Samuel Henderson, EMEA equities head trader, Invesco
I predict we will see increased flows into international equities and active management coming back into vogue amidst a rise in earnings and macro volatility. As money moves back into international equities the demand and competition for liquidity will increase and so, how we access it will become more of a focus. Traders will need different tools as well as the counterparties to navigate.
We have seen new entrants into the block space in 2023, and I see further appetite in 2024 as buy-side traders seek safer and larger block liquidity – I foresee “superblock” venues and an increase in capital provision. Lastly, as active management becomes more relevant again, so too the impact a buy-side trader can have on the investment process; gone are the days of execution only dealers.
Daniel Morris, chief market strategist, BNP Paribas Asset Management
Volatility has become the new normal, bringing opportunities for active managers, and 2024 is likely to see a continuation of the profound and often unanticipated change in the global economy and financial markets that typified 2023. Central banks are continuing to tighten monetary policy to tame inflation, although the global economy has taken higher rates in its stride and the much-anticipated global recession has yet to materialise, albeit that prices are rising at a significantly less rapid pace than a year earlier. Markets will continue to focus on the outlook for growth and inflation, and the implications for the valuations of those assets that are the most cyclical and/or interest rate sensitive.
Although tighter financial conditions may negatively impact economic growth and corporate profitability in the shorter term, markets are not losing sight of more positive longer-term influences. The widespread application of artificial intelligence will drive innovation and creative destruction in many areas, including healthcare, education, logistics and mobility, as well as being key to semiconductor demand in the coming years. Nonetheless, amid the optimism around the transformative impact of AI, it will be important to be mindful of risk factors such as ESG concerns, regulation and fluctuating investor sentiment.
Thomas Griffiths, head of product, Cassini
In 2024, central banks will be closely monitoring inflation trends and considering the effects of possible interest rate changes on both inflation and economic growth as inflation shows signs of subsiding in major economies. The direction of rate adjustments, whether increasing or decreasing, will be a crucial area of global attention.
In Q3-Q4 of 2023, there was an emphasis on the cost of collateral and the strategies firms use to efficiently utilise their asset portfolios for collateral purposes. This trend highlights how elevated interest rates have compelled companies to rethink their asset management strategies, including how they handle fees paid to third-party managers for collateral processes. These funding challenges have underscored the significance of cost-effective derivative trading and the need for an efficient margin and collateral management throughout the trading lifecycle, a focus expected to persist into 2024.
Regulatory emphasis on the need for centralised and transparent margin requirements is expected to continue. This will likely encompass mandatory clearing, such as the forthcoming regulation on treasury repos, stress testing of margins as recently advised by the Bank of England, and efforts to optimise margins through arrangements like cross-margining, exemplified by the FICC/CME treasury enhancements.
Mark Rogerson, EMEA head of interest rate products, CME Group
Between 2019 and 2023, the proportion of risk exchange in over-the-counter European derivatives referencing the euro short-term rate (€STR) has jumped from 6% to 32%. This has been a voluntary adoption, not driven by a regulatory mandate. I think there are multiple drivers of this; importantly the level of familiarity with overnight rates has increased across the globe following transitions away from Libor, and separately many customers want to have the same type of benchmark rate on all their rates products meaning ESTR vs SOFR is now almost universally the first choice for cross currency and forward foreign exchange.
Central bank activity has meant that the granularity provided by overnight rate products is more desirable, while the demand for a rate that is grounded in observable transactions has made ESTR increasingly the choice of participants. For all these reasons, I expect the voluntary adoption of ESTR based products to continue into 2024 and beyond.