Wednesday, December 8, 2010

What's Around the Corner in 2011?

Will 2010 be memorable in finance circles? There was no major institutional collapse, no memorable moment, or no defining memory. There were financial reform and confirmed regulation, but they had been contemplated the year before. There were no notable financial-institution mergers.

There were occasional scares from European debt markets and the struggle for certain European countries to get their finances in order. There were, as there are always these days, ripple effects all over the globe. There were continual worry about another recession, unemployment trends that never got better, and non-stop chatter about China.

There are worries in municipal markets, as people fret about the deficits and debt among states and local governments. There are faint signs of a revival among those in private equity and venture capital.

The year didn't bring threats to the financial system, an imminent collapse in capitalism, or a demise in hundred-year-old institutions. For many, that was a good thing, signs of times getting better.

As 2011 looms, what can we expect? Or what do we hope for? Where do Consortium students and MBAs wish to be? What career paths do younger finance professionals yearn to plan? Will 2011 bring more of the same--long debates over tax structures, disagreements over whether the recession is over, and little progress in unemployment trends?

What might happen in 2011?

1. Banks are still coming to grips with financial reform and regulation. But the rules of the road are not clear or well-defined. They will adapt institutionally and structurally. But they worry reform and regulation will narrow profit margins and reduce returns on equity. They will, therefore, look for novel, clever ways to boost profitability (new businesses, higher prices to customers, expansion abroad, etc.). The efforts to do so, however, won't be easy.

Restructuring or re-situating themselves while trying to maintain profitability might be enough challenge for big banks--enough to keep them focused inward, instead of outwardly eyeing possible acquisitions. Some might look to acquire smaller institutions if it means getting a quick boost in revenues and if it can be done without exorbitant costs.

2. Everybody is hopeful for continued economic recovery. But everybody--markets, job-seekers, businesses, consumers--has grown fatigued waiting for a sustained upturn, not the quarterly teasers or hints they observed in 2010 or a recovery empowered by government stimulus. Hurdles still exist; perhaps 2011's second half will be the start of the real thing and for the long term.

3. Business-school students in 2011 will have been through rough waters from crisis times. Students will go through school with a different, more realistic mindset. They will still ponder or dream of careers in consulting and investment banking. But they will be more open-minded, will consider broad options, and will be interested in exploring something different. It may no longer be just about the money. Having a life, making a difference, making a contribution and trying something new will count for something, too.

B-schools, including the Consortium 17, continue to attract young professionals as students, and they try hard to convince enrollees that the two years away from job markets will make them better off in the long term--especially those who are in career transition.

4. Banks, financial institutions, and funds will still attract the hardcore finance types into corporate finance, trading and markets. Those who enjoy and are entranced by financial models, quantitative analysis, firm valuation, mergers and acquisitions, and the vagaries and phenomena of capital markets will still head toward banks and funds to be bankers, traders, researchers, investors, and analysts.

5. Presidential politics will gear up in full swing by mid-2011. Market watchers, economists, businesses and traders will look to see which direction political winds might blow in 2012. Will there be more reform and regulation? Will a lackluster recovery justify more stimulus or government intervention? Will new advisers in Obama's economics circle step up and have a voice? Will a Republican majority in Congress overwhelm those who might have novel ways to spur employment?

6. Municipal-bond markets are fluttering; the year to come could be a pivotal one for municipalities struggling to make ends meet and avoid accumulating more debt. And no one has a catch-all solution to how states and cities will grapple with deficits while still trying to support social programs, pensions, schools and universities. A collapse or a default by one large state could have a detrimental ripple effect across other debt markets.

7. European debt markets have sputtered, too, the past year. Every few weeks a country slips into a precarious fiscal state and dominates the news (Greece, Spain, Ireland and others in 2010). And so in 2011, we'll continue to hear discussion, fuss and debate about the value and meaningfulness of the Euro and a European Union.

8. Derivatives trading and derivatives clearance will be better defined, even if it's done among private-sector participants (exchanges, banks, funds, etc.). Financial reform tried to kick-start efforts; more derivatives activity (at least basic, simple trading) will migrate to exchanges, but progress will be slow and deliberate because private-sector participants don't want to risk losing profits or reducing profit margins from trading amond the top dealers. And they must decide who will or should do what and how.

What about the expansion of carbon trading and the market's efforts to put a real price on pollutants and emissions? That, too, will be slow, deliberate, almost a crawl, in part because Congress and Presidential politics never seem to get around to providing the jolt this specialized market requires.

9. Private-equity firms, venture-capital firms and financial sponsors will dare to be aggressive or adventuresome in 2011. They came out of hiding in 2010. With too much capital not doing much at all, many of these firms will decide it's time to put that money to work and take meaningful, measured risks.
As 2011 looms, nobody is predicting surges and booms; nobody is hinting a doom and collapse. A cautious confidence is on the horizon.
Tracy Williams

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