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The outlook for the global asset management sector in 2023 is turning negative due to the weak economic and financial conditions that are expected to prevail in the year ahead, which will weigh on industry assets, revenues and earnings.

Moody’s Investors Service lowered its outlook on the global asset management business to negative from stable, citing its expectation that the fundamental business and market conditions will remain weak over the next 12 to 18 months.

“Industry assets under management (AUM) fell sharply in 2022 driven by significant market depreciation and net outflows,” the rating agency said in a new report. “Tightening financial conditions, slowing economic growth, and geopolitical shifts will keep market volatility elevated in 2023.”

These conditions will make asset growth tough to find, and the competition for assets will be increasingly intense, Moody’s said.

“The industry’s organic asset growth rate will remain subdued at least through the first half of 2023,” it said, adding that most of the new money will likely flow into ETFs, private assets and ESG funds.

In this environment, “competition for market share will be fierce as managers seek new revenue streams,” the report said.

Moody’s suggested that traditional active managers, particularly those with a hefty weighting in equities, will be at the greatest risk of losing market share.

Conversely, large diversified asset managers and alternative asset managers are best positioned to gain market share, it said.

The overall weakness in AUM will translate into softer industry revenue and earnings, the report noted.

“A sharp drop in asset managers’ AUM in 2022 due to market depreciation, coupled with low organic asset growth, will lead to further industry revenue declines, at least through the first half of 2023,” Moody’s said.

As revenues come under pressure and operating costs rise, firms will face eroding margins, it suggested.

Against this backdrop, Moody’s expects further industry consolidation.

“With the industry facing top-line and bottom-line erosion, as well as organic growth challenges, asset managers will look for opportunities to gain an edge in areas that can fuel future growth,” it said. “Although higher interest rates will likely not support big debt-funded M&A transactions, we expect smaller deals to flourish against the backdrop of intensifying competition.”

Regulatory trends will help shape the industry in the year ahead as well, the report said.

“A high regulatory priority — especially in the EU and the U.K. — is to tackle greenwashing; we expect asset managers to continue taking measures to confront this rising risk,” Moody’s said.