Smithfield Edelman Investment Outlook 2016

INVESTMENT

OUTLOOK

2016

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Contents Foreword – Lord Myners

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Fixed Income – Goldman Sachs Asset Management

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UK Equities – Old Mutual Global Investors

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US Equities – SkyBridge Capital

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Emerging Markets Equities – Charlemagne Capital

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Global equities – Premier Asset Management

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Restructuring – Rothschild

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EMEA Financial Regulation – EY

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US Financial Regulation – Center for Capital Markets Competitiveness

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Investment Profession – CFA Society of the UK

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Foreword

Lord Myners CBE, Chairman of Edelman UK This collection of views from some of the most high profile names across the investment profession is the third “Investment Outlook” compiled

by Smithfield. This year - following Smithfield’s acquisition by Edelman in September - there is a more international feel to the book than previously, as Smithfield’s clients in the UK are joined by SkyBridge Capital and The Center for Capital Markets Competitiveness, both based in the USA. For contributors on both sides of the Atlantic, however, a single theme appears uppermost in their thoughts 4

when looking forward to 2016 - namely how the search for growth will shape companies’, markets’ and investors’ behaviour. Several pieces cite the risks of falling commodity prices and the Chinese slowdown as the major headwinds for growth. The consensus seemingly is that we’ll see a year of modest growth in major economies (low 2% area in the US and UK and 1.4% in the Eurozone, according to Andrew Wilson at Goldman Sachs Asset Management) but that this grind higher won’t necessarily translate into business growth. In his article, Richard Buxton of Old Mutual Global Investors neatly captures how this preoccupation with locating and exploiting growth is dictating the actions of many fund managers: “Investors are so scared they will pay higher and higher valuations for ‘growth’... Value stocks, recovery stocks, commodity stocks, mega-cap stocks – if it doesn’t have positive earnings momentum, investors just do not want to know.”

The key challenge posed by this growth-obsessed period is how the value given to growth stocks can be sustained. If you are paying a high premium for growth opportunities in a low-growth environment, this is an unforgiving climate for stocks that don’t deliver. Where returns are not sufficient to meet the demands of clients, fund managers will experience increasing pressure to explain their strategies to asset owners and, of course, the media.

This, in turn, will alter the dynamic of their communication with the companies

in which they invest; we will see greater engagement between investors and management teams and, I believe, greater (and healthy!) pressure from the former on the latter to perform and to maintain high standards of corporate governance. 2016, in my view, could be the year when ‘activism’ of this type becomes more mainstream in the UK, as it already is in the US. It is interesting - and encouraging - to note that the investor focus on growth is mirrored in the regulatory world by a move from the post-crisis “correctional” measures to a more growth-focused form of regulation.

Certainly this is the view of Andy Baldwin of EY who highlights that the markets-based approach to European corporate and infrastructure finance, which is the foundation of the proposed Capital Markets Union, is “reflective of the EU’s desire to kick-start growth across the European Union”. It does seem that the regulatory architecture around financial services companies is now largely in place. 2016 should be a year of greater regulatory stability. I think that we should expect to see the transition from a “design phase” for regulation to an “enforcement phase”, with regulators keen to prove their powers to weed out miscreants and clamp down on malpractice.

The combination of growth being ‘the new black’ and a more settled regulatory landscape, could mean that 2016 is the year for banks to

come back into fashion as assets.

The anxiety that these companies will be hit yet again by a maelstrom of fines and ever-tightening regulatory strictures is beginning to abate; after a difficult few years, it may be the moment for bank share prices to mount a sustained recovery.

Naturally, banks would benefit from a prolonged upturn in M&A and the prospects for this appear relatively rosy as we enter next year with a fairly good economic outlook and continuing low interest rates. If, as contributors to this book suggest, we will see a divergence in Central Banking Policy between the US, Europe and UK, with interest rates rising in 2016 for the former but possibly not elsewhere, we might expect the tailwinds for a new M&A cycle to be even stronger in the UK and Europe than on the other side of the pond.

Whilst a highly competitive hunt for growth presages an investment climate for 2016 beset with challenges, the fact that so many leading investment voices in this compendium are talking about growth at all indicates a certain cautious optimism that it can be found. To that end, despite the clear dangers posed

by China and a febrile oil price, we appear to have reached a tipping point where the silver lining is actually larger than the cloud. I very much hope you find the contents of this book interesting, insightful and, above all, thought-provoking.

