With 2017 in full swing, there are many social and political influences that will be sure to impact capital market trends. In this video blog Numerix CMO, James Jockle, does the yearly outlook report with Kevin McPartland, Head of Market Structure and Research at Greenwich Associates.
James Jockle (Host): Hi welcome to Numerix Video Blog, I’m your host Jim Jockle. Joining me today for the third year in a row with his market outlook, Kevin McPartland, of Greenwich Associates, Head of Market Structure and Research at Greenwich Associates. Kevin how are you?
Kevin McPartland (Guest): Good, Jim. How are you? Happy New Year!
Jockle: Happy New Year! And just looking out the window behind you I’m hoping that your outlook is a little bit more rosy than the weather today.
McPartland: Yes, I think the clouds will part hopefully sooner rather than later.
Jockle: Let’s start with some good surprises in the end of the last year in terms of market performance and in your new report kind of on your top 10 imperatives looking for the new year, you kind of talk about the Trump bump continuing as we’re a couple weeks out at this point from the inauguration. What’s the near term market outlook and do you expect that the Trump elements continue to have positive trends on the market right now?
McPartland: It’s hard to talk about 2017 without talking about the impacts of Trump and maybe more importantly a Republican wash in general. So, talk of scaling back capital markets regulation, or not raising it anymore. There’s a lot of reality there. Full scale repeal of Dodd-Frank, that’s not in the cards, that’s not good for anybody. Right sizing as we called some of the rules, especially when you get down to the SEC and CFTC levels it’s hard to ignore it. While the market is initially afraid of Trump winning the election, now the thought that we will have lower taxes, higher government spending, which would then lead to inflation is really driving a lot of great volume in the market, and obviously volatility because there’s still a bit of amount of uncertainty, but those things are generally good for the major markets.
Jockle: So in talking a little bit about the market performance, I mean obviously we’re all waiting for the markets to move over 20,000, but you know obviously some things are really expensive at this point. In your research you talk a little bit about ETF’s and there’s still room there within the current valuations. What’s the outlook in terms of other investments other than equities at this point?
McPartland: ETF’s are certainly a continuing, growing story, Fixed ETF’s in particular, that area we continue to research pretty heavily. There’s a lot of demand there, in fixed income markets in general are always looking for new solutions for investors to get exposure as ETF’s were once a retail product and creates a variance to institutional products used in a variety of ways. I guess both a derivative replacement, but also a complementary product derivative for instance, so we see a lot of growth there. The interesting to watch for ETF’s, now this is more over a couple of years, as we move closer and closer to pass it and that gets more popular and the assets managed begin to grow, we would assume that over time we would see growth and the active strategy opportunities would start to come back because there would be less people in those areas.
Jockle: Well one of those things in terms of putting things in a dark light, you’re apparently in a dark light at this point in time. But that kind of takes a little bit of interesting things, the element of ETF’s, you also make the statement of futures are getting more popular. So, that feels a little contrary. What’s your thoughts there?
McPartland: It’s a great point, right. So, ever since Dodd Frank was passed, and swaps clearing became a big story it was an assumption that futures would sort of come and take over the swaps market. That certainly has not happened, swaps are there for a reason, they’ve always been there for a reason and in fact clearing has made trade swaps easier and more efficient, rather than harder and more expensive as many people expected, of course with some exceptions. But I think with what we’re seeing is sort of a rising time lifting all boats in that in there’s just more interest in gaining access to certain fixed income products or exposure that swaps also focus on, so we’re seeing growth, continuous volume growth at the CME for a lot of their fixed income futures. We expect to see slow and steady growth in credit futures over time as well, another area that really is ripe for certain new product innovation. So, futures getting more popular, I don’t think that would be the detriment of anything, that would be alongside continued growth as we said, ETF’s as we continue to move forward with the swaps market.
Jockle: And in terms of the rate environment at this point, I mean we’ve seen rates being raised, I think the consensus is we’re going to see two rate hikes here in the US over the next 12 months, how does that play into some of your market outlook?
McPartland: I would stay away from pretending to be an economist and determining when rates will rise but the fact that there is a little bit more uncertainty now about rates rising that we saw such a dramatic increase in the 10-year treasury yields since the election. The Fed taking some action, finally. It leaves everybody a bit more uncertain as to what will happen. Uncertainty requires hedging, and it generally creates volatility; both things which tend to be good for market volumes and so from a market structure perspective, those are great things to see, those are good for the exchanges, those are good for the trading venues, the broker dealers, etc. I think, rate movement is a good thing. Exactly when and how fast rates will rise, again, I’ll leave to the economists.
Jockle: And then, let’s just shift over on some of the technology side. You make a statement here in terms of “buy side goes best of breed”; what’s the insight there, Kevin?
McPartland: Yeah so this is a back and forth one if you read into the text of the report, you’ll see there’s sort of two sides to this, but I think you’ll see there’s certainly going to be some smaller firms where they’re going to look to buy it all in a box but increasingly, the technology you can get off the shelf. The ability to integrate different products with one another is going to also drop the buy side and sort of piece together what they need and pull in certain elements to create that workflow with themselves. Maybe the bigger story there its more and more we’re seeing buying the technology off the shelf. This isn’t the 90’s anymore where you had to build everything on your own and then you were using the same thing as your competitor. The products that are available now are so efficient, so customizable, but the cost of building in house, in many cases, is just not worth it anymore because there’s just so much great technology to be bought and configured.
Jockle: And the final thing I just want to try and drill down on, and again the report is the Greenwich Outlook for 2017 Top 10 Insights and here with Kevin. So Kevin, you talk cloud computing will become simply known as computing. Have we finally passed the hype and the hype cycle if you just don’t have a cloud strategy, you just don’t have a strategy at all?
McPartland: It’s a little tongue and cheek but I think we’re getting to that point. We’re starting to, more in our personal lives, and its slowly making its way into our professional lives, not even thinking about it anymore, where it’s being stored, we just know your information. It’s there and available and you can get it on any device, at any time. We’re finally starting to see a good amount of institutional financial services firms get there. There are still concerns about regulations and security, we addressed those inner pieces of research we did maybe about a year or two ago, and most of those concerns really just aren’t that valid anymore. I think we’re getting there; I think we’re finally getting over this big hump where the opportunity is far out, way, way, what some participants view as the risks and it will become just how some people do business going forward.
Jockle: The last question for you Kevin, while we still have you, are the Cubs going to win again?
McPartland: Just like leaving it to the economists, I’ll leave that to the sports experts. But, hey, I’m a New Yorker so it’s always the Yankees.
Jockle: That’s a good answer, and that’s why we keep having you back. Alright, Kevin, thank you so much and the report available on Greenwich.com Top Market Structure Trends to Watch in 2017. Kevin, of course, thank you so much for your insights. And of course we always want to talk about the topics you want to talk about, please follow us on LinkedIn or on Twitter @nxanalytics. I’m your host Jim Jockle, thanks so much.