With new regulations and changing business models on the horizon, 2019 will be a pivotal year across the globe for the financial industry. Our regional heads share their predictions and insights for 2019
China will continue to open up and look to new partnerships
China has pressed on with its bid to liberalise its capital markets and open up investment. Existing schemes are likely to grow substantially in 2019 as they are refined. China will also continue to open up new partnerships, probably under different models, with other countries. Along with the initiation and on-going development of the Shanghai-London Stock Connect link, we should not rule out the launch of enhanced schemes with other countries China has strategic links with. Might these include, for instance, dual-listed dairy derivatives with New Zealand, or construction futures with Australia?
Funds passporting schemes will boost cross-border capital flows
China’s moves to open its markets are one reason why cross-border capital flows into and out of Asia-Pacific markets will accelerate in 2019. But it’s not just China driving the trend. From February 2019 the Asia Regional Funds Passport (ARFP) is expected to launch, connecting fund markets in Australia, Japan, Korea, New Zealand and Thailand. We also anticipate convergence with ASEAN’s Collective Investment Scheme (CIS), which is getting more interest from industry players. This would bring larger AUM for fund managers, making the ARFP scheme a potential regional competitor for UCITS in Asia.
Outsourcing post-trade processing will accelerate
As APAC’s diverse markets make changes to their trading infrastructures, and new regulations and technologies transform clearing and settlement practices, third-party clearing (TPC) is likely to become a more attractive option. In the current extremely competitive environment the sell-side needs the capacity to invest in their core competencies (research, trading and execution) and differentiate their offerings. TPC offers a means to allow them to do so by reducing fixed costs, optimizing capital and liquidity and enhancing agility, so its popularity will continue to accelerate in the region through 2019.
US asset managers will continue to analyse efficiency opportunities across their middle- to back-office
As US investment managers adapt their business models to a changing landscape – declining management fees, challenges to alpha generation, increased regulatory oversight, aging operating infrastructure – we anticipate many of them will adjust their approach to post-trade services and more broadly embrace the concept of outsourcing.
According to a report by McKinsey & Company, North American asset managers’ costs for operations and technology nearly doubled from 2007 to 2016. Keeping pace will continue to be more costly and time-intensive for asset managers, and therefore investment operations automation and outsourcing, across the middle to back-office spectrum, will continue to become even more compelling.
ETFs will continue to gain market share
We anticipate that, across the Americas, institutional investors will increase their allocations to ETFs as they become more comfortable with the liquidity of this asset class. Additionally, we see that there will be continued innovation in the types of ETFs offered as asset managers continue to find new ways to innovate, differentiate, and distribute their product.
Hedge fund managers will need to re-adjust their models to cope with increased, and much welcomed, market volatility
Over the past several years, hedge funds have had to adapt their models to seek declining opportunities for alpha during a period of historically low and stagnant levels of volatility (with a few short-duration exceptions). However, since the beginning of the fourth quarter of 2018, and likely to continue into 2019, volatility has returned to not only the major equity markets, but also to the fixed income, FX and commodities markets (notably natural gas and crude oil). We believe that 2019 will serve as a test to see which hedge fund managers can successfully adjust their strategies to remain successful in this new higher volatility environment.
Asset owners in Latin America are diversifying cross-border
Cross-border allocations from Latin American pension funds and official institutions are expected, after some years of steady growth, to increase even further. Brazilian pension funds, in particular, are actively seeking new opportunities to diversify their investment strategies beyond domestic assets.
We also see insurance companies continuing their search for yield in Latin America, generated by transactions led by global players. We view this growth in the context of market consolidation, disintermediation by non-traditional channels, and permanent challenges to comply with more stringent local regulatory frameworks.
More collaboration to respond to a fast-evolving market
The last few years have represented a golden age for business innovation. Companies have evolved on ways to create value for their clients and approach to innovation. As markets continue to change fast, financial institutions will have to keep the pace as even a fast-follower approach has become highly risky.
Against this backdrop and in light of constraints to build everything in house, in 2019 financial institutions are expected to look more and more to collaborate with peers and IT firms to develop new value propositions and innovative solutions by combining capabilities and assets without tying participants in an M&A or JV transaction.
Asset managers and banks to progress on harmonising their operating model
Profitability challenges due to the increasing regulatory demands and competitive fee pressure require both asset managers and financial institutions to reconsider their operating model. In Europe, a fragmented and country specific structure has prevented many firms from reaching the desired level of efficiency and cost optimization as well as to provide a harmonized service to clients.
With the cost pressure that is expected to remain high, in 2019 both asset managers and banks may look with a renewed interest at harmonizing their operating model and assess more concretely outsourcing opportunities and providers’ consolidation across markets and products. In certain market segments, infrastructural changes are progressively delivering cross-country standardization that allow firms to rely on Regional post-trading providers.
Fund distribution platforms to continue a double-digit growth and consolidate
The European B2B fund platform market has reached EUR 2.4tn AUA in 2017 and is expected to grow at 15.8% CAGR until 2021 reaching AUA of EUR 4.3tn. The main drivers are the projected growth of the mutual fund industry as well as new clients, such as pension funds, requiring services from fund platforms. Also, investment requirements and scale are already driving a market consolidation with 4 M&A deals that have been announced in 2018.
This trend is expected to stay in the next few years, leaving only a small number of platforms in the market. The winners will be those platforms that will be able to reduce costs, increase efficiency and have a broad value proposition for both distributors and asset managers across Europe.
Whatever the final outcome of Brexit negotiations, we fully expect that London will retain its place as a leading global financial hub in 2019. Schemes such as London-Shanghai Stock Connect, earmarked for December 2018, speak to this. After more than 150 years in the UK, BNP Paribas is ideally placed to accompany existing clients through Brexit and offer unique expertise to those wishing to expand their business within, from or to the UK.
Diversity and gender equality
We hope and expect to see greater collaboration within the UK financial services community to tackle the issues of diversity and gender equality. Although some progress has been made, there remains an issue in attracting, retaining and promoting female talent in our industry and, in order to tackle this we are going to need to work together. With a female Chief Executive in the UK, BNP Paribas is leading the way but we know we must do more.
Centre for digital innovation
2019 will see London continue to build its reputation as a centre for digital innovation. Financial services businesses will double down on their efforts to recruit outside of their traditional talent pool, increasingly having to compete with the tech giants for the brightest candidates to drive innovation. We will see further investment into ‘incubator’ style programmes which will drive operating models of the future, increasing efficiency, reducing cost and unlocking new enhanced client experience.
Changing perceptions of agile working
For UK financial services to continue to thrive, we need to recognise that today’s top talents have very different career objectives, aspirations and opportunities than those from 20 years ago. As our industry becomes increasingly dependent upon technological innovation and data science, we are competing against tech giants and start-ups for the brightest minds. Flexible working practices, the latest technology, the acceptance of failure as part of the innovation process are among the expectations of this generation – but are not characteristics typically associated with banking. 2019 will be a year when we have to work harder to change that perception.