Where Will The Next Round Of Financial Crisis Come From? – Analysis

March 8, 2026 
By Anbound
By Wei Hongxu


Recently, several financial heavyweights have begun predicting and warning of a new financial crisis. In February, Ray Dalio, founder of Bridgewater Associates, warned that international relations have entered a new phase of a “Great Cycle” governed by the “law of the jungle”. This implies that trade, technology, geopolitical, and capital wars will become the norm and could eventually escalate into military conflict. He cautioned that the security of traditional financial assets will face immense challenges.

Meanwhile, Michael Burry, the famed “Big Short” investor who has been quiet for years, recently sounded the alarm on an Artificial Intelligence (AI) bubble, stating that a long-term downturn is imminent due to the impact of AI on the economy and employment. Renowned investor Jim Rogers also warned in late 2025 that the worst financial crisis of our lifetime will occur in 2026, driven primarily by two factors: the frantic post-pandemic debt growth across nations and the AI bubble. These warnings and predictions have not only triggered volatility and adjustments in major markets like the U.S. stock exchange but have also sparked panic and anxiety regarding global economic stability. After all, 18 years have passed since the 2008 global financial crisis; the evolution of the economic cycle suggests that the shadow of a “financial crisis” is drawing closer.

Faced with uncertainty and a complex politico-financial environment, researchers at ANBOUND believe that a financial tsunami does not form overnight, nor should the threats be ignored. The evolution of risk is a process that requires rational analysis and adjustment to find a “boundary of safety” amidst uncertainty.

Warnings of a financial crisis are neither groundless nor mere scare tactics; they reflect an increasingly complex international economic and financial environment, specifically the accumulation of risk and uncertainty in the financial sector. These factors can be summarized by the escalation of geopolitical risks, the impact of technological innovation like AI on financial and economic activity, and the accumulation of debt risk coupled with shifts in monetary policy. These risks are not sudden outbursts but have been brewing and evolving over time. In early 2025, many predicted a crisis due to the convergence of these factors. Under the broad trend of de-globalization, these risks have been accumulating and spreading since the COVID-19 pandemic, surfacing alternately as uncontrollable variables affecting security and development. While this situation shares historical similarities, the progress of technology and civilization means that economic and political games now follow a different logic. Furthermore, while these risks fluctuate, their targets and focal points differ. Currently, they have not yet formed a “resonance”, which means that they have not reached the stage capable of triggering systemic risk.


Recent U.S. and Israeli strikes against Iran and the deteriorating situation there are yet another example of the rising global geopolitical risks. The worsening Middle East situation has brought a new round of shocks to global economic and financial markets. However, most investors currently view this as a short-term disruption. While it has driven up prices for traditional energy sources like oil and gas, which affects Europe most significantly, its impact on financial markets remains localized rather than worldwide, given the shifting global energy landscape. Presently, the Russia-Ukraine conflict remains the most significant influence on Europe, bringing follow-on effects such as increased defense spending and a bolstered military-industrial sector, which began influencing market trades in 2025. The impact of its being long-term is gradual, and associated risks and opportunities have been largely recognized and addressed. As long as the U.S. maintains military flexibility and avoids a full-scale invasion, the escalation of conflicts or regime struggles in places like Iran, Venezuela, or Cuba is unlikely to cause major tremors in the financial sector. In fact, as the global “trade war” triggered by U.S. tariffs in 2025 begins to recede, the post-truce global landscape is entering what Kung Chan, ANBOUND’s founder, calls a “G2 competition”. Within this framework, localized military conflicts lack the energy to ignite a global financial shock or economic crisis.


