Which sectors within financial services might thrive in spite of market conditions? Which are likely to shrink? Lawrie Holmes scans the industry for potential winners and losers in 2012
For financial services workers sizing up their prospects for the year ahead, recent headlines would not have made happy reading. A combination of downsizing at Government-owned Royal Bank of Scotland and Lloyds Banking Group, the onset of increased capital demands for banks and insurers and unease around European sovereign debt, would have undermined confidence amongst City workers. Add to that the longer-term pressure of competition from other financial hubs and a hostile political climate, jobs in finance are not exactly the hot ticket right now. Professor Doug McWilliams, chief executive of the Centre for Economic and Business Research, certainly believes that’s the case. He says: “Last October we predicted a decline of 10% in city jobs over the 2011/12 period and I suspect that when we update in April the decline will be even greater.”
Tough times ahead for some
Yet a report by professional services provider PricewaterhouseCoopers and employers group the CBI in January revealed that although a number of areas of financial services were expected to continue suffering, there were also a number of bright spots.
Banking predictably was recognised in the report as a likely laggard in 2012. Despite strong growth in business volumes and income values combined with falling costs leading to rising profitability in the previous three months, investment intentions for the year ahead were understood to have worsened. In investment management, optimism about the general business situation fell again with business volumes and incomes lower, leading to a fall in profitability. Average costs per transaction grew strongly at general insurers, while insurance brokers’ difficulty was falling business volumes. As a result, profitability in both sectors fell in the previous quarter.
A brighter outlook for others
But the report also said life insurance business grew and was considered to be above its normal level, and premium income improved. The combination pushed average costs down and profitability up, and enabled firms to increase numbers employed. Most significant was the finding that although securities trading volumes had fallen leading to higher transaction costs and lower profitability, firms still increased their headcount, and plan to spend more on marketing in the year ahead.
The PwC/CBI report concluded that overall business conditions in financial services had improved with the volume of business increasing for the seventh quarter in a row, while value of income was up for the fourth consecutive quarter. Nevertheless, it warned that with sovereign debt tensions in Europe still unresolved, firms were less optimistic about the business situation and are less upbeat on investment in the year ahead.
London still dominates
Andrew Gray, a PwC banking partner who helped compile the report, says that London’s inherent advantages of time zone, employment conditions and tradition will stand it in good stead, despite the negative mood prevailing. He says London’s dominance in financial services has ensured that a strong pool of talent has remained in the City and not been enticed overseas. Rival firms operating in London that are chasing this pool have little alternative than to pay extra to retain talent. “As a result, individual institutions are still competing hard against each other,” says Gray.
He says this may all change when countries such as China, India and other emerging markets, which currently have immature financial centres, eventually up their game. “'It’s the long-term economic fundamentals that will determine the future of different industry groups,” he says.
James Bennett, Managing Director of EMEA and APAC at eFinancialcareers.com, says that in New York, Hong Kong and Singapore some sectors are booming. He says the top three growth sectors in the US – commodities, trading and quantitative analytics – are all showing a 50% improvement in the third quarter of 2011 compared to the previous year. “The top three growth sectors for Hong Kong and Singapore – trading, sales and marketing and commodities – are also up over 50% year-on-year,” he adds.
Bennett says that despite the gloom there are plenty of hotspots to consider. Discounting December, which is notoriously quiet, a number of sectors had shown improved performances in November compared to September. That’s in the context of eFinancialCareers’ last quarterly Barometer that showed a 2% decrease in the number of job opportunities in the UK financial sector in the third quarter from the second quarter. Comparing year-on-year, the total number of UK jobs posted on the site in Q3 2011 was up 17% over Q3 2010.
Sectors to watch
Bennett says, “Private equity seems to be doing OK. It was up over 40% in November, while commodities businesses are showing signs of health, as are hedge funds. The debt/fixed income side is also performing well. All are up more than 10% in November compared to September.” Bennett says although uncertainty prevails, it is not in the same vein as the post-Lehman climate of 2008-09. “Now we’re seeing head count reduction, but not to the same degree. Even if they’re moving out of one area, institutions may be looking to hire elsewhere.” A by-product of the tentative environment is that candidates are disinclined to jump ship as they might have done previously, cautions Bennett.
Simon Patterson of independent remuneration consultancy Patterson Associates says conditions at the moment are ‘soft at best’. But he senses salary levels are set to pick up as conditions improve. “We saw a sharp decrease from July 2011 to January 2012. Now I expect things to pick up. 2012 is likely to be an improvement on last year.”
Freelance financial journalist Lawrie Holmes was formerly Business Editor of the Daily Express and Deputy Business Editor at The Sunday Telegraph.