Economic and financial uncertainty remains, driven by several factors: weaker economic recovery in the US and Europe than in previous post-crisis periods, a deceleration of growth in China, extraordinary monetary policies, political populism, and Brexit.
Our influence and control
No business likes uncertainty. Currently, we're seeing significant economic risks. Asset prices are rising. At the same time, inflation in many countries remains below target – a sign that there is still slack in the global economy. As we've seen, there is also increased political uncertainty – a rise in populism in the US and Europe, continued tensions in the Middle East and the Korean peninsula, fears over international terrorism and the impact of climate change. Over the past year, we've seen growing political and economic uncertainty in several of our key markets – notably, the US, Turkey, Spain, and the UK, following the 2016 vote for Brexit.
Uncertainty is often bad news for the economy. It hampers longterm investment, can disrupt financial markets and dent consumer confidence. If financial markets go down, that directly affects both our earnings and the value of the assets we hold. Declining markets may also reduce demand for investment and savings products. There's currency risk – we saw, with Brexit, a sharp fall in the value of UK sterling1. New governments also bring new ideas. Changes to legislation can affect us – not only financial regulation but also rules affecting pensions, data protection, tax, and the terms of trade in financial services.
Despite current fears, financial markets have risen sharply. In 2017, share markets hit all-time highs, which helped lift our earnings. Economies in the US, Europe and Asia are continuing to expand. In the US, there has been strong business growth – partly as a result of consumer spending and the prospect of tax cuts. Uncertainty is also boosting demand for some financial products, particularly among consumers who want greater income security.
What we're doing about it
First, we make sure we have a very solid capital position. Last year, we revised up our capital target. This gives us a buffer against increased financial market volatility. Strong risk management is also important. Aegon has risk policies that apply across the group, and a risk management framework that operates at all levels. As part of that, we avoid risk concentration – we spread our risk across different assets and investments. And we keep our capital in various currencies to mitigate movements in exchange rates. In addition, we hedge, which limits our exposure to sharp movements in currencies or financial markets.