Fourteen for 2014, part two

What to expect in financial markets: 14 ideas for 2014.
Bitcoin will see some virtual competition in 2014, FA predicts.
Bitcoin will see some virtual competition in 2014, FA predicts.

The upcoming print edition of FinanceAsia will be exploring the key trends in the Year of the Horse, notably the resurgence of China equity activity and whether or not that will translate into profits for investment banks. In the meantime, here is the second half of 14 calls for 2014. (Read part one here.)

8. Bitcoin is not going to replace the greenback any time soon, if its wild gyrations are anything to go by – not to mention China’s banning its nationals from buying Bitcoins with renminbi. But virtual currencies are here to stay: even JP Morgan is developing one. If 2013 was the year that Bitcoin put crypto-currencies on the map, 2014 will be the year when competitors begin to enjoy their share of the limelight. 

9. Taobao, China’s version of eBay, has begun to sell mutual funds on its platform. 2014 will see this alternative channel gain traction. It suggests that all kinds of financial services will come under renewed pressure. Finance is about being the middleman, matching companies with capital. Electronic trading has already transformed equities and increasingly FX (think of retail flows from Japan, all of which are electronic). Taobao is rewriting the rule book for investment products. In the US, the JOBS Act has transformed IPOs for small companies to disintermediate underwriters. This coming year will see new entrants continue to disrupt financial services via digital connections. Will this transform the middle tier of private banking? What about mobile banking in Indonesia?

10. Compliance and risk mitigation have dominated hiring across financial services for the past several years. But with Dodd Frank now law, the industry has a clear view about regulation and its costs. The next areas for hiring: tax and data. Just as Dodd Frank provisions enable the US to impose its will on non-US securities firms and investors, so will its tax laws impact overseas banks and brokers. Continued moves to chase tax-avoiders will lead to increased rules and costs for financial players. At the same time, an increasing amount of information technology will involve ‘big data’, whether it’s around collateral management, securities inventories or pricing strategies. Indeed, banks have been amassing data for years; the opportunity now is in how to harness it. Look for hiring to focus on everything from hard-core data mining to UX (user experience), to help executives make sense of what the numbers say – and to reassure clients and regulators that they can trust you with this information.

11. The ‘taper’ by the Federal Reserve, formally begun yesterday, will not have such a major impact on emerging markets this year. In many cases the turmoil of summer 2013 has moved currency and equity markets to more sustainable price levels. It is also now clear that decelerating the Fed’s asset purchase programme, or recalibrating it toward mortgages, is not the same thing as a change to policy rates – and the Janet Yellen Fed will most likely not raise the federal funds rate from its current 0.25%, perhaps for years. Countries with balance of payment problems have a small window of time to straighten their affairs… 

12. …Although India’s recent equities run, inspired by mid-term elections that saw the Bharatiya Janata Party make significant gains, is not sustainable. If Indian politics were simply about Congress versus the BJP, this might be cause for celebration. Congress’s rule is past its sell-by date; despite some very able technocrats, such as finance minister P Chidambaram and Reserve Bank of India governor Raghuram Rajan, it remains in thrall to the sclerotic Nehru-Gandhi clan. But the outcome of the bid to rule New Delhi, won by the upstart Aam Aadmi Party, suggests either Congress or BJP will only gain power by rickety coalitions with groups that lack the experience or the vision to govern at a national level. That makes it unlikely that Narenda Modi, if elected prime minister, will be able to enact meaningful reforms to free up labour markets, straighten government finances or bring clarity to land use for infrastructure projects. The national election must be held by May.

13. The ‘great rotation’ of investments from fixed income to equities will be muted. There will continue to be a shift out of cash, and 2014 will be the year in which companies in developed markets, particularly the US, start to invest again. But a slowdown in Fed asset-purchasing will not by itself lead to a wholesale shift out of bonds. Meanwhile monetary conditions will remain or become easy in Europe, the UK, Australia and Japan. Flows will move away from duration (the seven-to-10 year tenors of US Treasuries, for example) in favour of strategies that benefit from likely increases in volatility. Emerging-market debt is likely to still provide relatively better yields, although countries with a large portion of bonds held by foreign investors will be vulnerable to shifts in sentiment. This may prove more of a challenge than whether countries have trade deficits.

14. Two big macro threats will loom over 2014. The one more likely to occur is a credit event in China. Where it emerges and how the government and counterparties react will reveal the extent to which Beijing really can steer the economy to a new model. The greatest macro threat, however, is not financial but geopolitical: shots fired between China, Japan, the US, or the Koreas. The obvious costs of war are not enough to prevent an accident in North Asian seas or skies from spiralling out of control. However, conflict may not necessarily take the form of bullets, missiles or torpedoes. Look instead to cyber attacks increasing in frequency and intensity. For financial institutions, risk mitigation will be about how to keep the lights on in the event that Asian governments begin to have a go at one another. The prospect of such a clash is low, but not zero.

Despite these concerns, the world is in a better place compared to a year ago, and perhaps in its best shape since before the 2008 financial crisis. Most bankers are modestly upbeat regarding 2014 and so are we. FinanceAsia.com will close for the Christmas and New Year holidays. We wish everyone all the best for the coming year.

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