Where will the rain fall on this year's banking parade? Here are our suggestions for the damp squibs of 2007.
Trading revenues were an important element of banks' earnings in 2006, but they may not persist at a similar level in 2007. "It's difficult to see markets being as favourable as they were in the first half of the year," says Simon Adamson, an analyst at independent research firm CreditSights. "Trading income depends to a large extent on rising equity markets and narrowing credit spreads. It also helps to have predictable interest rate movements." The coincidence of those conditions in 2006 is extremely unlikely to be repeated in 2007, according to Adamson (due not least to rising credit spreads). Traders' income may fall as a result.
Will 2007 be the year that sees a nasty mess in the credit markets? Not according to Andrea Zazzarelli, associate director of corporate default research at Moody's Investor Services. Credit quality will continue declining in 2007, he predicts, but it won't do so as quickly as in 2006. Why not? Zazzerelli says liquidity won't disappear overnight and companies have invested the money borrowed over the past year wisely: "Investors will slowly refocus towards the fundamentals and away from high returns."
In the mean time, Paula Maiden, head of the credit market risk team at recruitment firm Robert Walters, says demand is set to remain robust for credit analysts in banks, although it will be more a question of replacement than expansion.
On a similar note, will the infrastructure market go awry in 2007? Mike Wilkins, managing director of Standard & Poor's European infrastructure finance group, has issued a research note suggesting the existence of a "classic asset bubble in the infrastructure market".
It may not pop just yet, says Wilkins. "There's so much money sloshing around and so many funds looking to buy assets that you may not see deterioration until mid-2008 and 2009." Funds are likely to be hiring, he predicts. Just remember that it could end in a nasty bang.
Pay at Goldman Sachs
After receiving gargantuan payouts in 2006, the only way may be down for senior Goldman Sachs bankers in 2007. "As a general rule, a downturn will have a more significant impact on managing director compensation," says Brad Hintz, an analyst at Sanford Bernstein in New York. This isn't to say that a downturn is definitely around the corner, but anyone suffering from Goldman-envy can at least take some consolation in the fact that it will come.
Funds of hedge funds:
The dying days of 2006 saw a proliferation of hedge fund clones, which mimic hedge funds' investment decisions and deliver comparable returns at a fraction of the cost. The trend is most likely to impact funds of hedge funds, which charge dual fees - once for their selection of hedge funds to invest in, and again for the fees levied by the hedge fund managers themselves.
Recruiters say the dreaded clones have yet to impact hiring, however. "A lot of the big fund of funds have been recruiting heavily and I see that continuing in 2007," says Peter Elliott at Emerson Chase City.