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Fixed Income loads in the US corporate sector and emerging markets create idiosyncratic risks but we don’t view them as a global growth risk for 2016. Our view is that we’ll see US and UK growth in the low 2% area and Eurozone growth staying at around 1.4% during 2016.

Against, this backdrop, however, a key theme is the potential for central banking divergence – driven by inflation - to get disruptive. As the Fed raises rates, the global policy backdrop is likely to be less predictable than the previous regime, leading to bouts of volatility and an increase in the volatility of volatility itself.

Andrew Wilson, EMEA CEO, Goldman Sachs Asset Management The year ahead will be dominated by a trend of central bank policy divergence we have been flagging throughout 2015. While this poses risks for fixed income assets, our outlook for the asset class is broadly positive.

Our house macroeconomic outlook for 2016 is generally favourable - a continuation of low but positive global growth, led by the developed economies, and a moderate pick-up in inflation.

We believe the world’s major economies can grind out another year of modest growth in 2016. Rising debt 6

That said, the US monetary policy cycle continues to lag far behind the growth cycle. As a result, the Fed’s first hike is far less important for financial markets than the pace of the tightening cycle and the eventual stopping point.

The Fed continues to signal that both of those will be considerably more moderate than in the past. In addition, the Bank of Japan and European Central Bank remain in maximum accommodation mode, and the Bank of England appears to be in no hurry to raise rates, suggesting the global policy backdrop is likely to remain highly accommodative.

There are two main risks to this benign outlook. First, if the US economy strengthens, the gap between growth and policy cycles could challenge expectations of a gradual hiking path, which could lead to periods of volatility.

“ A KEY THEME IS THE POTENTIAL FOR CENTRAL BANKING DIVERGENCE – DRIVEN BY INFLATION – TO GET DISRUPTIVE.” Second, the potential divergence in monetary policy is uncharted territory and uncertainty over the effects could create volatility. But with central banks acutely focused on these risks it is likely that they would respond quickly to threats to stability in growth and financial markets.

I take a constructive view on several sectors within fixed income markets in the year ahead, with the cautionary observation that policy divergence and an aging credit cycle contribute to market uncertainty and the risk of aggressive corrections.

Yields and volatility are low in developed market rates, and probably unlikely to generate strong absolute returns in 2016. The Fed is expected to pursue a shallower path of rate hikes than in past tightening cycles, and European and Japanese rates markets have already priced in substantial policy easing. There is therefore more potential in relative value strategies to exploit divergence between markets and sectors.

The symptoms of late-cycle activity in corporate credit are already evident, with elevated M&A activity contributing to higher leverage. As a result, weaknesses have emerged in sectors beyond Energy, including more cyclical and/or defensive sectors such as Chemicals, Healthcare, Retail and Telecommunications. That said, as with the economic cycle, an uneven

recovery and accommodative policy are helping to extend the credit cycle.

I expect another 12 to 18 months of moderate returns in the investment grade and high yield markets, with the high yield default rate rising from 2.5% to around 5% in 2016 – consistent with the long-run average, although primarily due to increasing stress in the energy sector.

A measured pace of Fed tightening in line with continued economic expansion should allow companies to service their debt and present little threat to the credit cycle. Additionally, there is potential for oil supply and demand dynamics to balance out in 2016, which should provide support to the Energy sector. Nevertheless, as we progress further into the mature stages of the cycle it will make strategic sense to favour higher-quality names when choosing where on the high yield credit curve to invest.

2016 is likely to see something that quite seasoned market participants have never experienced – a sustained round of monetary tightening. This is of course going to grab headlines and unsettle many in the investment market, but if the central bankers behave as expected, the return to normality should be a benign process for fixed income.

Further information can be found at: https://assetmanagement.gs.com/content/ gsam/worldwide/en/gateway.html 7

UK Equities dominated by interest rate policy, even if the question now becomes ‘how high, how quickly’. The concern about the strength of the global economy is not going away any time soon.

Thanks to the impact of slower growth in China and other emerging markets, plunging commodity prices and massive retrenchment by oil & mining companies and all those touched even tangentially by their behaviour, industrial activity is weakening. Profit warnings and earnings downgrades from industrial companies worldwide abound, with manufacturing surveys pointing sharply south.

Richard Buxton, CEO and Head of UK equities, Old Mutual Global Investors In our crazy QE-distorted world, where buyers of short-dated European bonds are guaranteed to lose money if holding until redemption, we are faced daily with anomalies and distortions at odds with rational analysis and investment behaviour.