Naturally, concerns regarding the impact of AI on the economy and employment have intensified recently, reflecting a period of uncertainty as the world navigates the unknown stages of its implementation. As AI is a capital-intensive field, market anxieties are focused on two fronts: the lack of clarity regarding the competitive landscape, which sparks fear that market clearing could jeopardize capital security, and the risk that rapid technological iteration could devalue existing legacy assets. These factors have triggered a series of market reactions, including a pullback in U.S. tech stocks and the emergence of the so-called “HALO” (Heavy Assets Low Obsolescence) trade to navigate the value re-evaluation caused by AI’s impact on the real economy. Goldman Sachs notes that under the triple pressure of rising interest rates, geopolitical fragmentation, and surging AI capital expenditure (CapEx), the market is undergoing a repricing where tangible production capacity has become a rare resource. While there may be a bubble element to AI, its efficiency gains span almost every sector, offering a net positive for most industries. The core issue lies not with AI itself, but in how enterprises and markets adapt to this shift. Even software companies currently facing valuation pressure stand to improve performance and expand their market reach through AI integration. This cycle differs from the late-90s internet bubble because current investment is heavily concentrated in digital economy infrastructure. While investors may face a “high spend, slow return” outlook, these hardware assets maintain relatively stable long-term value, making a total market collapse less likely. Furthermore, this re-evaluation is a long-term process that evolves with the depth and breadth of AI adoption, meaning that as long as there is sufficient market liquidity, the structural adjustment is unlikely to result in a comprehensive downturn, but rather a period of volatile consolidation without a unified direction, as seen in the current U.S. stock market.

The issues surrounding debt and interest rates currently remain the “gray rhino” posing a systemic impact on financial markets. In fact, this problem has recurred repeatedly since the COVID-19 pandemic. Whether it was the collapse of Silicon Valley Bank in March 2023, the global stock market crash on “Black Monday” triggered by the Japanese yen’s interest rate hike in 2024, or the crises of certain U.S. regional banks in 2025, all have been shadowed by interest rate adjustments and the intensification of U.S. dollar credit risk. At present, with the independence of the Federal Reserve under threat, the outlook for U.S. interest rates is unclear, particularly as heightened geopolitical risks may influence the trajectory of U.S. inflation and, consequently, the Fed’s rate policy. The Fed is very likely to delay the pace of rate cuts. Such unexpected rate adjustments and changes in dollar liquidity can be considered the fundamental factors governing market direction. Naturally, a misjudgment of interest rates can be fatal for investors, yet since the 2008 global financial crisis, nations. including the U.S., have placed great emphasis on the stability of market liquidity. Therefore, even if large institutions fail, the derivative impacts are swiftly contained, similar to the measures taken by the Fed and the ECB during the Silicon Valley Bank crisis, where despite the eventual fall of entities like Credit Suisse, the contagion of risk was blocked, meaning overall systemic risk remains under the control of central banks. It should be noted that financial crises typically emerge during the Fed’s rate-hiking cycles. In both U.S. and international markets, the associated interest rate risks are actually being continuously released during a downward cycle of interest rates.


Recently, the private credit issues currently concerning the market are, in essence, problems of interest rates and debt. When U.S. regional banks encountered these crises last year, JPMorgan Chase CEO Jamie Dimon compared them to “cockroaches”, hinting at a potential crisis within this USD 1.8 trillion private credit market. This sector represents a new frontier of alternative investment pushed by Wall Street in recent years to drive higher yields, involving the extension of loans to institutions and enterprises through private equity funds. While this shadow banking business indeed offers higher fixed-income returns, it carries significantly greater risk than traditional commercial bank lending. Furthermore, some banks have been keen to funnel capital into these private vehicles. For instance, the recent bankruptcy of the British mortgage lender Market Financial Solutions (MFS) involved the exposure of several banks, including Barclays. However, with the Fed maintaining high interest rates, not only have private financing costs risen, but the underlying credit subjects have encountered trouble, placing the associated credit assets in jeopardy. Of course, the transmission of private equity risk is ultimately limited and its impact on banks remains indirect, stemming more from market panic caused by information asymmetry. As long as the situation is handled properly, it is unlikely to ignite a new round of financial crisis.

