Prosek Bracket: What Are The Top Financial Services Themes for 2016?
March Madness is one of the most exciting events on the calendar—that is, unless your bracket is busted on Day One. Few of us saw Villanova going all the way, but we want a second chance with the whole bracket thing. With that in mind, we present the first annual Prosek Bracket!
We want to take a look at the top financial services themes for 2016. What topics or themes will emerge and dominate headlines? What will people remember most about the year 2016?
To answer these questions, we divided up 16 major themes across four regions: Technology, Government, Risks and Investment Trends. For each theme we looked at what’s grabbed headlines so far through Q1, and what the outlook is for the rest of the year. Then we used our proprietary scoring algorithm to pick a winner for each region.
Without further ado:
1. Blockchain Technology
Q1: Blockchain technology, the record-keeping technology behind Bitcoin, got off to a strong start in 2016 after a very active 2015. On April 7, a consortium of big banks (including JPMorgan Chase and Citigroup) completed a successful blockchain test using credit-default swaps, which represents an important step for mass adoption of the technology. Many other businesses across the financial sector, including payment processing companies, are exploring ways to leverage blockchain to lower transaction costs and improve data security.
Outlook: Blockchain has been the subject of a lot of buzz since Bitcoins came onto the scene, but is 2016 the year it finally enters the mainstream? As revolutionary as the technology is, it simply takes time to overhaul existing systems. But with so many big names behind it, the outlook is certainly positive.
Q1: The dominant cybersecurity headline of 2016 has been Apple’s (and by proxy, the entire tech industry’s) ongoing battle with the FBI and the U.S. government over whether a private company can be forced to surrender customer data (or weaken existing security features). The battle reached a temporary stalemate when the FBI announced that they had figured out a way to hack into the iPhones of the San Bernadino attackers, but the Justice Department isn’t done yet.
Outlook: Edward Snowden called the Apple case “the most important tech case in a decade,” and we’re inclined to agree with him. Providing the U.S. government with access to a literal treasure trove of data could upend virtually every industry, including financial services. What’s to stop the FBI from asking for bank records, or PIN’s? This is something everyone in the financial community will be paying close attention to in 2016.
3. Artificial Intelligence
Q1: Artificial intelligence, or AI, is not just the stuff of movies or books anymore. The triumph of AlphaGo, Google’s DeepMind computer program, over a world-class Go player represented a watershed moment for AI. Now hedge funds are getting in on the act too, with several managers embracing AI to help boost returns.
Outlook: AI is still a relatively new technology, especially when it comes to the investing world. The potential is there to build a smarter and better money manager, but what’s still missing is the proof. Is 2016 the year AI hits it big?
4. Marketplace Lending
Q1: Marketplace lending continues to grow at an astronomical rate, with one report citing a 700% increase in total loans to individuals and small businesses from 2010 to 2014. The industry is also growing in legitimacy, with large institutions such as BlackRock and Goldman Sachs recently joining the fray.
Outlook: More of the same, with perhaps an IPO of one of the large players (Prosper?) on the horizon. One potential red flag is the increased attention from regulators, including SEC chairman Mary Jo White, who said she is “concerned about the adequacy of the information received by investors.” The major online lenders are stepping up in response by forming the Marketplace Lending Association, an industry trade group, but only time will tell how much increased regulations hurts (or helps) these companies.
Winner: Cybersecurity. This was a region dominated by long-term trends. Although we’re confident both blockchain and artificial intelligence will continue to grab headlines in 2016, we’re not sure this is the year they become an official part of the financial lexicon. And although marketplace lending continues to grab market share from big banks, the media shine may have largely worn off. Cybersecurity, meanwhile, offers the most potential to dominate headlines this year, especially if the Apple case takes off again.
Q1: The Fed dominated headlines in 2015 after raising rates for the first time since 2006, earning it a No. 1 slot in perhaps the bracket’s most competitive region. But so far in 2016 the Fed has been all talk, literally.
Outlook: All eyes will be on the world’s most influential federal agency in 2016 to see if liftoff continues. There’s good odds of at least one more rate hike this year, but there’s a growing debate over whether higher rates will actually accomplish what the Fed wants.
Q1: The European Central Bank, Europe’s equivalent to the Fed, is another major player in global politics. The ECB pushed rates into negative territory to start off 2016, earning countless international headlines.
Outlook: Europe is several years behind the U.S. in its recovery from the Great Recession, and the pressure is on ECB head Mario Draghi to turn it around. Will he push rates even lower? Will he begin the tightening process?
Q1: In terms of sheer media coverage, the U.S. Presidential election had this bracket racked up by the end of January, courtesy of Mr. Trump. It’s easy to anoint 2016 “The Year of Trump,” but if college basketball has taught us anything it’s to not name a champion until after the games are played. (See: Kentucky, 2015).
Outlook: The general election isn’t until November, but will the outcome have a lasting impact on the financial services industry? We’ll have to wait and see.
Q1: The Bank of Japan set the standard for negative interest rates in January, making a last-ditch effort to revive growth in the world’s third-largest economy.
Outlook: The results so far have been underwhelming, and there’s a growing sentiment among market prognosticators that the BOJ may have to pull something else out of its sleeve.
