I see several trends that will continue to shape our markets and the broader economic landscape in the year ahead.
ESG finally gets the acceptance it deserves
We expect that investments and investment strategies focused on environmental, social, and governance (ESG) goals will continue to take hold across the global markets this year. The focus among investors and corporations on ESG is reaching a healthy and important state of maturity in Europe, but it is still just beginning its rise across North America, and is shooting some early sprouts of interest in Asia. According to research from State Street Global Advisors more than two-thirds (68 percent) of institutional asset managers report that the integration of ESG has significantly improved their returns.
A growing body of research and fund reports also shows that ESG-themed investments not only have the ability to outperform during calm markets, but also have a better ability to withstand market volatility and downturns. State Street Global Advisors released a study late last year finding that 69 percent of ESG investors said the investments helped them manage volatility. The reasons behind these results are likely varied: some firms might benefit from loyal customers or shareholders who support their principles, for instance, while others may do well because their deliberately diverse executive teams and/or steady focus on their social responsibilities and the environment are able to generate more profitable ideas. As an exchange, our goal is to take an increasing role in facilitating ESG practices, disclosures, and dialogue between investors and public companies. This not only creates liquidity for new investible products, such as ESG index futures, green bonds, and exchange-traded products that focus on ESG principles -- but it will also likely create a better, more sustainable economy over the long-term.
Mega-unicorn IPOs remain on the horizon despite the government shutdown
Last year, we were fortunate to have some wonderful technology innovators, including Dropbox, DocuSign, Greensky, iQIYI , Stone, and Pinduoduo tap the public markets. In 2019, several of the biggest and most influential private tech companies founded in the last 20 years, all veterans of the CNBC Disruptor 50 list, are widely anticipated to go public. These include consumer platforms for transportation as well as large-scale enterprise software companies, which combined, the top four could reach a market capitalisation north of $200 billion, as reported by CNBC.
As the large cap IPOs successfully come to market, it could spark a wave of additional venture-capital-backed startups moving toward the public markets. These companies have received several more rounds of capital than was typical in previous tech booms, with some venture-backed companies receiving funding through Series F, or six rounds of capital-raising. Therefore, by going public, their venture owners and early employees will have the opportunity to seek liquidity for their shares after experiencing many years of growth in their value. And as a leading global equity exchange, we are very excited to play our part in giving millions of new investors the opportunity to share in the future growth of these seminal companies by becoming their new owners.
Cryptocurrencies could still be a global currency of the future
It’s been more than a decade since bitcoin took the world by storm. With several thousand competing cryptocurrencies vying for investor attention, the world of 'crypto' has gone through the first phase of the classic invention lifecycle, marked by early pioneers, followed by hype, followed by proliferation of newcomers and then a dose of reality. What comes next is one of two outcomes:
1) Either the innovation finds practical utility followed by years of steady and sustainable commercial progress and integration into the economic fabric (e.g., the Internet); or
2) The invention fails to achieve broad adoption and its commercial applications as medium of exchange are limited (e.g., the Segway).
However, it is difficult to ignore the huge amount that investors, including some of the most sophisticated global investors, have poured into digital currencies in recent years. The invention itself is a tremendous demonstration of genius and creativity, and it deserves an opportunity to find a sustainable future in our economy.
We would argue that two key ingredients to establishing a practical utility and a more stable value are governance and regulatory clarity – both of which are antithetical to the original intent as a decentralised, ungovernable global currency. And yet, as with exchanges, transparency and fairness are the keys to trust, and without some level of oversight and regulation, it is not possible to demonstrate a level of transparency and fairness that will build trust. At Nasdaq, we are working to help cryptocurrencies gain investors’ trust by offering our technology for trade matching, clearing, and trade integrity to start-up exchanges. We have also invested in ErisX, an institutional marketplace for cryptocurrency spot and futures. While this year will be another proving ground for cryptocurrencies, we believe digital currencies will have a role in the future. The extent of its impact will depend on the evolution of regulation and broader institutional adoption.
