Panel, Conference Presentation
2014 London Summit - Capital Markets Outlook
Milken InstituteMichael Milken, Madelyn Antoncic, Richard Byrne, John Calamos Sr., Elroy Dimson, Thomas Finke, Mike, Rich Byrne
- Conference operations plan to fill the current Salesforce venue, prompting a search for a new location next year that offers views similar to the existing space.
- Banks are expected to lose dominance in direct and middle market lending as regulation forces them out of these sectors, creating a void filled by alternative capital providers such as private lenders, GEs, BDCs, and subordinated lenders.
- The market capitalization of the BDC sector, estimated at approximately $40 billion, is projected to approach the volume of annual middle-market loans previously underwritten by banks.
- Bank ownership of loans in the United States is anticipated to fall below 20%, whereas banks are expected to retain dominance in most other countries, including Europe.
- The World Bank continues to manage $51 billion in debt issuance and $145 billion in assets, including $22 billion for pensions, while working with 55 central banks and sovereign wealth funds on governance and strategic asset allocation.
- Future World Bank strategies include hedging foreign exchange and interest rate risks, developing pandemic and longevity risk products, and structuring deals with triggers based on WHO epidemic definitions in three African countries.
- Market participants currently operate in a deflationary environment causing near-term volatility, with inflation identified as a critical issue and growth not yet recovered.
- Capital markets are increasingly replacing banks as the primary source of funding, evidenced by expansion in the convertible bond market across Europe and the U.S.
- Investment banks face challenges in creating securities functional in both deflationary and inflationary conditions, while private equity firms may require over six times leverage to compete with banks capped at six times.
- Non-banks are expected to fill the gap left by banks more frequently, potentially increasing market volatility if assets are forced into the market by institutional selling.
- Asset manager opportunities are shifting toward smaller and medium-sized enterprises with less than $50 million EBITDA, while institutional adoption of non-bank roles is projected to grow faster in Europe than in the U.S.
- European bank asset values are expected to appreciate to 95–100 cents on the dollar, moving away from previous sales of 80–85 cents, as banks off-balance-sheet assets only when they reach par.
- China faces pressure to serve its 88% of companies and 85–90% of employees comprising the SME sector, while emerging markets in Latin America, the Middle East, and Africa require developed capital markets to support growth.
- Real short-term interest rates are negative, deterring investment unless deflation is expected, with rate increases not anticipated until late next year, a move that would likely surprise the market.
- Convertible bonds are expected to outperform the general bond market nine out of ten times during interest rate increases, while private equity liquidity is rising in anticipation of valuation changes.
- Private equity pre-tax multiples and yields are projected to remain substantially higher than the high-yield market, with real long-term rewards dependent on exposure to risk as real interest rates hover near zero.
- Historical data suggests developed markets generally outperform emerging ones over long periods starting in 1900, though performance varies based on the specific time frame analyzed.
- Geographic diversification is advised against the risk of technological advancements and future shifts, such as mobile penetration in Africa, which may alter historical economic patterns.
- Countries experiencing trauma and trading at high dividend yields are expected to deliver superior total returns over the long term, while the U.S. share of global markets is projected to decline from 59% in 1950 to 36% in 2014.
- The global economic center is shifting away from the U.S., Japan, and Europe, with the majority of the middle class expected to reside in Asia long-term and Africa surpassing the U.S. population within the middle class in five to ten years.
- Capital markets are expected to facilitate growth for new ideas and entrepreneurs, with asset management evolving to identify opportunities in direct lending and emerging Asian markets.