BBH Investor Services published its outlook for securities lending in the US, APAC, and European markets for H2 2024.
Robert Lees, managing director for Securities Lending, writes that a favored trading phrase when he started on the desk was ‘they are not house numbers, they do move.’ This phrase was used when trade term renegotiations became protracted due to a counterparty’s unwillingness to engage in such a discussion. Eventually, the phrase would be said a few more times upon which reality would finally dawn on them that compromise was needed.
In some ways, much of the first half of the year has felt like this protracted negotiation – a tussle of sorts between the markets and policymakers. With stubbornly high inflation and a buoyant job market the conviction to pivot on interest rates is taking longer than expected, forcing many commentators to push out their forecasts as they react to the prevailing sentiment.
“As we reach the halfway point the competing pressures of growth versus inflation is building. Yet most policymakers seem to be staying exactly where they are, at least for now,” Lees writes.
The first half of the year has reflected wider markets trends with investors’ sentiment tilted towards a ‘wait and see’ approach. After last year’s banner returns for US equities, demand in the first half has softened and spreads have compressed, with deal flow remaining relatively muted. European equities demand remains subdued, driven by limited deal activity and a weaker environment, though deal flow began to pick up towards the end of the first half. Asia-Pacific has generally stayed range-bound, buoyed by healthy demand in both Japan and Taiwan but crimped by the short sale ban in South Korea.
“We expect a slight pickup in the second half in global demand as central banks gain conviction that inflation is under control and the prospect to shift to a more accommodative stance becomes more visible. Until then we expect that securities lending revenues will continue to be highly targeted to a concentrated set of opportunities and the threshold for short exposure becomes high in the face of a dynamic and potentially reactive market,” Lees wrote.