Various risks and uncertainties are surfacing one after another and continue to accumulate. However, they have not yet reached the point of triggering a new round of financial crisis. Nonetheless, as ANBOUND has previously noted, this does not mean the buildup of the risks can be ignored. The economic and financial outlook under such complex circumstances is, in fact, far from optimistic. The evolution of these risks may lead to many unforeseen outcomes. An expected crisis can no longer truly be called a crisis. Indeed, historical financial crises rarely occur under constant warnings and alerts; they tend to erupt in unexpected ways and at unforeseeable times.
Final analysis conclusion:

The wide array of complex and evolving information and signals suggests that economic and financial instability, along with associated risks, will not dissipate but will continue to surface. Mitigating the impact of financial crises, therefore, requires the continuous and dynamic monitoring and analysis of the deepening and evolving political and financial risks. It is essential to prepare proactively for uncertainties and to build the institutional resilience and confidence necessary to remain composed and effective in the face of change.

Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.

Anbound

Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

UBS grilled on Capitol Hill over Nazi-era probe

ByAFP
February 3, 2026


An ombudsman tasked with investigating funds stolen from Holocaust victims says Swiss banking giant UBS is withholding key documents - Copyright AFP/File Fabrice COFFRINI

A Senate panel grilled UBS officials Tuesday over withholding documents sought in a probe of Holocaust-era assets stolen by Nazis and held at Credit Suisse.

Neil Barofsky, an ombudsman tasked with investigating funds stolen from Holocaust victims, told the panel that 150 or more key documents are being withheld by the Swiss banking giant, which acquired Credit Suisse in 2023.

“What we’re talking about are documents that are relevant to the question of whether a Nazi had an account or didn’t have an account at Credit Suisse,” said Barofsky.

The former prosecutor has documented numerous previously unknown Credit Suisse accounts linked to Nazi officials and unearthed the financial trajectory of many Nazis who fled to Argentina.

The clash over documents represents the latest hurdle in the probe after Barofsky was ousted by Credit Suisse in 2022, before being reinstated by UBS in 2023.

Barofsky said the dispute began in November. “Up until that point UBS cooperation has been picture perfect,” he said.

He suspects the contested papers include information listing German clients, info on looted art and valuables, and other matters that are “very very core to the heart of our investigation.”

UBS General Counsel Barbara Levi told the Senate Judiciary Committee the bank was committed to openness over past actions, but said it faced an “active threat” of litigation from the Simon Wiesenthal Center and other NGOs.

“We believe that bringing to light this information is extremely important,” Levi said. “But at the same time, if the same organization threatens us of litigation, we are put in a very difficult situation.”

Both UBS and Credit Suisse were part of a longstanding $1.25 billion settlement between Swiss banks and more than a half-million plaintiffs over looted assets from the Holocaust.

Levi described the accord as providing “final closure to the parties,” covering both known and future claims.

“It cannot be that for every piece of information that comes to light, we get under the threat of litigation,” Levi said.

“Where is the incentive then for any financial institution or any other institution to look into the past and bring this information to light?”

UBS on January 28 asked US District Judge Edward Korman for an order “clarifying the scope of the settlement.”

Korman — who approved the $1.25 billion Swiss bank settlement in 2000 — set a hearing for March 12.

Senator Sheldon Whitehouse, a Rhode Island Democrat, said the dispute “seems like an unnecessary quarrel that is tainting both Mr. Barofsky’s ability to proceed and the reputation of the bank, which I think wants to be seen as cooperative and in good faith.”

Senator Charles Grassley, an Iowa Republican who chaired the hearing, called UBS’s conduct an “historic shame that’ll outlive today’s hearing.”

The hidden money behind deep-sea mining

Serdar Vardar

DW

January 31, 2026

A DW investigation traces the hidden financial web behind deep-sea mining — an industry scientists say remains poorly understood, yet capable of causing irreversible harm to oceans worldwide.

The deep sea is home to a vast number of unknown species but could also be a future source of critical minerals

Image: Kim Jens Bauer/PantherMedia/IMAGO


More than 20 financial institutions worldwide have publicly vowed not to finance deep-sea mining — an activity scientists say could cause irreversible harm to ocean ecosystems. However, a DW investigation has found that some have invested at least $684 million (€581 million) in companies linked to the industry.

Hundreds of millions of dollars are flowing into companies racing to extract nickel, cobalt, and copper for batteries and other industrial uses from deposits buried thousands of meters below the ocean surface — an environment where scientific knowledge remains limited. Less than 0.001% of the seafloor has been explored.

