Future of Capital Markets - Potential Scenarios and Outlook

Back in 2015, many of us will have been asked the question “where do you see yourself in five years’ time?” - none will have answered correctly. A large proportion of the global population has never lived in more interesting times or have had to react and adjust to a new way of living at great speed. One would be very brave to say with any confidence, what the coming years will bring.

We are living through a crushing example of the fallibility of prediction, nonetheless, capital markets institutions must choose courses of action and commitments against which to execute, and these are likely to be momentous given the turbulent conditions in which we are operating. Never has it been more important for institutions, regulators and governments to consolidate and work towards a common goal.

Deloitte is thinking very hard about how the world is likely to look over the coming years, and what the key trends and factors impacting the capital markets industry (and our market within it) are. Given this, we believe that a great way to think about the way in which events may unfold is a scenario planning framework. This takes a set of possible scenarios of how the world could look, and thinks about how the forces driving our industry could play out in each scenario, thus identifying common themes and drivers which can be used to inform planning and decision making.

The scenarios that we are examining, and which have been used by other Deloitte colleagues globally to consider other industry contexts, are as follows:

• The Passing Storm – relatively successful management means that pre-pandemic norms return in many areas, although not without lasting repercussions. These disproportionately affect lower and middle income individuals and communities.
• Good Company – the role of large corporations and of the wholesale financial services industry in supporting the public response accelerates developments towards more socially engaged ‘stakeholder capitalism’. The financial services industry adopts a heightened responsibility post crisis, both economically and socially.  
• Lone Wolves – a prolonged pandemic period, with unpredictable bouts of volatility and an extended global recession spurs governments to adopt isolationist policies. This leads to insufficient global coordination.
• Sunrise in the East – a more effective response and better recovery trajectory accelerates a long term increase in the relative importance and influence of East Asian nations including China. Western recovery is based on lessons learned from the earlier recovery observed in the East.

Note that these are not predictions, but ways in which the world could be and contexts within which the impact of industry trends and forces can be considered. The set of industry forces that we have considered, some of which pre-date the current COVID-19 pandemic and some of which have arisen or gained new impetus during it, is as follows:

Operating models and technology are changing rapidly:

• Rapid technology change will accelerate, challenging institutions to navigate amidst disruption.
• Systemic stability and infrastructure modernization initiatives will accelerate to enhance future resilience.
• The future operating model will need to be refined for a rapidly deployed hybrid workforce across client service, talent management, delivery models, controls and resilience, and technology.

The way in which the capital markets support society is evolving:

• Deepening Capital Markets will play a more prominent role in funding and sustaining the real economy.
• New forms of financial supervision and new responsibilities for financial institutions will emerge.
• There will be an increased expectation for governments and financial institutions to work together and for banks to play a societal role beyond shareholder return.

Business models and performance expectations must adapt to new realities:

• The impact on institutions will not be uniform and will depend on their geographical, sector and product mix.
• The industry must learn to live with the increased probability of ‘long tail’ events which have the ability to create periods of high market turbulence.
• Funding and investment horizons for infrastructure investments will be challenged, driving use of imaginative structures to fund and deliver change.

Despite positive results in the near term, profitability will remain a key constraint leading to capital buffer erosion.

From Friday, we will be blogging each week about how each of these sets of forces will play out in the scenarios that we have identified, and the full output of our scenario planning exercise will be launched shortly. If you would like to talk to us about any of these themes in the meantime, please contact:

Operating models and technology: James Dallas, Suresh Kanwar, Orlagh Tuite.

Capital markets and society: David Strachan.

Business models and performance: Vishal Vedi, Zeshan Choudhry.