So, in the year which marks the 150th anniversary since Alice fell down the rabbit hole in Lewis Carroll’s children’s book Alice in Wonderland, let’s look at some of the ‘nonsenses’ out there.

2015 was another year overshadowed by the ‘will they, won’t they’ debate over higher US interest rates. 2016 will continue to be 8

By contrast, most service sector surveys are still pointing firmly upwards. Developed world consumers are benefiting from robust labour markets, modest income growth and lower fuel and energy costs.

A key question for 2016 is whether the industrial weakness infects broader corporate sector confidence, undermines the strength in job creation and saps consumer appetites.

If so, US rates are hardly going up at all – but then neither are corporate profits or, probably, equity markets. If, on the other hand, the industrial weakness turns out to be a one-off adjustment to a lower level of demand from China and resource companies – exacerbated as ever by an inventory cycle – then the surprise for next year could be that the resilience of the consumer and services sides of Western economies more than offsets manufacturing weakness and growth is steady if unspectacular.

“ THE BOE’S RECENT PRONOUNCEMENTS ON BANK CAPITAL REALLY DO INDICATE THAT WE HAVE REACHED A TURNING POINT... BANK SHARES CAN REALLY START TO APPEAL ONCE MORE.”

The degree to which investors are split into two camps of ‘growth’ versus ‘no growth’ is evidenced in the ever-widening gap between the valuations of those companies offering a reasonable certainty of growth and any company where there is uncertainty about the outlook.

Investors are so scared they will pay higher and higher valuations for ‘growth’ and refuse to abandon that which is working for anything which currently isn’t.

Value stocks, recovery stocks, commodity stocks, mega-cap stocks – if it doesn’t have positive earnings momentum, investors just do not want to know. Mean reversion? Relative value? There is no appetite whatsoever to ‘catch a falling knife’.

It is like the scene in Alice where the Queen instructs the royal gardeners to paint all remaining white rose trees in her garden red, simply because she despises the colour white. No one wants any white stocks in their portfolio when red is the only colour which works today.

Whilst mindful that trends can go on for longer than anyone anticipates, if growth does muddle along in 2016 rather than anything more sinister, then surely at some point investors will become a little less fearful. In a more normal economic cycle, as central banks begin to raise interest rates from recovery levels, cyclical and value shares tend to perform well as beneficiaries of economic growth.

Premiums for defensive stocks unwind.

In this long drawn-out post-crisis healing cycle, the same should be true eventually.

And whilst I fully expect any journey towards higher levels of interest rates and bond yields is going to be an equally protracted multi-year process, this will over time be helpful to financial stocks.

For years now they have faced the headwind of rock-bottom interest rates and ever-declining bond yields. Slowly, this should turn into a modest tailwind.

Meanwhile, the Bank of England’s recent pronouncements on bank capital really do indicate that we have reached a turning point. The regulator has flagged that UK banks have sufficient capital or will have through planned capital generation over the next few years. No more worries over equity capital-raising. The move towards higher dividend payments to shareholders can now begin in earnest.

Bank shares, shunned by investors for so long, can really start to appeal once more.

And again, the premiums paid for growth stocks with commensurately modest dividend yields must surely come into question if yields offered by banks are set to rise sharply.

Or is the grinning Cheshire cat in the book right when he concludes ‘we’re all mad here’…

Further information can be found at: http:// www.omglobalinvestors.com/

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US Equities Furthermore, QE artificially depressed market volatility and dispersion between securities and increased correlations between securities and asset classes.

This made security selection as an alpha source very challenging. In today’s environment, managers have a fighting chance to generate positive returns from short positions again. This has provided a more robust opportunity set for market neutral equity managers.

Troy Gayeski, Senior Portfolio Manager, SkyBridge Capital We view market neutral equity having emerged, after struggling for most of the post-crisis era on a relative basis to other more target rich strategies, as a viable investment theme for 2016.

Secondly, during the majority of the post-crisis period, there were typically numerous strategies with greater absolute return potential. Now that we are over a year past the end of QE3, markets have experienced higher volatility and dispersion and lower correlations between securities.

Empirically, the past 12 months, the strategy has arguably produced its best relative absolute and riskadjusted returns since the crisis and we don’t foresee this trend changing anytime soon.

