After a weak 2019 for trading revenues, global investment banks may see an even weaker 2020 as uncertainty about the spread and duration of the new coronavirus rattles capital markets.
Concerns about COVID-19 could curb capital market issuances, and exacerbate an already predicted slowdown, according to market experts.
Global investment banks will feel the impact, especially European institutions, which have already been struggling to boost trading returns. An unusually weak first quarter of 2019 had a lasting effect on i-bank revenues, which ended the year at their lowest level since 2008.
The first quarter of 2020 may be similarly weak if recent selloffs erase the gains of an otherwise robust initial part of the period.
Despite a strong start to the first quarter, virus-induced panic caused, in late February and early March, some of the worst market selloffs seen since the global financial crisis, with equities and commodities prices dropping to new lows. March 9 saw a market meltdown as fears over the rising number of infected people in Europe and the U.S. were coupled with worries over global oil supply after talks between Russia and Saudi Arabia broke down — the S&P 500 and the Stoxx Europe 600 both dropped by more than 7%.
Price falls and volatility are likely to continue in the short term, which will require portfolio adjustments at many institutional investors, "especially the sale of investments such as equities or corporate bonds," investment firm DWS said in a March 10 market analysis.
This comes on the back of recent lackluster performance at global investment banks. In a sample of banks compiled by S&P Global Market Intelligence, most reported a year-over-year drop in equities revenues in 2019; the exceptions were Credit Suisse Group AG and Natixis.
The increased market volatility is likely to reduce issuance activity, which will hurt capital market revenues at globally trading banks in the "normally seasonally strong first quarter first quarter [of the year]," Fitch Ratings said in a March 3 note.
While volatility can sometimes drive revenues, recent market whipsawing and spikes in trading volumes indicate a high level of uncertainty over the intensity, geographic reach and duration of the coronavirus, the rating agency said. The current market situation is similar to the selloffs in the fourth quarter of 2018 and in the first quarter of 2016 when transaction volumes plummeted after investors reshuffled their portfolios, it said.
While investment strategists remain cautiously optimistic about capital market activity later in the year, many of their best-case scenarios are contingent on the containment of the virus in the near future.
"In our view, a sustained recovery will only set in either after a major, coordinated fiscal or monetary international rescue package. Or simply if, over time, a slowdown in the number of new infections in Europe and the U.S. becomes clearly apparent," DWS said.
Reasons for concern would be a new flare-up of the outbreak in regions where it is already considered to be contained, especially Asia; indications that the U.S. is unprepared for or incapable of stopping a widespread epidemic; or knock-on effects of the virus triggering a crisis in countries or sectors with preexisting weaknesses, DWS said.
"If the spread of the deadly virus is not contained soon, the impact of this outbreak is likely to be far-reaching, and, based on the time taken to contain it, will keep building pressure on companies' revenue and earnings in the year ahead," equity analysts at Kalkine said in a written comment.
Although it is still unclear how long the epidemic will last, investment strategists expect containment sooner rather than later in the year, and still hope for a quick rebound of the economy.
"Once the death rate stabilizes, things will return to business as usual quite quickly," Octavio Marenzi, CEO of investment firm Opimas told S&P Global Market Intelligence.
To really thwart global growth, the outbreak will have to continue to increase rapidly through the second quarter of 2020, which is still very unlikely to happen, Marenzi said.
DWS also expects the global economy to "more or less" return to the growth trajectory expected before the coronavirus outbreak, in the second half of 2020. Even though the previously projected slowdown will be more pronounced because of the virus impact, if this does not trigger lasting liquidity and solvency problems, a recession, particularly in the U.S., should be avoided this year and next, DWS said.
Click here to download a table in Excel showing historical FICC and equities income.