Warnings of worse to come as activity levels slump

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The heightened uncertainty from the UK referendum and forthcoming US vote has dealt another blow to confidence already rattled this year by the Chinese stock market rout, commodity price volatility and macroeconomic concerns in Europe. As activity in many business lines slumps, analysts are searching further and further back for the last year things were this bad – and few in the City harbour any hope of respite.

Octavio Marenzi, co-founder of research firm Opimas, who has worked at Oliver Wyman and UBS, said: “The kind of trading volumes and activity we see is what banks are going to have to live with for the foreseeable future. And in fact it could get worse.”

Marenzi described the trading outlook as “pretty bleak” given the likelihood of interest rates remaining low.

European investment banking revenue in the year to date is at its lowest for the period since 2002.

The number of announced mergers and acquisitions by European buyers started the second half at an 11-year low, according to Dealogic. It is now at a 12-year low after the worst July since 1997. European bond issuances remain at their lowest number since 2001 following their ropiest July in two decades, while regional equity capital market deals stand at their lowest figure since 2013 and have almost halved in value year on year.

Loans too are languishing – the number of signed deals in Europe has gone from a four-year low at the halfway point of 2016 to a seven-year low after the quietest July since Dealogic began tracking transactions in 1995. Crispin Osborne, co-head of banking for Europe, the Middle East and Africa at Barclays, said: “Dealflow is driven significantly by general levels of confidence and clearly this year has been impacted by a number of factors which have hampered this, most notably the UK’s vote on EU membership.”

Private equity entries and exits are at the lowest number since 2009 after suffering their sharpest year-on-year fall since then. Markus Golser, a partner at buyout firm Graphite Capital, said: “I don’t believe deal numbers will pick up, they’ll continue to be lacklustre. It’s not just Brexit though, there’s economic uncertainty on a global scale and there’s political uncertainty apart from Brexit.”

Bankers point to greater certainty about how the post-Brexit world will look as a vital factor in getting regional dealflow back on track.

Marisa Drew, Credit Suisse’s co-head of Emea investment banking and capital markets, said that although answers to how the UK will interact with the rest of Europe “are unlikely to come quickly”, even gradual clarity “will allow our clients to adjust their business and financial strategies accordingly and it will bring more stability and confidence to the markets”.

Despite post-Brexit volatility, trading volumes in Europe are down 7% year on year. Herbie Skeete, a managing director at exchange consultancy Mondo Visione, said: “Low volumes is nothing new. It’s happened before, but there are more things to be uncertain about now than in previous years.”

Marenzi said the reduced activity might lead to cuts: “What are banks going to do about this? Headcount reductions, closing down certain trading desks, getting out of lines of business altogether. I think that’s going to be the agenda for the next couple of years for financial institutions.”

Patrick Young, an exchange consultant and director at DV Advisors, agreed that many investors had been “sitting on the sidelines awaiting direction”. He added that the “sheer dysfunction” in Europe and the “ongoing likelihood that the EU is now closer to death than ever” would be “a worry in the backs of the minds of most astute investors”.

Amid the unpredictable conditions, investors are also struggling. As a result of poor performance – and a risk-off mentality – investors pulled a net €19 billion out of the top 20 equity categories from funds domiciled in Europe in the first six months of the year, Morningstar’s data showed. Just three sub-sets out of 20 saw net inflows. UK domiciled funds saw net outflows of more than £4 billion. No net new money flowed into any UK equity funds.

The global uncertainty is fuelling demand for gold, which reached a record high in the first half, according to the World Gold Council.

Nathan Flanders, managing director at Fitch, said: “The immediate aftermath of the Brexit vote exacerbated asset price volatility for many asset classes, and while most of the largest US traditional investment managers are only moderately exposed to Europe, Middle East and Africa from an assets under management perspective, uncertainty over EU passporting may lead to burdensome expenses from staff and office relocations.”

And the worst could yet be to come. Russell Jones, a partner at Llewellyn Consulting, pointed to the potential for several “new shocks” ahead: “The global economy is still in a fragile state and just not capable of growing fast. Europe still has many fault-lines. Global trade volumes remain depressed. China and Asia are overly dependent on debt for growth.”

The City is likely to remain “under duress”, Jones added, and “downsizing will accelerate”.

Investors who ventured into more diverse assets will, however, have benefited in the past six months.

A report by Bank of America Merrill Lynch on August 11 said that risk assets had recorded a “ferocious rally” since February, with commodities, high yield bonds and emerging market bonds having jumped by 18%, 17% and 12% respectively.

Additional reporting by Anna Irrera, Mike Foster, William Louch, Andrew Pearce and Elizabeth Pfeuti

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