The last time we had meaningful exposure to this strategy was 2008 for two key reasons:

The biggest risk to the strategy is disappointment in the event that equities are up north of 15% next year because this low beta strategy will not keep up. However, we think the probability of a >15% S&P 500 next year is low.

Firstly, the opportunity set was not attractive during the majority of the post-crisis period. During the multiple and lengthy QE periods, the looming question for managers was how much money they would lose on their shorts.

In terms of broader equity markets, we continue to expect volatile, more range bound equity markets with much more modest appreciation compared to the majority of the post-crisis, Fed QE periods. We expect 2016 to look

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“ DESPITE CLEAR DETERIORATION IN PROFIT MARGINS, EARNINGS GROWTH POTENTIAL, AND A GENERAL TIGHTENING OF FINANCIAL CONDITIONS, WE DO NOT BELIEVE A FULL BLOWN BEAR MARKET IS A HIGH PROBABILITY SCENARIO.� much more similar to 2015 than 2013 for instance. Despite clear deterioration in profit margins, earnings growth potential, and a general tightening of financial conditions, we do not believe a full blown bear market is a high probability scenario in the absence of hard landing in China given the relative robustness of the US economy and the consumer in particular as well as domestic European economic resilience. However, the probability of exceptional equity strength also looks rather low given those factors, average to marginally rich valuations, continued emerging market and commodity woes, and sputtering global manufacturing.

Geographically, 2016 will also more than likely be similar to 2015 with modest outperformance of European equities vs the US and developed markets vs emerging markets. The greatest risk to this outlook would be a true hard landing in China coupled with a significant devaluation of the Chinese Yuan. This would have the potential to cause a more-mild bear market in developed markets equities in comparison to the last two more substantial ones.

Further information can be found at: http://www.skybridgecapital.com/ 11

Emerging Markets Equities The acceleration in fund outflows in 2015 suggests that sentiment is poor.

There may be grounds for optimism as some of the causes of this pessimism begin to reverse.

Julian Mayo, Co-CIO Charlemagne Capital (UK) Ltd After another disappointing year for the asset class, investors seem to be split between those who are asking if the markets will turn and those who have thrown in the towel.

Start with earnings, a key driver of share prices. Sales momentum has been weak, as growth has slumped in many economies. Costs have risen: weak currencies meant that imported inputs have risen in price, capital spending budgets were not cut sufficiently and wage inflation has been a feature of most emerging countries.

This has all driven company profitability lower. For 2016, some of these factors may start to reverse. Growth rates should gradually recover, while cost pressure is likely to reduce. Companies are becoming more disciplined with their capex plans. The plunge in commodity prices over the last two years reflects both the consequences of long term build-up of supply and the slowdown in demand from emerging economies. Looking forward, the sharp commodity price falls will benefit most economies, as well as providing a boost

“ GROWTH RATES SHOULD GRADUALLY RECOVER, WHILE COST PRESSURE IS LIKELY TO REDUCE. COMPANIES ARE BECOMING MORE DISCIPLINED WITH THEIR CAPEX PLANS... LOOKING FORWARD, THE SHARP COMMODITY PRICE FALLS WILL BENEFIT MOST ECONOMIES.�

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to consumption. Furthermore, wage inflation is abating.

Another important driver this year has been the expectations of rising US interest rates and the impact on currencies. This monetary cycle has been unusually long and unusually flat.

Investors have expected rates to rise since at least May 2013 and it is unlikely that they will rise sharply. They have accordingly positioned themselves long US Dollar against emerging markets forex. Given that currencies such as the Brazilian Real, the South African Rand and the Indonesian Rupiah have fallen by 35-50% since then, there is a case for arguing that the rate hike has already been discounted by the forex markets.

The currency declines leave these economies in a better competitive shape.

China’s economy has come under increased scrutiny in the last 12 months, not least because of the small devaluation of its currency and some clumsy stock market intervention. The economic slowdown is both inevitable and desirable, as it seeks to rebalance to a model less dependent on exports and fixed investment.

Valuations for emerging markets look attractive, with an average price/ earnings ratio of 12 times. With growth expected to accelerate in 2016 in most economies, with the exception of China, the coming year should be a better one for the asset class.

Further information can be found at: https://www.charlemagnecapital.com/

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Global equities and over-capacity across manufacturing industries and commodity producers means that the outlook for inflation remains extraordinarily weak.

Jake Robbins, Senior Investment Manager, Premier Asset Management Growth in global economies during 2015 has been quite a disappointment given high hopes for an acceleration on the back of massive monetary stimulus throughout the year. The US has stuttered and stalled, but largely continued on its moderate recovery.

