By 2020, a new equilibrium for global capital markets will emerge and the environment will look very different from today, according to Capital Markets 2020: Will it change for good, a new report from PwC released today. The report asserts that while policymakers and regulators may be setting the pace of reform, the drivers likely to fundamentally and permanently reshape global capital markets are the expectations of a wider set of stakeholders combined with the realities of a new economic and commercial landscape. As a result, a new equilibrium will emerge in terms of innovation, technology, industry structures, business models, financial structures, products, and remuneration.
"As global interconnectivity and ubiquitous access to financial markets increase, we see a world where well-functioning, deep capital markets are needed more than ever," said John Garvey, PwC global advisory financial services leader. "Industry leaders must address the continually changing market forces and prove they can operate within this new equilibrium, which includes justifying their social utility. To succeed in the world of 2020, participants and users of capital markets will need to choose what posture to adopt against this shifting landscape – whether to be a shaper of the future or a fast follower. Staying the same will not be an option."
PwC's conclusions are supported by responses to a global survey of 250 capital market executives and industry leaders comprised of capital markets users (private equity firms, pension funds, hedge funds, corporates, and other non-bank financial intermediaries) and participants (investment banks, broker-dealers, financial market utilities, etc.). Overall, increasing client profitability (36%), adapting to new technologies (33%) and attracting and retaining talented employees (33%), emerged as the top three challenges. Looking more closely, capital markets users seem focused on maintaining their foothold and positioning with clients while participants view attracting and retaining employees and the threat of new market entrants as their top concerns. Participants also recognize the need to enhance their client offering, more than half (56%) citing this as their top investment priority.
The views of both capital markets participants and users are aligned in terms of their perspectives on major market events. For example, both expect staccato-like volatility and instability that may cause markets to experience booms and retreats and both anticipate strong financial performance will require business focus.
Where the two groups differ, however, is in their interpretation of how market changes will shape individual investment priorities and challenges. While both users and participants agree client-innovation is an important investment focus, users are more concerned about the implications of technology and compliance investments than their participant counterparts. This stems from the fact that a number of participants have already embarked on big transformation programs while many users are only starting to consider the implications of these market structural changes. As such, users still have a long way to go in terms of financing their strategic initiatives. Additionally, more than half of users indicated they have to raise additional capital to fund their regulatory initiatives compared to less than a third for participants.
Among other notable findings:
Executives are highly concerned by the threat posed by shadow banking players such as crowd funders and peer-to-peer lenders, with nearly two thirds (70%) stating they see a moderate to severe threat to traditional banks and 16% indicating they believe shadow banking may expand beyond its current 25% market share of financial assets. Only a fifth of respondents agree that shadow banking players present innovative partnership opportunities.
Despite shifts in global gross domestic profit and economic power, liquidity pools will continue to aggregate in established global financial hubs. While the majority (76%) expects a financial center rivaling London and New York to emerge, PwC expects that these two cities will continue to lead the global financial ecosystem through to 2020, as they provide a combination of stability, transparency and rule of law, against a global backdrop of global instability, state-directed capitalism and a war for resources.
Both users and participants view the business impact of technology similarly – as a source of risk if not managed properly on one hand, and an enabler of competitive advantage, on the other. This extends to executives' perceptions on the ability to gain an information advantage through big data, as both groups expect it to be a significant consideration going into 2020.
In response to this rapidly shifting landscape, PwC has identified the following six priorities that players in global capital markets should examine and address strategically now to emerge as leaders in the next five years:
- Proactively manage regulation, risk and capital
- Establish stronger culture and conduct
- Redefine the business model
- Strategically renew the operating model
- Enable innovation, and the capabilities to foster it
- Obtain an information advantage
