Last year, was a turbulent year for global markets and from a securities lending perspective, it offered numerous opportunities to generate returns in what became a banner year for many lending programs. This year, we expect many of the core themes of last year will continue leading to another broadly positive year for securities lending returns.
BBH’s Head of Securities Lending Trading and Head of Securities Lending EMEA, Rob Lees, contributed to the recent issue of Securities Lending Times. An excerpt of his article on the 2019 outlook for Securities Lending globally is below, for the full article please click here.
In the Americas, demand has been driven by many factors. The foremost is the worsening consumer sector, as online giants continue to change the way consumers purchase products. As we move throughout this year, we expect a much different economic landscape in the US than in 2018. The predicted speed of rate hikes has decreased, oil prices have dropped precipitously, and markets have been disrupted. The hedge fund market saw minimal outflows and has seen many new high-profile start-ups in 2018. Demand is expected to be resilient in H1 2019.
In Asia, lending demand has been driven by a combination of themes, not least by the escalation of the US/China trade war which led to an increase in volatility across the region. In Hong Kong, demand has been buoyed by a strong pipeline of initial public offerings and broad capital raising activity. In Japan, an increase in corporate scandals and merger and acquisition deals has provided additional impetus for lending demand. Lastly, in South Korea, we have witnessed robust demand in the biotech and pharmaceutical sector.
In Europe, political uncertainty and a weak consumer environment have proved to be key drivers for lending demand. We expect Brexit to continue to dominate headlines in the first half of the year. Demand for retail providers, particularly in the UK, has been strong as several high street names announce store closures, restructuring plans and poor sales because of rising costs and poor seasonal revenue. In Italy, banks continue to face headwinds as the economy continues to stumble. Overall, lending demand has increased for companies within the construction sector as output has fallen, and contract uncertainty has grown.
In conclusion, we expect lending demand to be steady in H1 2019, albeit masked with extra cautiousness. The market volatility in Q4 2018 has led to a period of de-risking and hedge fund performance in the second half of 2018 came in below expectations. Additionally, several macro headwinds could negatively impact borrowing demand, such as a rapid escalation of the US/China trade war, a sharp economic slowdown in China and an increase in political tensions across Europe.
View the full issue in which this article appeared here.