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Improving economic conditions and attractive valuations should see equity performance broaden beyond the Magnificent 7 mega-cap stocks in 2025
Alongside this positive market environment, we anticipate key FinTech themes to unfold, involving dynamics such as M&A, cryptocurrencies, cybersecurity and ‘RegTech’.
2024 was a year with two phases. In the first half, the only trade that worked was investing in the Magnificent 7. In 2025, we believe favourable economic conditions in the US, attractive valuations and strong earnings growth potential should benefit equities beyond the group of mega-cap US tech stocks. For investors in the FinTech space, below we outline key themes for the year ahead.
Consolidation within the financial sector
The volume of M&A deals has been subdued since 2021, particularly as interest rates rose. That changed in 2024, particularly after Trump’s victory. A key catalyst was his statement that it would become easier to acquire companies under his presidency, amid reduced paperwork and greater regulatory ease in approving bank M&A. These effects would be transformational for smaller companies and could have a positive effect on software suppliers too. In our view, private equity and IPO activity within the FinTech space is likely to increase.
FIG 1. Global dealmaking in the FinTech sector was subdued until H1 20241
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Payment companies are inherently cyclical, with earnings based on transactions. The cycle in the US is consumer-driven and, so far, those dynamics are looking good. Within Europe, the story is a bit different since a recession could impact the profitability of payment companies. In China, these firms should benefit from a stabilisation of the economy.
Yet the playing field may also change. The mix of ‘traditional’ digital payments is expected to decrease and the contribution of e-money and instant payments to increase. For investors, picking the right payment companies and methodologies will be key.
Trump’s victory has steered cryptocurrencies to all-time highs amid expectations of lighter regulation and a more accommodative regime. In reality, that regime has already been forming in Asia, where crypto and the tokenisation of assets are far more advanced. In Europe, the Markets in Crypto-Assets Regulation (MiCAR) came into effect in 2024, but the regulatory framework remains unclear and Europe risks falling behind further.
During 2025 we expect to see more central banks promote their digital solutions in the form of central bank digital currencies. Digital wallets are one of the growth areas within the payment mix and the e-dollar, e-Swiss franc, e-pound sterling and e-euro are likely to move closer to becoming realities.
Rationalisation of AI in finance
Generative artificial intelligence (gen AI) was, undoubtedly, the most-hyped theme of 2024. In financial services, we see gen AI being used to enhance workflows. However, we also believe there are limitations to using AI in finance. From a cybersecurity perspective, it can be tricky to use AI to create code if that company does not have in-house expertise – AI may improve efficiency, but it doesn’t always replace skills. Regulatory pushback is also coming. Black-box decision-making using AI is an absolute no-go within the financial sector. Finally, data has become ever more important. Wrong or incomplete data leads to wrong or incomplete decision outputs. We expect many financial institutions will look at their AI capabilities and anticipate a shift in value creation from hardware to services.
Cybersecurity resilience will be more important than ever
The financial industry is one of the most targeted industries when it comes to cyber hacks. We believe cybersecurity will again be in focus during 2025 as regulators revisit company preparedness and start issuing big fines to those who have been negligent. Not all cybersecurity software providers are investible, since their profitability is often lower than their cost of capital. However, there are several good quality companies within the FinTech universe.
FIG 3. Number of data breaches by industry3
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Regulatory technology will shift from being ‘nice-to-have’ to a ‘must-have’
Regulatory technology (RegTech) is becoming more significant within the financial sector. AI is improving regulatory compliance via predictive analytics, enabling more efficient and accurate monitoring and reporting processes. But this cannot be a black-box approach: regulators want to know the logic behind algorithms. Anti-money laundering solutions are an important focus of RegTech solutions. These systems can help financial institutions meet stringent regulatory requirements, combat fraudulent activities more efficiently and ensure compliance processes are up-to-date and efficient.
The stage is set for FinTech
We believe the FinTech proposition offers strong, high quality companies trading at attractive valuations. Combined with the positive trends we expect to unfold, in our view the stage should be set for a good 2025.
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Global FinTech Equities: eight themes to watch in 2025
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.