Among the investors are some of the world's largest financial institutions — including Deutsche Bank, UBS, Credit Suisse, Credit Agricole and BNP Paribas — according to DW's analysis of company filings compiled by Greenpeace Germany's investigation unit.

Banks invested in deep-sea mining industry

UBS AG

$164,777,396

$222,113,261

The Goldman Sachs Group, Inc

$161,166,771

$219,623,226

Credit Agricole Group

$99,639,890

$101,189,595

Deutsche Bank AG

$62,387,989

$67,610,238

BNP Paribas SA

$50,598,541

$58,663,438

Credit Suisse Group AG

The investments come as the United States pushes to advance deep-sea mining as a future source of critical minerals. At the same time, some 40 countries have already announced a moratorium on the practice, arguing the environmental risks for these critical ecosystems need to be properly assessed.

The deep sea is "home to incredible life that is fragile, yet essential to the planet," Diva Amon, a marine biologist and scientific advisor at the University of California, told DW. "We don't yet understand what we're planning to destroy, and once it's gone, we can't bring it back."

'It's greenwashing' — when pledges and investments diverge

When contacted by DW, Deutsche Bank and Credit Agricole said their commitments apply to financing specific projects, not to investments in companies. Critics argue this distinction allows banks to avoid directly funding individual seabed-mining operations while continuing to invest in companies preparing to mine — akin to refusing to finance an oil drilling site for climate reasons but still buying shares in the drilling company.

The other banks did not respond to DW's questions.

"It's greenwashing," said Mauricio Vargas, a former investment strategist turned financial expert at Greenpeace. "Banks want to avoid negative PR related to environmental controversies."

Vargas added that banks often rely on technicalities and small-print exceptions, counting on the public not fully understanding the implications of their investment policies.

Andy Whitmore of the Deep-Sea Mining Campaign said the gap between banks' public commitments and their investments often reflects internal incentives.

"Their policies are carefully worded," he said, adding any commitments are often made in good faith, "but there are pressures within banks to invest in areas deemed as potentially profitable, and/or mis-sold as profitable." Accordingly, commitments are not always applied uniformly across large institutions.

But some banks, such as one of Norway's largest financial groups, Storebrand, have managed it. DW found the group recently divested millions of dollars from companies linked to deep-sea mining.

A Storebrand spokesperson told DW the decision followed the precautionary principle, which prioritizes avoiding harm in the face of scientific uncertainty.

"Storebrand will not invest in companies involved in deep-sea mining until we have more scientific knowledge on the impacts of these activities," they said.
When green commitments contradict short-term incentives

Goldman Sachs, on the other hand, has no public policy opposing deep-sea mining. Still, the Wall Street giant markets itself as a leader in environmental, social and governance (ESG) investing.

DW found it holds €187 million in stakes across companies enabling deep-sea mining. The company did not respond to requests for comment.

Experts say the public could pressure governments to divest pensions from companies linked to deep-sea mining

Image: Michal Kamaryt/CTK Photo/IMAGO

"Goldman Sachs is one of the biggest wealth managers in the world, and what it does matters," said Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, which manages around $10 trillion in assets.

"It's much cheaper to paint yourself green than to actually be green," Fancy added. With time frames for high returns "the shortest they've been in decades," he said, many CEOs operate on five-year timelines, making it rational to "squeeze every last penny and then use philanthropy as reputation laundering."

While ESG can "make differences at the edges," Fancy said, "the real change has to come from political reform and stronger regulation."

Taxpayer money flowing to private deep-sea mining companies

DW also analyzed investment data compiled by a Washington-based nonprofit, the Anti-Corruption Data Collective (ACDC). The analysis found that taxpayer money from countries that officially support a precautionary pause on seabed mining was invested in companies linked to the industry.

Retirement savings are also on the hook. The Triton IV private-equity fund draws money from public pension funds across Europe and Canada, even as the governments behind it publicly oppose deep-sea mining. The fund managed subsea firms DeepOcean and Adepth Minerals until spring 2025 before selling the group to a new Triton-managed investment entity.

