- Professional Services
Capital Markets 2020
Brave New World?
Capital Markets will look very different in 2020 than they do today. Many have gloomily predicted a shrinking capital markets landscape, over-regulation and the fall of traditionally powerful financial centers such as London and New York. However, a different vision for 2020 is emerging consisting of a new Equilibrium.
Brave New World : Equilibrium
This New Equilibrium consists of: government intervention receding (as memories of the financial and sovereign debt crises fade), traditional financial axis of power further solidifying their positions at the top, and the world seeking stability and predictability in the context of riskier and more uncertain geopolitical situations. In addition, much of the landscape where financial institutions operate will change significantly. This change will come from economic and government policies, from innovation, operational restructuring, technology, from smarter and more demanding clients, companies harnessing powerful data, and from continued growth of the shadow banking system.
Global Capital Markets 2016: The Value Migration
Unfavorable economic conditions, escalating capital requirements, and stubbornly high costs continue to depress the performance of many investment banks. Their collective 6% ROE in 2015 capped off five years of dismal revenue results.
Yet the same cannot be said for the capital markets industry as a whole—the ecosystem that includes buy-side firms, sell-side firms, information service providers, and exchanges. Indeed, even as regulation forces investment banks to retrench and hinders their ability to compete, other players remain unaffected and will even, in some cases, benefit. Over the next five years, revenues in the capital markets industry will grow by an estimated 12%, increasing to $661 billion from $593 billion in 2015.
The asset base of buy-side entities is expected to reach around $100 trillion by 2020, up from an estimated $74 trillion in assets under management (AuM) in 2014. If this transpires, the buy side will generate nearly $300 billion in fees by 2020, constituting 45% of the overall capital markets revenue pool (assuming favorable market conditions and current fee structures). However, investment banks, on the sell side, are expected to generate just over $205 billion by 2020, a decrease to 31% of the total revenue pool from 53% in 2006.
Information service providers and exchanges are poised to benefit. They will profit from increased demand for technology solutions and greater access to market information and analytics. Growth in electronic exchange trading and the use of central clearing will mean that their share of the capital markets revenue pool will grow to 19%, representing an estimated $125 billion, by 2020 – an impressive rise from 8% in 2006.
Yet even as competition intensifies, opportunities for investment banks will continue to arise. Some larger or niche players will be able to absorb market share from those that are retrenching. Others will require a change in mindset and approach to explore alternative revenue opportunities beyond their traditional roles as capital raisers and market makers. Such players might consider leveraging internal data and technology systems to diversify revenues and enhance their market positions.
Moreover, the role of capital itself is changing. Escalating capital costs, occurring simultaneously with the growth of buy-side assets and revenues, indicate that the industry is moving toward leveraging benchmarks and other index products aimed at passive investors. Both the ability to discover liquidity and the demand for risk transformation services are becoming less dependent on capital. If investment banks are to compete, they must recognize their ability to generate revenues as information companies.