Meanwhile it is hard to ascertain much success from the quantitative easing programmes undertaken by the Eurozone and Japan. One is experiencing anaemic and slowing growth and the other is currently experiencing their 5th recession in 7 years. Global trade volumes are weak 14

Against this backdrop, 2016 will likely begin with US monetary policy tightening whilst most other parts of the world embark on yet another round of easing. Full employment in the US will prompt the Fed to slowly raise rates over the year for the first time in a decade. Hard pressed financials that have struggled to generate acceptable returns in a zero interest rate environment will breathe a huge sigh of relief. Higher interest rates and growing demand for loans from firms and individuals should result in better earnings momentum. Sector valuations in both the banking and life insurance remain attractive and with a clearer path to higher returns, those companies trading below or around book value such as AIG and Metlife, or Bank of America and Fifth Third Bancorp should experience a rerating.

Elsewhere, companies and sectors that have displayed an ability to grow and flourish despite the difficult economic environment should continue to be rewarded. Technology leads the way in growth terms, and the shift to wireless devices will continue regardless of the wider economy. Those businesses that are tapped into this secular trend should continue to see strong sales and earnings growth. Concerns over

“ TECHNOLOGY LEADS THE WAY IN GROWTH TERMS, AND THE SHIFT TO WIRELESS DEVICES WILL CONTINUE REGARDLESS OF THE WIDER ECONOMY. THOSE BUSINESSES THAT ARE TAPPED INTO THIS SECULAR TREND SHOULD CONTINUE TO SEE STRONG SALES AND EARNINGS GROWTH.� growth have proved unfounded but has resulted in a de-rating this year, a trend likely to reverse in 2016.

Healthcare remains a sector with very attractive long term growth dynamics as the population ages and becomes heavier. However, 2016 may be a more difficult year due to aggressive drug pricing becoming a major point of focus during the US presidential race. Whilst unlikely to result in any actual sanctions against the industry, constant negative headlines may continue to weigh on valuations over the year.

on high quality, attractively valued companies that have displayed an ability to grow regardless of the wider economic environment should continue to perform well.

Further information can be found at: https://www.premierfunds.co.uk/global

Like 2015, there are high hopes that monetary stimulus will lead to a pick-up in growth in Europe and Asia, resulting in better earnings prospects, particularly in the industrials and energy sectors. However, economic reports and company commentary within these sectors continue to paint a fairly grim outlook well into 2016. Whilst the promise of a cyclical pick-up can be alluring, until there is some tangible evidence that this is occurring these remain sectors to avoid once again.

The same could be said for emerging markets, particularly as they remain sensitive to higher US interest rates.

Overall the outlook for markets is more difficult, as weak growth and rising US interest rates will probably be balanced by continued monetary easing elsewhere. A strategy of focussing 15

Restructuring This worsening picture globally has already led to an uptick in restructuring business for us. After a quiet first half this year, since September we have been busy on issues linked to companies with exposure to oil and gas, commodity prices, or exposed to de-stocking of supply chains into China.

Andrew Merrett, Head of Restructuring, Europe, Rothschild 2016 is likely to be a much bigger year for restructuring, as the demise of QE – at least outside the Eurozone – and the prospect of rising rates collide with worsening macroeconomic conditions and indications that credit markets are approaching another peak.

The macro picture is inescapable: China is slowing down, Russia is under sanctions following its annex of Crimea, and growth in Brazil has reversed. Exports of physical goods from the US are down, and indices of dry cargo shipping prices – the cost of renting a container – show a steep decline, suggesting slowing international trade.

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We are not the only market participant to note a turn in the restructuring market: there were 60 credit defaults worldwide in 2014, but S&P expect there to have been 109 by year-end.

To put that into context, there were 268 in 2009, at the height of the crisis. In addition, this comes after a prolonged period of below average default rates, suggesting that this year could be the start of an uptick in defaults towards the next peak in the default cycle.

Turning to the capital markets, credit markets have been hot by any measure during 2014 and 2015. There is no set formula for predicting a turn in the sector, but many indications suggest that one might be imminent.

In November, we had the first hung syndication since the crisis. The financing, which involved most of the major banks, is now being re-cut to enable distribution but the message is clear: a hung syndication is an obvious sign of indigestion in the market.