Public pension exposure to deep-sea mining despite moratoriums

Table with 3 columns and 8 rows. (column headers with buttons are sortable)

California Public Employees' Retirement System	US	$101.11 million
California State Teachers' Retirement System	US	$67.40 million
Greater Manchester Pension Fund	UK	$19.76 million
Local Pensions Partnership	UK	Not disclosed
Pensioenfonds PNO Media	FR	Not disclosed
Industriens Pensionsforsikring	NR	Not disclosed
Sjätte AP-fonden	SWD	Not disclosed (divested in 2022)
CPP Investments (Canada Pension Plan Investment Board)		$263 million (divested in 2022)

Source: Pitchbook

Triton disputed the characterization, saying that DeepOcean is not a seabed-mining company and that its investment in Adepth Minerals is limited, regulated and not central to its strategy.

For Whitmore, accountability is the most effective way to push for change — especially for pension funds. "They invest on behalf of the public for the future," he said, adding that they must therefore take the potential environmental risks of deep-sea mining seriously.

"It is important for pension funds to join the growing number of financiers and insurers who are excluding deep-sea mining," he continued. So far, no pension funds have made such a pledge.

Some governments are drawing firmer lines, though. Norway, a country with several companies positioning themselves to mine the deep sea, has agreed not to issue mining licenses in its national waters until at least 2029. At the same time, 40 countries now support moratoriums or precautionary pauses on mining in international waters amid uncertainty about how it could affect marine life.

 Polymetallic nodules found on the ocean floor

Chemical composition in percentage

Most deep-sea species haven't yet been discovered

"The deep sea is one of the most biodiverse places on the planet," said marine biologist Diva Amon, who has led deep-sea research expeditions around the world. Far below the surface of the Pacific, Amon has seen sharks glowing in perpetual darkness and corals that are thousands of years old. But many deep-ocean species remain largely unknown to humans.

Millions of dollars are flowing into companies preparing to mine the deep sea despite the potential environmental risks

Image: Shanghai Jiao Tong University/Xinhua/picture alliance

"About 90% of deep-sea species still lack formal names," Amon said, adding that removing polymetallic nodules — potato-sized rocks containing many of the critical metals targeted by mining companies — could cause irreversible damage on million-year timescales.

Peter Thomson, UN Special Envoy for the Ocean, called for a 10-year moratorium on deep-sea mining to allow science to catch up and protect the "common heritage of humankind." The UN's finance initiative has also said there is "no foreseeable way" that financing the practice can align with the sustainable use of the ocean.

Early evidence from trial operations has reinforced those warnings. A recent study funded by leading deep-sea mining firm The Metals Company (TMC) found that test mining in the Pacific reduced seafloor abundance and biodiversity by more than a third.


But scientists say the risks extend beyond biodiversity loss. Some deep-sea microbes are already used in medicine, including enzymes for SARS-CoV-2 PCR tests and compounds now being studied in cancer trials. Mining could eliminate similar organisms before they are even identified.

"There is still so much the science doesn't know when it comes to the deep sea," Amon said. "If more people knew about its wonders, we wouldn't even be talking about mining it."

Edited by: Anke Rasper

The reporting for this investigation was supported by a grant from the Investigative Journalism for Europe (IJ4EU) fund.

Serdar Vardar Reporter working for DW's Environment desk.https://twitter.com/SerdarVardar_

 

History offers warning on dollar and deficits

Economic fallout could be severe if the U.S. dollar falls from dominance as the world’s reserve currency

University of Texas at Austin

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It’s no secret that Uncle Sam has been living beyond his means. During the past 25 years, U.S. national debt as a percentage of gross domestic product has almost tripled to 98%, according to the Congressional Budget Office. It’s projected to hit 166% by 2054.

The U.S. government has been able to run up that debt, in part, because investors around the world are still willing to buy its IOUs. Last year alone, the U.S. Treasury auctioned off $28 trillion in securities.

But investors may not always be so willing, according to new research from Mindy Xiaolan, associate professor of finance at Texas McCombs. She finds the U.S. government’s fiscal capacity — its ability to raise money — depends on the dominance of the U.S. dollar. Dollar-denominated assets make up 57% of global currency reserves, and dollars are used in 88% of foreign exchange transactions.

