COVID-19 Spurs Economic Policy, Investment Trends Acceleration

The COVID-19 pandemic has accelerated significant changes in existing trends, and while some of these trends may recede as the public health crisis diminishes, others are here to stay, according to a recent report from consulting firm Mercer.

“Nonstop social and technological change has increased at a rate as exciting as it is bewildering,” Deb Clarke, Mercer’s global head of investment research, said in a statement. “And COVID-19 has resulted in an acceleration within that acceleration.”

The report, titled “The Great Acceleration: Themes and Opportunities 2021,” identifies three main premises that Mercer believes will impact investment decisions in 2021 and beyond: “the new world,” “business as unusual,” and “position for transition.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“The new world” refers to ways in which fiscal institutions are trying new techniques to garner economic stability and continuity, as well as the way in which global allegiances and working relationships are being recast. Mercer said this may have an impact on inflation, risk considerations, and the appeal of opportunistic investment strategies.

According to the report, policy is currently “warping the fabric of the economy,” as authorities experiment with monetary and fiscal stimulus in response to the pandemic. As a result, interest rates have gone from “lower for longer” to “lower for very long,” Mercer said.

“This has come with a price for the privilege of holding government assets, which have changed from a risk-free return to return-free risk,” according to the report. “In these strange, interventionist times, the ‘invisible hand’ has been effectively furloughed as the cost of capital and therefore the value of risk assets are now largely policy driven.”

The report also said that a “huge, unanswered question” is what asset returns look like when the economy becomes so “artificial.”

Mercer said many portfolios could be more resilient if their inflation protection “went from none to some,” and suggests investors consider buying unexpected inflation protection before it gets too expensive.

“Investors who have the governance and implementation capacity to use derivatives could consider investing in a break-even inflation strategy that gives more direct exposure to changes in inflation expectations,” the report said.

Meanwhile, “business as unusual” refers to trends within financial and commercial marketplaces, and within social movements, in which the ways of the world have “changed forever.”

The report noted that investors increasingly care more about where their money is invested, and that the companies they invest in are working toward a sustainable future. Last year saw strong flows into sustainable funds, Mercer said, and those flows have accelerated this year, with a stark contrast in net outflows compared with the rest of the fund market.

“In our view, investing in strategies with high ESG [environmental, social, and governance] ratings is the broadest way to improve portfolio sustainability,” the report said.

Mercer also noted that tech companies “were an invaluable part of the COVID-19 response,” by providing remote working and online shopping from the safety of one’s home. However, the firm said these stocks are priced somewhere between “fair weather” and “perfection,” and while they can provide great potential for further growth, “they come with substantial risk.”

Lastly, “position for transition” is a “call to action” for investors to align their portfolios with a strategy that manages the risks of transitioning to a low-carbon economy and the risks of climate change.

“Investors should not be caught off guard by carbon-heavy portfolios being affected by market, technological, or regulatory changes,” said the report. “This means investors should not wait any longer to act, and should exercise DARP—decarbonization at the right price. “

Related Stories:

Will the Wheels Come Off the Market in 5 Years?

Market Already Has Priced in Good 2021 Earnings, Says Moody’s

A Look Ahead to 2021: Institutional Investors Brace for a Bumpy Road

Tags: 2021, Coronavirus, COVID-19, Deb Clarke, Inflation, Mercer, Pandemic, The Great Acceleration

The US Securities and Exchange Commission (SEC) has filed a civil lawsuit against cryptocurrency firm Ripple Labs Inc. and two of its executives, alleging they illegally raised nearly $1.4 billion in an unregistered offering of its digital asset XRP. Ripple’s XRP is the third-largest cryptocurrency by market cap after Bitcoin and Ethereum.

According to the SEC’s complaint, Ripple co-founder and former CEO Christian Larsen, and current CEO Bradley Garlinghouse raised capital to finance the company’s business through the sale of XRP digital assets in an unregistered securities offering to investors.

For more stories like this, sign up for the CIO Alert newsletter. 

Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration, such as labor and market-making services. According to the complaint, the XRP sales also affected personal unregistered sales of XRP totaling approximately $600 million. The complaint alleges Larsen and Garlinghouse violated federal securities laws when they failed to register their offerings and sales of XRP or prove they were exempt from registration.

“Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution, and a secondary trading market, must comply with the federal securities laws that require registration of offerings,” Stephanie Avakian, director of the SEC’s Enforcement Division, said in a statement.

“Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business.”

According to the lawsuit, Ripple sold more than 14.6 billion units of XRP in return for cash or other consideration worth over $1.38 billion in order “to fund Ripple’s operations and enrich Larsen and Garlinghouse.” The SEC accuses Ripple of creating an “information vacuum” that allowed Larsen and Garlinghouse to sell XRP into a market “that possessed only the information defendants chose to share about Ripple and XRP.”

The SEC also said Ripple received legal advice as early as 2012 that XRP could be considered an “investment contract” under certain circumstances and therefore is a security under federal securities laws.

“Ripple and Larsen ignored this advice and instead elected to assume the risk of initiating a large-scale distribution of XRP without registration,” the complaint said.

The lawsuit could spook cryptocurrency exchanges selling XRP, as they risk being charged by the SEC for allowing unregistered securities to be traded. Bruce Fenton, CIO of Atlantic Financial Inc. and a former board member of the Bitcoin Foundation, warned cryptocurrency exchanges against continuing to sell the digital asset based on the SEC’s charges.

“I think any crypto exchange who doesn’t delist XRP this week is out of their mind,” Fenton said in a tweet. “If the SEC says it’s a security you’d be crazy to list it without a license.”

Ripple is already facing a class action lawsuit filed by a group of investors who claim the company never registered XRP as a security with the SEC, and have accused Ripple and Garlinghouse of making misleading statements. In October, Garlinghouse told CNBC in an interview that he was considering moving the firm to London because of the strict regulatory environment for digital assets in the United States.

The SEC’s complaint, which was filed in federal district court in Manhattan, charges Ripple, Larsen, and Garlinghouse with violating the registration provisions of the Securities Act of 1933, and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties.