Financial markets Q2 2019 outlook

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US financial market volatility rose in the second quarter as uncertainty increased.

The markets continued to be volatile in the second quarter with continued uncertainty over the strength of the global economy, a downward shift in expected growth rates, and the risks of open trade negotiations.

Globally, central bankers have paused or lowered rates in the quarter. The ECB noted that it did not expect rate increases until 2020 or later.

The Federal Reserve and central bankers continue to monitor inflation and employment. There has been minimal increases in US inflation despite low unemployment levels. Low energy prices have had a beneficial impact year to date, however, any adverse impact to global oil supply could be disruptive in the near term.

In late June, the spread between the 1 and 10 year UST rates remained narrow. At its June meeting, the Federal Reserve left the benchmark fed funds rate target steady at 2.25% and 2.5%. It noted that the labor market “remains strong” and the economy continues to expand at a “moderate” rate. At this time, the Fed does not expect to reduce borrowing costs in 2019. Fed Chairman Jerome Powell noted that it would “closely monitor” the economy in light of waning inflation and growing “uncertainties.”

There has been a slowdown in growth expectations for China, and Europe continues to work through a multitude of issues influencing growth and economic recovery. European leaders and central banks continue to assess the next steps to support their economies.

The market continues to respond to revised expectations for growth and remains sensitive to the risks from adverse news and developments. Investors continue to seek out opportunities for returns in a low interest rate environment that is likely to continue for at least the next 12 months. These pressures have continued to suppress borrowing rates and have provided an opportunity for borrowers to lock in costs at historically low levels. At the same time, the equity markets have rebounded since the beginning of the year, albeit with significant volatility and market swings over the last six months. 

Any changes in the trends or new events are likely to drive volatility levels until the markets assess the longer term effects.

Real estate

While fundamentals remain healthy, the forecasts for property types indicate a contraction and, potentially, a recession phase during the next three years.

Real estate cycles vary across markets and geographic areas, as well as within markets and geographic locations based on property type: office, retail, industrial, and multifamily.

This means that national cycles differ for the same property type across individual markets. An in-depth analysis of historical and forecasted stock data allows us to gauge each sector’s likely shifts over the near term. 


Office

Leasing remains positive in many office metros, but the market has begun to slow. The forecast for 2019 is for most office metros to move from expansion to contraction.

This trend is projected to continue over the next three years. Our outlook has 2021 as the year when more cities slip into recession, including New York, San Jose, Seattle, and Washington, DC.

Retail

The US is expected to show improvement in 2019 as the number of metros in the recession phase is projected to fall from 51 to 35 with six metros projected to move into expansion.

Cities forecasted to be experiencing expansion by the close of 2019 include Columbus, Dallas, Greensboro, Houston, Memphis, and San Antonio.

Industrial

As it moves through 2019 and 2020, the US industrial sector is projected to slide deeper into the contraction phase of the cycle. By the end of 2020, 52 of the 55 industrial metros analyzed will likely sit in contraction, up from 18 at the end of 2018. This shift is largely due to slower demand and an increase in new supply that typically follows strong sector fundamentals.

Multifamily

The US multifamily sector has outperformed the industry this cycle, and that trend is expected to continue through 2019.

In general, tenant demand has risen to meet higher levels of new supply, but a number of cities may be short on demand over the next few years. Demand is expected to slow in 73 metros by the end of 2020. Overall, a slowdown in leasing demand will be the primary issue for this sector over the forecast period.

Sources: PwC Real Estate Investor Survey® 2Q 2019; Preqin Real Estate Online

Digital transformation

Standardized data models play a crucial role in the success of a company’s digital transformation efforts.

A wide range of industries and business segments are making significant investments in technology modernization and digital transformations. Successful efforts have been driven by standard data models.

Company initiatives vary in size of investment and complexity. The following examples illustrate technology use cases we have observed in the market.


Asset management: Data standardization

The extent of data standardization is a key driving factor in the success of digital optimization efforts. A data model must facilitate scalable, controlled, and efficient processes that are integrated across a company’s platforms and promote accountability.

Large global asset managers are redesigning processes to integrate proprietary data warehouses with workflow tools and standard valuation models to facilitate efficient and controlled flows of data and valuations across their firms.

Banking and real estate: Predictive analytics

Banking and real estate entities continue to navigate regulatory and market shifts including the current expected credit loss (CECL) standard and the end of LIBOR as a benchmark rate. There is increased demand for enhanced insights and predictive analytics to respond to these changes.

Market participants are demanding analytical tools to leverage massive amounts of historical market and pricing data to assess balance sheet impacts and inform business decision-making.

Credit, lending and securitization: RPA, OCR, and AI

There is increased demand for efficiencies related to the extraction, transformation, and analysis of the data found within key documents for direct lending, securitized products, and esoteric investment vehicles.

Businesses are leveraging customized tools that utilize a combination of robotic process automation (RPA), optical character recognition (OCR), and artificial intelligence (AI) to reduce the processing time and risks involved with document reviews.

Achieving digital transformation goals

Market participants with successful digital transformations by redesigning the end-to-end operating model, realizing sub-process efficiencies, performing predictive analytics, or deriving meaningful insights from reporting dashboards.

Contact us

Peter Pollini

Financial Markets Practice Leader, PwC US

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