Her research highlights potential losses U.S. government bondholders could face if another currency ever replaces the dollar as the global reserve currency. The federal government might have to face significant fiscal adjustments, while investors in U.S. Treasury bonds could take a bath.

“When a country’s fiscal fundamentals deteriorate, and their currency loses its privileged status, its government’s borrowing capacity may become limited,” she says. “The market value of its debt will be lower, and the bondholders will suffer losses.”

Whether such consequences could strike the U.S. is “a trillion-dollar question,” she says.

Fiscal History Repeats Itself

How can Xiaolan make such forecasts? Because it’s happened before.

With Zefeng Chen of Peking University, Zhengyang Jiang of Northwestern University, Hanno Lustig of Stanford University, and Stijn Van Nieuwerburgh of Columbia University, her research compared America’s fiscal trajectory with those of two other countries that once boasted the world’s No. 1 currency.

• In the 17th and 18th centuries, the Dutch Republic and its florin dominated international trade.
• After 1800, the United Kingdom and the pound took over the role — until World War II, when the dollar took its place.

“The key common feature of those nations is that they were all the leading economy during their specific time frames,” she says.

While those governments were riding high, investors viewed their bonds as the world’s safest assets. Analyzing historical prices, Xiaolan finds investors paid a premium of 1% to 1.5% for Dutch and British government securities over those of other countries.

Over time, investor demand for safe assets gave both countries room to borrow beyond what was fully backed by their primary budget surpluses, generally to fund wars. Holland’s debt reached more than 200% of its GDP during the age of Napoleon, while the U.K.’s topped 130% of GDP at the end of WWII.

But when both currencies fell from their pedestals, economic reckonings came.

• Bondholders lost big. Dutch bonds traded 70% below their face value, while U.K. bonds dropped 61% in value.
• Deficits dried up. Holland’s postwar surpluses averaged 3.3% of GDP, while the U.K.’s were 1.8%.

Will the Dollar Be Next?

Today, Xiaolan says, the U.S. government is treading a similar path. Its fiscal capacity appears to exceed what is justified by its underlying fiscal fundamentals.

The researchers analyzed the federal balance sheet as if it belonged to a private corporation, to assess whether present and projected cash flows are sufficient to redeem its debts.

Before WWII, they were. In the 80 years since, however, they have only been enough to cover 32% of the outstanding national debt, the researchers estimate. That gap has gotten steeper during the past two decades, as the Great Recession and the COVID-19 pandemic have spiked deficits.

For now, global investors are still allowing the U.S. to run up more debt than it can afford, a phenomenon she calls exorbitant privilege.

But she sees warning signs that global investors might be losing patience. The market value of U.S. government debt, reflecting what investors are willing to pay for it, has dropped more than 15% since its high in 2020.

If investors sour on Treasury securities, she says the U.S. might incur greater costs to finance deficits. Like Holland and the U.K., it might be forced to start running surpluses — which it hasn’t done since 2000.

“It may become more difficult to expand the balance sheet if we lose the privilege to borrow at a relatively low cost,” Xiaolan says. That might help reduce the reliance on deficit financing, but it would come at a price: the ability to stimulate the economy with short-term deficits.

No Strong Competition, Yet

For now, she says, the dollar has one thing going for it: a lack of competition. When Holland and the U.K. each faltered, another country and currency were ready to take their place. For America, by contrast, potential rivals such as China and the eurozone are suffering economic woes.

“While fiscal conditions haven’t significantly improved since COVID, the economy continues to grow at a steady pace for now,” Xiaolan says.

History, however, warns that our strength won’t necessarily last. “I think our message is that maybe we should be a little bit cautious as a country,” she says. “We may not permanently enjoy this privileged status.”

“Exorbitant Privilege Gained and Lost: Fiscal Implications” is published in Journal of Political Economy.

