Financial Market

FLASH FRIDAY: Top 10 Surprises for 2024

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.

Last year Byron Wien, the famed market strategist, died at the age of 90 after publishing his annual “Ten Surprises” list covering economic, financial market and political events for 38 consecutive years. 

Byron started the tradition in 1986 when he was the chief US investment strategist at Morgan Stanley at Morgan Stanley, then became chief investment strategist for Pequot Capital before joining Blackstone Advisory Services in 2008 as vice chairman to advise both the alternative asset manager and its clients in analyzing economic, political, market and social trends.  

Joe Zidle, chief investment strategist in the private wealth solutions group at Blackstone, joined Wien in the development of the Ten Surprises in 2018 and they published their final list at the beginning of last year. 

Wien defined a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which he believed was “probable,” having a better than 50% likelihood of happening. 

In tribute to Wien, Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset & Wealth Management published his own one-off 10 surprises list.

Michael Cembalest, J.P. Morgan

Cembalest said in a report: “I never read any of the articles that kept score on how well Byron’s predictions did since that’s not the point. They were an exercise in thinking against the grain about what might happen in an industry dominated by consensus.”

His surprises included: 

Broadly syndicated loan losses rising above private credit losses for the first time, as the underwriting chickens come home to roost in the loan markets more than in private credit.

“Historically, there hasn’t been much difference in their loss respective rates,” added Cembalest. “But after a decade of comparatively lax loan underwriting with respect to maintenance covenants, EBITDA add-backs, maturity priming clauses, intellectual property transfer restrictions and other terms and conditions, that will change. See our December 5 Eye on the Market Alternative Investment Review for more details.”

US regional banks stocks doing well in 2024, with stable or rising price to book values. 

Cembalest said that when Silicon Valley Bank failed last year, US regional bank valuations temporarily converged with Europe before unprecedented rescues by the Federal Reserve and FDIC slowed deposit outflows. 

“Despite challenges related to underwater Treasuries, commercial real estate writedowns, competition for deposits and slowing loan growth, US regional bank price to book ratios remain at 1.0x or higher in 2024 and widen the gap vs Europe,” he added. 

Consultancy Oliver Wyman has also published its top 10 predictions for 2024 in asset management after the industry last year had to deal with the end of the 15-year bull market, thigher rates and inflation, rising geopolitical tensions, and the impact of generative artificial intelligence.

The first prediction was that the golden age of private credit will keep on shining. Incoming regulations on bank capital will lead to more “de-banking” to private credit funds, especially those with scale that can offer speed and certainty of execution and larger deal size.

“Private credit funds will expand beyond leveraged finance into broader corporate lending and asset-backed finance, said Oliver Wyman. “The latter will require significant enhancement in asset origination capabilities or partnerships with banks to source deals, a reduced financing role that banks will accept to maintain client relationships.”

Increased capital requirements are just one of the regulatory changes that are likely in 2024 and consultancy, EY, also published a report on how financial firms can prepare for more regulation in 2024. 

One of EY’s regulations is that firms should engage proactively with regulators on new prudential developments following the US bank failures last year which highlighted that Liquidity regulation does not fully reflect how changes in technology have changed consumer behavior. 

“Continued reporting of liquidity and stronger metrics will likely lead to more sophisticated and thoughtful approaches to stress testing that consider non-financial risks,” said EY. “These will require firms to engage with regulators and understand the potential vulnerabilities, themes and players involved.”

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