenges, e.g., the ongoing war in Ukraine, high interest rates, a potential resurgence of inflation, and the possibility of a regional or global recession.

Financial institutions are struggling to attract and retain talented professionals, a challenge highlighted by the Luxembourg edition of PwC’s CEO Survey in early 2023.

Zooming in on the asset & wealth management industry, while Luxembourg remains the dominant financial centre in Europe, we face stiff competition from fund managers in Ireland, especially when it comes to low-cost exchange-traded funds (ETFs). Lured by its unique tax relationship with the U.S., some asset managers have already started redomiciling their Luxembourg-based ETFs to Ireland, which could become an issue for Luxembourg in the long-term if nothing is done to reverse this trend. We welcome that the new government will have a closer look at this topic.

Yet, next to this sober macroeconomic and geopolitical outlook, some of the largest market opportunities of the past decade are materialising: ESG transformation and assurance across the financial service sector, managed services in alternative and asset & wealth management, as well as business compliance and transformation with a technological dimension.

These are exactly the themes Sandra and I want to explore in our podcast. We want to go on a journey with our listeners throughout the year, starting with a macro look at the state of the economy, because this is the environment in which we are all conducting our business.

At PwC Luxembourg, our key success factors will be client-centricity, fostering entrepreneurial initiatives and innovation.

We first defined our vision as a firm as aiming to be the most impactful, dynamic and trusted professional services partnership in Luxembourg and beyond its borders. This involves a very ambitious growth and transformation strategy that works alongside our sustainability strategy.

Put simply, we need to be sure we can get to where we aim to be, and our T&T approach will help us to succeed. This approach is built around the four main priorities that have been carefully defined for our firm. Lines of Service (LoS) transformation, Delivery Models, Managed Services and our Sustainability Services.

Why are you and Sandra launching the podcast, and what can listeners expect?

Our “Financial Services: What’s up?” podcast aims to serve as an informative platform addressing crucial issues affecting professionals in the financial services sector in Luxembourg and beyond. Our aim is to strike the right balance between positioning ourselves as experts and not overwhelming people on an intellectual or cognitive level.

Our objectives are to provide timely and relevant information, offering specialist analysis and perspective on a wide range of financial services topics. We want to help professionals navigate the landscape, keep the audience informed and foster a community of professionals to connect and share insights.

Some of the topics we are tackling include the implications of the Digital Operational Resilience Act (DORA), evolution of fund administration, actuarial service, investor compliance, tax disputes and lots more!

One driver for transformation is the innovative technologies that are emerging. To that purpose, we are pursuing our ‘Exponential Initiative’. This programme encourages employees to think like entrepreneurs and develop client-centric products to drive innovation within the organisation.

It isn’t surprising that AI would be one of our priorities since the pace of change in AI is such that the potential of this technology must be seized for innovation, efficiency, and competitive edge purposes. It can’t happen without people though. You can’t ignore the human element.

We have forged strong partnerships with leading technology firms (sometimes within the network), but a priority is enhancing our existing alliances and developing new ones. These include cloud migration and modernisation, data and analytics, cybersecurity and risk, customer experience, among others.

Finally, a key priority for transformation is our sustainability services, which is the continuous implementation and scaling of sustainability-related client service models. Our firm takes a holistic approach to sustainable development and change that produces hands-on and valuable results across the full ESG spectrum.

When it comes to interest rates, both the European Central Bank and the Federal Reserve are expected to lower rates later in the year. A drop in interest rates is typically seen as a good sign for equity markets, and portfolios exposed to bonds prior to the drop in rates will likely benefit from rate cuts. Nonetheless, it would be imprudent to expect a return to the pre-Covid near-zero rates, as central banks have signaled that rates will remain ‘higher for longer.’ Even if some cuts are implemented this year, interest rates will likely remain high by the standards of the previous decade.

According to the IMF’s latest World Economic Outlook, GDP growth in Europe is expected to be weak, with euro area growth projected at just 0.9% for 2024. This is due to the region’s high exposure to the conflict in Ukraine and all its attendant shocks. As the U.S.’ financial support for Ukraine’s war effort appears to be waning, there are signs that the EU may need to step in, and on 1 February 2024, the EU reached an agreement to send €50 billion in aid to Ukraine.

Beyond Europe, continued geopolitical tensions in the Middle East, particularly the Red Sea, may adversely affect Luxembourg and Europe.

DORA is also expected to significantly alter the way financial entities manage their digital operational resilience and will require them to embark on substantial intra-firm transformations which, if not managed adequately, could expose them to significant threats and risks.

Nonetheless, the picture is not all doom and gloom. As the Paris Agreement’s 2030 deadline approaches, we can expect policymakers and markets to focus more energy and attention on sustainable finance, which will hopefully continue to flourish in Europe. Luxembourg is already a pioneering hub in that space as a host of initiatives and institutions—such as LuxFLAG, the Luxembourg Green Exchange and the Luxembourg Sustainable Finance Initiative (LSFI)—can attest.

Last year, PwC Luxembourg received the Best ESG Transformation Partner in Benelux award from Capital Finance International, and we are uniquely well-positioned to support our clients in the Greater Region and beyond when it comes to compliance with sustainability regulations.

The monthly podcast “Financial Services: What’s Up” will be available on Apple Podcast, Spotify, YouTube Podcast, and Deezer.

Editor’s note: This article first appeared in Forbes Luxembourg here.

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