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Journal

Journal of Political Economy

DOI

10.1086/738149 

Article Title

Exorbitant Privilege Gained and Lost: Fiscal Implications

Cross-border M&A activity predicts changes in economic growth, foreign exchange returns

University of Toronto, Rotman School of Management

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image: 

Steven J. Riddiough is an Associate Professor of Finance at the University of Toronto, where he teaches courses in international finance and corporate finance. His research interests span international finance, empirical asset pricing, and household finance. His research has been published in leading academic and practitioner journals including the Journal of Financial Economics, Review of Financial Studies, and the IMF Economic Review. His paper “Global Imbalances and Currency Premia” (with Pasquale Della Corte and Lucio Sarno) won the Kepos Capital Award for the Best Paper on Investments at the Western Finance Association Annual Meeting. Previously, Steven was a Senior Lecturer (Assistant Professor) in Finance at the University of Melbourne, which he joined following the completion of his PhD in Finance at the Warwick Business School. During his PhD studies, Steven worked as a Lecturer in Finance at Imperial College London, undertook research in the International Finance Division at the Bank of England, and consulted to the Canada Pension Plan Investment Board. He began his career as a Foreign Exchange Research Strategist at the Investment Bank, Credit Suisse.

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Credit: University of Toronto

Toronto - In a world facing rising economic uncertainty and instability, look to cross-border investment activity for solid clues about what's next for economic growth and foreign exchange rates.

 

That's a key finding by Steven Riddiough, an associate professor of finance at the University of Toronto Scarborough and Rotman School of Management, and Huizhong Zhang from Australia's Monash University. They assessed nearly a quarter century of data on cross-border deals involving more than 40 countries and identified a predictive relationship between changes in a country's foreign investment activity and future changes in its economic growth and currency values.

 

It's a useful discovery for global investors and anyone setting policies that depend on accurately gauging the economic future. Although it's generally thought that foreign exchange rates are driven by changes in fundamental economic indicators like economic growth, researchers have had trouble showing a strong relationship between them in practice.

 

Cross-border merger and acquisition announcements, however, act as an easily identifiable "signal" for changing expectations within the market about economic fundamentals, say the researchers. That's because they are the moment when companies reveal previously private "micro-level" information about on-the-ground conditions affecting expectations for their industries. Once that information is out for everyone to see, it begins to affect other market players' economic expectations, which in turn influences currency values.

 

Micro-economic information like that is otherwise hard to get, said Prof. Riddiough. "Most economic announcements that might signal future growth are macro in nature -- economy-wide information on growth, labour markets, inflation, interest rates, and so on," he said. In contrast, "firms are at the coal face of the economy, giving them a real-time perspective on current and future economy-wide trends."

 

He and Prof. Zhang found that unusually high amounts of investment flowing out of a country to another were followed by a weakened domestic currency in the month after, and about a 1% drop in the originating country's economic growth rate within five years. However countries who were on the receiving end of unusually high foreign investment saw about a 1% bump in their rate of economic growth within five years, and an increase in the relative value of their currency over the following month.

 

The study looked at data on all cross-border investment deals between 40 developed and emerging market countries and the United States between 1994 and 2018. The U.S. was chosen as the anchor economy because it is the most active in the world when it comes to cross-border investment and provided a common currency (U.S. dollars) for the researchers' evaluations.

 

Instead of looking at the results of individual investment deals, the researchers focused on overall trends in investment activity and what happened afterwards. Their findings were most relevant to predicting changes for domestic economies.

 

"It is more about outflows than inflows," said Prof. Riddiough. "When domestic firms are undertaking more international M and A investment it tends to signal future weakness in the domestic economy and a weakening of the domestic currency. Vice versa, when domestic firms undertake less international M and A investment than typical, it tends to predict stronger future home conditions."

 

The study appears in the Review of Financial Studies.

 

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The Rotman School of Management is part of the University of Toronto, a global centre of research and teaching excellence at the heart of Canada’s commercial capital. Rotman is a catalyst for transformative learning, insights and public engagement, bringing together diverse views and initiatives around a defining purpose: to create value for business and society. For more information, visit www.rotman.utoronto.ca

 

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Journal

Review of Financial Studies

DOI

10.1093/rfs/hhaf109 

Method of Research

Meta-analysis

Subject of Research

Not applicable

Article Title

Cross-Border M&A Flows, Economic Growth, and Foreign Exchange Rates