Capital is jittery – it takes very little negative news to see prices fluctuate, a sure sign of investors

“ CAPITAL IS JITTERY – IT TAKES VERY LITTLE NEGATIVE NEWS TO SEE PRICES FLUCTUATE, A SURE SIGN OF INVESTORS WANTING TO BE FIRST OUT FOR FEAR OF BEING CAUGHT IN THE STAMPEDE.” wanting to be first out for fear of being caught in the stampede.

Liquidity is shrinking even from dependable sources: the decline in oil prices has led the Gulf Sovereign Wealth Funds to take assets back home, with €70 billion being pulled from international markets by the Saudis alone.

Asset managers are feeling the pinch amid this general return to riskaversion: two fund managers have blocked redemptions from high-yield funds in December .

The big question of course is, what will the trigger be? As with previous crises, it’s impossible to predict that crucial single event, but a good guess is that it will come from the shadow banking sector. As banks’ balance sheets have

shrunk, functions previously performed by the highly regulated banking sector have moved over to institutions without that heavy oversight.

In theory private financial institutions can fail, subject to how systemically important participants in the shadow banking sector really are. When Enron collapsed, it took some businesses who’d hedged their energy market exposure with the firm down with it.

These are the headline risks we are considering. The return to monetary tightening and the unwinding of artificial stimulus remain as the key underlying risks, but the indicators of a market peak are starting to appear across markets.

Further information can be found at: https://www.rothschild.com/ 17

EMEA Financial Regulation transparency of the financial system - and ultimately to remove the need for future taxpayer bailouts.

While we will once again see some additional regulation introduced in 2016, the sense is that much of the post crisis prudential, and to a lesser extent conduct architecture, is now taking shape and is in place. While 90% of financial regulation is either decided in Brussels or is a global standard, we expect continued debate on how national regulators will adapt the legislation for their local market.

This will inevitably create some anomalies, inconsistencies and risk of regulatory arbitrage.

Andy Baldwin, Global Financial Services Leader, EY Every year for much of the last decade, regulation has formed a critical part of the outlook. Since 2008 we have seen over 10,000 cumulative pieces of legislation forming the post crisis architecture, designed to ensure safety, stability and

Within Europe we have the added complexity of Eurozone ‘ins’ and ‘outs’, and the interplay between the European Central Bank (ECB) and the Single Supervisory Mechanism (SSM) overseeing the largest Eurozone banks and the national regulators overseeing the rest. The change management challenge involved in this over the last 24 months has been incredible, even at the basic level of assembling the 1,000 or so

“ WHILE 90% OF FINANCIAL REGULATION IS EITHER DECIDED IN BRUSSELS OR IS A GLOBAL STANDARD, WE EXPECT CONTINUED DEBATE ON HOW NATIONAL REGULATORS WILL ADAPT THE LEGISLATION FOR THEIR LOCAL MARKET.” 18

staff required to oversee the 130 or so institutions the SSM now oversees.

The hope of many is that we are now nearer the end of the post crisis regulatory response with the introduction of newer regulation slowing. This will give the industry much needed time and space to reflect on future capital needs and what strategy or business model changes will be required to meet minimum investor returns.

2016 should also see the continuation of the political backdrop and narrative in Europe towards jobs and growth supported by further QE. This will likely increasingly influence the future shape of regulation along with a focus on delivering the right customer outcomes.

A good example of this more growthfocused regulation is the Capital Markets Union (CMU). This ambitious programme, focused on promoting a markets-based

approach to European corporate and infrastructure finance, is reflective of the EU’s desire to kick-start growth across the European Union.

The CMU programme includes changes to promote simple securitisation, prospectus reforms and much more.

But it is also asking the right questions about the regulation introduced post crisis; is it still fit for purpose; are there any unintended consequences? For example, are the effects of Solvency II as intended or are they inhibiting institutional investors’ participation in much-needed infrastructure and long term projects?

While regulation is of course still at the top of the agenda for European financial services firms, signs suggest there may be some grounds for a little more optimism.

Further information can be found at: http://www.ey.com/ 19

US Financial Regulation the Dodd-Frank bill was one of its flagship policy accomplishments.

U.S. regulators will work to finish the remaining Basel III capital rules, while other politically charged issues such as incentive compensation and fiduciary duty will continue to progress. Agencies will grapple with how best to harmonize prudential bank-like regulation and its counterpart, disclosure-based securities regimes. Since the financial crisis, bank regulators have grown in influence as they have been given increased oversight and responsibility, a trend most clearly exemplified by the Federal Reserve. These developments will have significant implications for market participants and activities after 2016.