Winner: BOJ. In a surprise upset, the BOJ topples the world’s two most important federal agencies and the future leader of the free world (or whatever Trump’s world would be called). The ECB and Fed may both be heavyweights, but unless they do something outlandish like (gasp!) announce three rate hikes this year, then it’s unlikely they’ll greatly affect the markets. The race for POTUS is a media circus and will likely stay that way all year, but few in the financial community seem especially concerned. Even if someone with extreme policies gets elected, their decisions won’t have any bearing until 2017 at the earliest. In the BOJ, we have the perfect dark horse in that nobody knows what will happen. How do you prepare for something that is unprecedented in financial history? Keep a close eye on Japan.
Q1: Volatility in China sent shockwaves through the market in 2015, and the structural economic problems are still a long way away from being solved. In the near-term, news about China’s dwindling foreign-exchange reserves—a direct result of foreign investment fleeing unstable Chinese markets—has contributed to the choppy start to 2016.
Outlook: China’s transition from an investment-driven economy to a consumption-driven economy will undoubtedly take time, but it’s the road that has investors all over the world so worried. Will China chart a straightforward path with moderate growth, or will the economy continue to chug along in fits and starts?
Q1: The jury’s still out on Abenomics, the economic plan of Japanese Prime Minister Shinzo Abe, but the early returns aren’t promising. Growth and inflation are still around zero and the labor market is trending in the wrong direction, forcing foreign investors to rethink the appropriate amount of exposure to Japanese markets in 2016.
Outlook: Japan has an aging population and a stagnant economy, a sure-fire formula for failure. Although Japan has long played in the shadows of the Chinese behemoth, this could be the year Japan shows just how important it is to international markets.
Q1: As Europe deals with a mountain of challenges—lack of growth, the Syrian refugee crisis, stalled recoveries in Greece and Spain—the threat of the United Kingdom potentially exiting the European Union has caught everyone’s attention. Prime Minister David Cameron opposes a Brexit, but London Mayor Boris Johnson (and presumed Cameron successor) is a supporter. Let the debate begin!
Outlook: The UK votes on June 23 on if it will leave the EU. A “no” vote likely means more of the same – rich, developed countries continuing to prop up poor, developing countries. But a “yes” vote could throw the entire region, and the world with it, into complete chaos.
4. Middle East
Q1: Unrest in the Middle East continues to fuel tensions across Europe and the U.S., most notably with the Syrian refugee crisis. It’s also a hot topic on the campaign trail.
Outlook: The region has been in a state of political and economic stability for decades, and market prognosticators have never seemed that concerned (as long as oil reserves are spared from the fighting). Will that change this year?
Winner: Brexit. China is the 800-pound gorilla in this region, and a repeat of last year’s wild swings could throw the markets into a tailspin. But Chinese central bankers seem to have realized the folly of trying to maintain past growth rates and are now pursuing a more market-friendly strategy. Japan and the Middle East are both wild cards, but the worst-case scenarios (Japan defaulting on its debt, or all-out war in major oil-producing regions) are both unlikely in 2016. The odds of a Brexit, however, are at roughly 33 percent and rising. If the UK leaves, what’s to stop every other European power from following in their footsteps?
Investment Trends Region
Q1: Roboadvisors continue to disrupt the wealth management industry by siphoning assets away from the large wirehouses. The first quarter has been an active one, with Betterment raising $100 million, Wealthfront upgrading its services and several other major players (Vanguard, Fidelity, Charles Schwab, BlackRock, etc.) now getting involved in the game.
Outlook: The “robo” industry saw more than 200 percent growth in 2015 and is now up to $50 billion in total assets, but that’s still just a fraction of the overall asset management industry. Will 2016 be the year the ‘robos’ take over?
Q1: Unicorns (private companies valued at $1 billion or more) have been the darlings of the venture capital industry, with mega-unicorn Uber (valued at $62 billion) leading the way. But despite outrageous growth rates, there’s now some skepticism about if these businesses will ever provide an attractive exit for investors.
Outlook: A tumultuous start to 2016 has reduced the appetite for IPOs to the lowest level since 2008, with most unicorns avoiding the public markets. Are we seeing a fundamental shift in how companies raise capital?
3. Activist Investing
Q1: Another side effect of choppy markets is reduced M&A activity, which means fewer opportunities for activist investors to make their mark. Although there have been a few high-profile cases in the first quarter (Yahoo, Darden, Avon, Valeant, etc.), the overall activist landscape is subdued compared to recent years.
Outlook: There’s an ongoing debate about the effectiveness of activist investing, with the Wall Street Journal last year concluding that activist shareholders are “sometimes” good for business and “sometimes” bad. Activists aren’t likely to go away anytime soon, but corporate boards are getting smarter about how to deal with them.
4. Impact Investing
Q1: Impact investing got a big boost in February when BlackRock announced a new initiative called BlackRock Impact, which will include “an array of new investment products that will allow clients to invest in addressing societal issues.” Other brand-name firms such as Goldman Sachs and JPMorgan Chase are also getting involved in the space.
Outlook: Impact investing, and socially responsible investing (SRI), is still a relatively new theme in the asset management world as companies try to figure out how to support social issues while still earning a return for clients. The future is bright, but is 2016 the year impact investing enters the mainstream?
Winner: Roboadvisors. It’s not often a service comes along that threatens to upend an entire industry, but it looks like roboadvisors are going to do just that. As other asset classes struggle with increased volatility and diminished returns, the passive index funds favored by roboadvisors continue to attract massive inflows. Unicorns, activists and impact investors are all worthy competitors, but we don’t quite see 2016 as their year.
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Now that we have our Final Four (cybersecurity, BOJ, Brexit and roboadvisors), it's up to our readers to pick a champion. Let us know in the comments below which theme you think deserves to take home the crown. The winner will be announced in a post next week.