What if good times aren’t just around the corner?
Investment banking, one of the first industries to be hit by the financial crisis, appears to be at the front of the pack in leading the recovery.
In past issues, Financial News has reported an upsurge of confidence in the equity and corporate debt markets: this week we look at how things have turned round in a series of other sectors.
There is renewed confidence in emerging markets – the Russian stock market is up 70% this year. Overall, the appetite for risk has turned positive for the first time in a year, according to UBS. Last month was the busiest for high-yield bond issues in a year.
And if Andy Hornby, the man vilified for bringing down HBOS, can re-emerge as the new chief executive of Alliance Boots, surely there is hope for all those others who plied their trade inventing, structuring or selling products that were brought down by the credit crunch?
The debate about the likely path of the financial markets matters enormously, for bankers, the institutions they work for, regulators and economic policymakers. For banks, it is a question of ensuring they have not shrunk the teams that need to be grown quickly to take advantage of the recovery. The failings of banks in this regard is legendary. Many have attained notoriety for cutting staff and pulling out of markets just as they get going again.
The issue is particularly acute for those banks – on both sides of the Atlantic – which plan to repay, or which have already started to pay off, their government support. In doing so, the likes of JP Morgan Chase and Goldman Sachs are showing confidence that they believe the worst of the crisis is behind us. They are also demonstrating a desire to shed the restrictions on pay and hiring that go hand in glove with the authorities’ intervention.
If they are right, they will look smart, and will feel they can show a clean pair of heels to their rivals – including Citigroup and Bank of America Merrill Lynch – which have yet to break free. If they are wrong, and the economy turns down again, they risk finding themselves short of financial muscle just when it would be politically and economically inexpedient for governments to offer the same level of support granted in the past.
Governments in general face an even more complex problem. Their reactions to the crisis have been dressed up in all manner of fancy names but fundamentally amount to chucking piles of cash at the situation and hoping for the best. This policy may be laudable at the moment – indeed it may be the only one that currently has any chance of working – but it brings with it dangers of an inflationary bomb exploding in the years ahead.
That means the most important policy decision at the moment is not whether interest rates should be raised and quantitative easing stopped, but when. If the appetite for risk really is backed by a recovery, those moves need to come soon. At least part of the reason the last boom turned to bust was because policymakers did not act soon enough to curb the upturn of the mid-2000s.
But if the renewed appetite for risk turns out to be misplaced, then battening down the hatches risks killing off the recovery before it starts. Increasingly, the lights are turning green for the prospects of a sharp recovery. The consequences of them switching back to red again are almost too horrible to contemplate.
Why don’t banks make better asset managers?
One sector that has yet to see any signs of a return to the boom era is mergers and acquisitions. With nearly half the year gone, the value of global M&A is still only a third of the figure recorded for the whole of 2008.
The asset management sector, however, is starting to come alive. The fate of Barclays Global Investors – the sale of which to BlackRock looks like part of a repositioning of Barclays as it bulks up in M&A, equities and prime brokerage – is only the latest example of the trend.
There are several reasons why banks have been selling out of asset management. First, in a world of scarce capital, some banks believe their shareholders are best served putting their money to use in “racier” operations, such as prime broking and corporate advisory work.
Second, consultants have long argued their clients should not simply succumb to the allure of having their assets managed by blue-blooded investment banks because their way of running these businesses runs counter to the way asset managers like to be treated.
Third, just as in investment banking, there has been a procession of talented individuals leaving the banks’ asset management divisions in favour of the more sympathetic treatment and better rewards they think they will get at an independent firm. Unlike investment banking, clients are more likely to believe that the flow of talent will not reverse when activity picks up.
The debate about whether financial institutions really can offer a portfolio of services – from insurance to retail banking to investment banking to asset management and beyond – is decades old.
The fact that – perhaps with the exception of JP Morgan and a handful of others – they have never been able to make a decent go of it suggests the jury is still out.
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