Thomas Quaadman, Vice President, U.S. Chamber Center for Capital Markets Competitiveness Unlike some presidential campaigns, the U.S. regulatory and legislative landscape in 2016 will be predictable, with some potential interesting twists. Understanding the political undercurrents will be necessary to mitigate regulatory and legislative risk.

Regulatory Outlook The last year of any presidential administration is always a busy one as agencies rush to push through long-standing proposals and new rules before time runs out. President Obama’s administration will be no different given

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Also, keep an eye out for midnight regulations and executive orders between the election and presidential inauguration.

Legislative Outlook In contrast to the regulatory outlook, Congress will not be as active from a policymaking perspective, unless there is an economic downturn. Recent bipartisan support of the Ross-Delaney bill (H.R. 1550) to reform the Financial Stability Oversight Council may signal efforts to reform the Dodd-Frank Act. While such efforts will have to wait until 2017, an underperforming economy could force the hand of legislators up for re-election. Congress will continue its recent trend of considering JOBS Act capital formation legislation to stimulate the growth of smaller businesses.

Nevertheless, large-scale sweeping

“ CONGRESS HAS ALREADY BEGUN TO LOOK TO 2017 AND BEYOND AS POLICY MAKERS EXPLORE WHAT WILL BE POSSIBLE AND PRESSING IN A POSTELECTION WORLD. THE LEGISLATIVE AGENDA FOR THE NEXT FOUR YEARS IS BEING SHAPED NOW.”

proposals should not be expected to be considered and stand little chance of being sent to the President’s desk.

It is important to understand that Congress has already begun to look to 2017 and beyond as policy makers explore what will be possible and pressing in a post-election world.

The legislative agenda for the next four years is being shaped now. If you focus your attention on one thing in 2016, focus on that agenda, as that is where the biggest risks and opportunities will lie.

Further information can be found at: http://www.centerforcapitalmarkets.com/ 21

Investment Profession regulatory scrutiny. The FCA’s competition review will question the efficiency of the market for investment products and services. MiFID II will impose additional constraints and requirements on the sector, and the ongoing moves to increase the cost of risk-taking by banks will see portions of that risk shift to the investment sector, bringing with it additional considerations about the sector’s contribution to systemic stability.

Will Goodhart, CEO, CFA Society of the UK The coming year will be challenging for the investment profession. Slow growth, rising rates and diminishing returns will mean that clients’ expectations may be disappointed and need to be reset. At the same time, the profession in the UK will continue to come under

In that context, the sector’s need to explain itself to its stakeholders clients, regulators and policy-makers - will deepen. CFA UK’s members are all lucky enough to have built or to be building careers in the investment profession. They believe that this work is purposeful – that it creates value for our clients and for society as a whole - but this is not how we are perceived.

Most people have little understanding of what those who work across the investment profession actually do and few people understand how we contribute to value generation.

As a profession, we will need to address these issues in 2016. The number of

“ ...THE ONGOING MOVES TO INCREASE THE COST OF RISK-TAKING BY BANKS WILL SEE PORTIONS OF THAT RISK SHIFT TO THE INVESTMENT SECTOR, BRINGING WITH IT ADDITIONAL CONSIDERATIONS ABOUT THE SECTOR’S CONTRIBUTION TO SYSTEMIC STABILITY.” 22

people that rely on us to help them meet their financial needs is growing.

The calls for us to play a more effective role in corporate governance are getting louder. And as the assets that we manage increase, so, too, do our responsibilities and our need to demonstrate that we understand those responsibilities and can meet them.

Every year in the UK, more than 10,000 individuals sit the CFA Program growing the membership and influence of our society. We want to use that

influence to build a better investment profession. We believe that investment management creates value by helping savers share in the proceeds of growth and by providing capital to those that can use it best. But, we also know that there are areas of practice where our clients’ interests could be better met and in 2016 we will strive to improve our ability to generate and deliver value that is understood by our clients.

Further information can be found at: https://secure.cfauk.org/

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CONTACTS London Andrew Wilde Director awilde@smithfieldgroup.com +44 (0)20 7903 0661 New York Rich Myers General Manager rich.myers@edelman.com +1 212 277 3747 Chicago Jeff Zilka EVP and General Manager Jeff.Zilka@edelman.com +1 312 240 3389