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Monday, 20 November 2017

IFR Americas Review of the Year 2016

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Markets are more agnostic about elections than the public at large. Even as half (or more) of America was gnashing its teeth over the election of the country’s first non-politician president since Eisenhower, the “Trump Rally” was in full flight.

Equities powered to record highs and, spurred by Opec, a bounce in oil prices helped re-open capital markets for junk-rated energy companies that had been all but frozen out for months. Even as a sell-off in Treasuries and other sovereigns kicked in, US investment-grade issuance still powered its way to a sixth consecutive record year of volume – helped in part by solid M&A activity.

In all it was a surprising coda to a year that had already been packed with surprises – enough to wrong-foot more than a few investors. Those who got out of energy bonds earlier in the year when the writing was on the wall, for example, ended up discovering they’d misread the script entirely. Average yields on Triple C bonds were above 20% in February; they were about half that by mid-December.

And it wasn’t only investors who failed to predict the future. Pollsters missed the victories of both Donald Trump and the campaign for the UK to quit the European Union – seismic changes whose effects on markets will continue to be felt for quite some time.

Meanwhile the new regulatory landscape ushered in significant changes of its own. Money-market reforms led banks in particular to term out debt in the bond market. And much like the year itself more broadly, the disaster for commercial paper that many had expected never actually came to pass.

Not everything was wine and roses, of course. IPO activity remains depressed – it was the worst year for public listings since the financial crisis. Investors continued to take cash out of actively managed investment funds at a record pace and push it into passive funds instead, seeing little outperformance to justify the higher fees.

And for a second straight year as IFR prepares to send its awards issue to press, the Federal Reserve is on the verge of hiking rates. Like last year, the markets have already got an increase well priced in. But this time there is an even broader expanse of uncertainty ahead. The 10-year Treasury is yielding more than 2.5% for the first time since 2014. The US president-elect has promised a raft of changes, from dismantling Dodd-Frank to making corporate cash repatriation cheaper – something that could truly put a damper on corporate bond issuance – to changing America’s relations with much of the rest of the world.

Will he (be able to) do any of it? At the moment it hardly matters. With one tweet in mid-December about the cost of the F-35 stealth-fighter programme, Trump wiped some US$4bn off the value of Lockheed Martin. Now that’s what you call volatility.

So as the markets prepare for a bit of a rollercoaster ride ahead, clients will especially value those banks that stay steadfast and nimble and focused on anticipating the challenges – and the opportunities – ahead.

The award winners honoured here found paths to success, no matter what the prevailing conditions at the time. Please join us in congratulating all the winners of the 2016 IFR Awards.

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