Outlook 2017: Bhawana Khurana, The Smart Cube
Bhawana Khurana is vice president of financial services client solutions at The Smart Cube.
What do you view as the most important lesson of 2016?
This past year was a year full of surprises. Correctly predicting the outcome of Brexit and the US presidential election was no guarantee of achieving financial market success in a year which was marked by whipsawing asset prices and extremes in investor sentiment.
As we close out the year, the events of 2016 provide a template for investors who face another busy political year in 2017, particularly in Europe, as France, Germany, and the Netherlands go to the polls.
Key lessons 2016 has taught us that geopolitical risk is real, and risk management is critical. Brexit and the election of Donald Trump as President of the United States are the textbook definition of geopolitical risk and why it cannot be ignored when considering investments. Although the impact of such global events is always difficult to predict and avoid, broad diversification across asset classes can certainly help.
When faced with market volatility, patience is key – 2016 has become yet another year that demonstrates that having a long-term approach to investment is always better. And at times when economic indicators turn dark, for example in the first half of 2016 when the next European banking crisis seemed to be upon us and the Chinese economy was almost universally believed to be imploding, these are precisely the wrong moments to sell everything. For that matter, the fund managers who did manage to beat the market in 2016 (YTD) were those who stuck with their stock picks through the periods of sharp volatility.
In the competition between passive and active asset management, smart beta is a winning solution – 2016 has been the year of a true take-off of smart beta in the ETF space. Smart beta strategies are active strategies (requiring periodic rebalancing) with some of the characteristics of passive strategies (rule-based, transparent approaches to portfolio building). The brutal spikes in volatility caused by events such as Brexit have driven investors’ interest in smart beta, which offer minimum volatility/variance.
What changes do you expect to see in regards to MiFID II in 2017?
The research unbundling requirements of MiFID II will disrupt traditional models of how research is funded, assessed and paid for in 2017. The changes being ushered in by MiFID II are designed to curb the use of research as an ‘inducement’ that brokers offer to investment managers in exchange for execution and flow.
Research unbundling could significantly affect the profit margins of buy-side firms as research moves from an unpriced to a priced environment. Sell-side firms will be affected too, with speculation that commission spend will decrease if sell-side firms price research.
In this new European research regime, the challenge for both buy-side and sell-side firms will be to develop cost-effective research strategies. Failure to do so could result in firms being priced out of the market.
Financial technology is set to play a significant role in research going forward; the ability to track and ultimately put a value on every piece of research will help firms to comply with unbundling requirements and build cost effective research departments. Although some firms may do it alone, others will look to collaborate with specialists that can help them to build the necessary digital platforms required, and to extend and strengthen existing research teams by providing the best value for money analysis.
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.