A global inflationary crisis combined with aggressive monetary tightening have turned the tide on an era of easy financial conditions. Investors are searching for signs beyond traditional capital market assumptions that indicate how resilient markets may be in the face of a significant economic downturn.
Financial inclusion may not seem a priority input for investors mapping risks across markets. However, successive shocks—such as the impact of lockdowns, pricing pressures, energy supply constraints, disruptions to education, and strained health care systems—continue to lay bare the inequalities underpinning global economies.
The World Bank defines financial inclusion as “individuals and businesses having access to useful and affordable financial products and services that meet their needs—transactions, payments, savings, credit, and insurance—delivered in a responsible and sustainable way.”
According to our research, the extent to which governments, financial systems, and employers are investing in financial inclusion can act as a lens for analyzing a market’s future resilience, long-term productivity, and growth potential.
We recently undertook research to create a benchmark of financial inclusion globally, cross-referencing the results against indexes that track markers of stable, successful societies. We found clear correlation between how countries rank for financial inclusion and for indicators such as economic resilience, food security, standards of living, and action on climate change. These relationships suggest how improving access to relevant financial tools, services, and advice might help markets make progress against concerns such as hunger, climate resiliency, and enhancing overall health and well-being. In turn, these factors can be significant as a marker of economies’ resilience to financial shocks.
Our analysis of financial inclusivity across 42 different global markets indicates four distinct categories.
The first category is mature, forward-looking economies: wealthy countries exhibiting successful actions related to financial inclusion, and other societal factors more broadly, which support long-term economic growth and resilience through business cycle peaks and troughs.
Four Scandinavian markets—Sweden, Finland, Denmark, and Norway—all rank in the top 10 for overall financial inclusion, according to our model. Indeed, these types of markets represent relative economic safe havens, even in today’s market environment.
Europe’s largest, oldest economies make up a second, distinct category: mature, backward-looking economies. In the U.K., Germany, and France, the effect of soaring living costs is muted by the availability of government support packages and relatively high levels of household income. In the short term, these factors may be sufficient to protect these economies from the wild swings of the current cycle.
However, cracks in their longer-term resilience are revealed by flaws in their financial inclusivity. While these countries rank highly for the adequacy and sustainability of their public pension systems, their overall financial inclusion scores are dragged down by low marks for indicators like the availability of government-provided financial education and the level of support employers provide to their workforces, such as pension contributions.
This reliance on public pensions versus individual contributions means as the aging population grows, so does the burden on the state. Over time, this becomes less sustainable without increased contributions from employers and workers.
By failing to engage their aging populations around the threats of inadequate retirement income, both at an employer and a government level, many of the continent’s largest markets could be facing a potential pensions crisis. State safety nets mean this risk is not priced in today but poses a serious long-term risk to economic health and resilience over the next several decades.
Over the same multi-decade view, a third category of young, forward-looking markets for financial inclusion have more attractive prospects for their long-term economic resilience. In newer economies, predominantly in Asia and Southeast Asia, financial literacy may be relatively low, but the middle class is growing rapidly. Governments, financial systems, and employers are collaborating effectively and investing in forward-looking initiatives.
These newer economies have dynamic governments and private sectors and have taken the most financially inclusive aspects of other markets to shape their society. The wealthier among them (such as Singapore, which tops our ranking) can cherry-pick the infrastructure, regulation, and the structure of their financial systems to match the growing wealth of their populations. Many of these economies are weathering the current market storm relatively well.
The fourth category comprises markets that have to date lacked the resources to invest in their financial and social systems—including those promoting financial inclusion. Predominantly developing markets situated in Latin America and sub-Saharan Africa, these are the least resilient to the market impact of the global cost-of-living crisis, and the least able to prevent civil unrest resulting from food insecurity.
The financial inclusivity scores for the U.S. defy categorization. For example, it achieves scores comparable to a mature, backward-looking economy in terms of its government infrastructure but performs more like a young, forward-looking economy in terms of its tech adoption, employer support, and pro-business philosophy.
However, there is strong evidence that women in the U.S. feel far less supported by the financial system than men, citing concerns such as access to credit, which could be a limiting factor in terms of the growth of entrepreneurial female-led businesses.
The U.S. economy is already struggling with a lack of labor supply as several groups resist returning to the job market, contributing to the sharp increase in price pressures. The last two years have unveiled the vulnerabilities in the U.S. jobs market. Without additional support and encouragement for female workers, the current labor market and inflation struggles may be extended.
A global downturn leaves investors with difficult choices in the immediate future. Very few markets look attractive, but the level and underlying drivers of financial inclusion offer some clues about the longer-term resilience of global economies.
Seema Shah is chief global strategist at Principal Asset Management. This article is not intended as investment advice.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
More must-read commentary published by Fortune:
- The Fed may be running out of ammunition–but U.S. banks have never been healthier. It’s time to admit Dodd-Frank is paying off
- The inventors of ESG: ‘Critics have a point—here’s the new global reporting system that will address it’
- I got rich by betting that inequality would destroy the U.S. and U.K. I’m sorry
- America’s richest want to pay more taxes–but we won’t let them. We need a tax bracket and rate overhaul