Space really is the next frontier
Being fascinated with space since my childhood, it is incredibly exciting to see the latest advancements in space travel – financed by both the government and private investors. Think about what we have witnessed in the past three months alone: NASA’s InSight was the first mission to explore Mars' subterranean geology; China is now the first country to land a spacecraft on the moon's dark side; Virgin Galactic’s rocket plane became the first US commercial human flight to reach the edge of space; NASA's New Horizons mission released the first detailed images of the most distant object ever explored from the Kuiper Belt; and SpaceX unveiled its Starship Hopper for suborbital takeoff and landing (and potentially for journeys to Mars). Imagine the potential that society can achieve in 2019 and beyond as public government, private investors, and ultimately public investors come together to finance our next wave of space exploration. Where Gene Roddenberry had us joining the adventures into space of the United Space Ship Enterprise from our living rooms on television, the bold entrepreneurs and innovators of today are making it happen in the real world.
Artificial Intelligence takes a central role as cybercop
Financial firms are leveraging innovative and potentially disruptive technologies to increase efficiency, reduce costs, enhance security, improve the customer experience, generate revenue and facilitate regulatory compliance. One such advancement that has captivated the industry more than any other is artificial intelligence (AI). Companies today achieve success by focusing on narrow AI applications, where an algorithm can be trained to do one thing extremely well, surpassing human capabilities alone. This early focus has been on machine learning, and we will continue to see advances in 2019. While Financial Services has both offensive and defensive opportunities to adopt AI, we are seeing the earliest investments in AI by major banks and brokers to be on defense – rooting out fraud, manipulation, insider trading, etc. That will continue in 2019, but there will be more adoption of AI techniques used across a range of alternative data sources to find predictive market signals, and to increase their ability to compete for wealth management dollars and institutional flow.
On the defensive side, at Nasdaq we have enhanced our market surveillance technology by developing machine learning capabilities to analyze abnormal market events, turning it into an industry benchmark for real-time and T+1 solutions for market surveillance, supervision and compliance. More than 50 marketplaces and regulators around the world now use our technology. We are now turning our machine learning efforts to our broker-dealer surveillance solution, serving our 140+ banks and brokers with similar AI capabilities. To support the industry’s increasing focus on AI for front-office business opportunities, Nasdaq launched Analytics Hub and acquired Quandl in 2018, a preeminent provider of alternative data and analytics. My view is that AI, if properly governed, will ultimately allow all industries to leverage the best of humans and machines together to create better, safer, and smarter solutions for our customers. In 2019, progress in this technological area will be steady, but with some breakthroughs that could change everything for years ahead. What will be the next big leap in this area of innovation: Quantum powered AI.
'Platform' businesses firmly take hold across every industry
At this time last year, I discussed the emergence of the Markets Economy, taking the principles of the capital markets and applying them across all industries in the global economy. In 2019, that concept of the Markets Economy will continue to penetrate parts of our lives that have nothing to do with stock trading. The winning model that is now taking flight across all industries is the 'Platform' and is not simply a technology or a business model but a combination of both. Leveraging distributed architecture technology, brought to life in the cloud, and amplified by machine-driven intelligence and petabytes of data, every industry wants to find a way to create the 'flywheel' that generates a network effect to achieve sticky, customer loyalty. Autonomous cars are a perfect example of a potential platform model entering a traditional manufacturing industry.
We are experiencing this at Nasdaq as we become the technology partner for the global capital markets. The Platform model is nothing new to the great innovators of our day, such as Apple, Amazon, Google, but for traditional, or entrenched, or highly regulated industries, the Platform construct is just starting to take hold. Just as eBay helped consumers with continuous price discovery, we see markets across 'everything' start to develop and give more power to both buyers and sellers alike around the world. This evolution in how B2C and B2B companies do business will mean more access to discovering value and more opportunities to build trust with their clients.
Market risk does not always equal economic risk
Over the last two months, the markets have reflected a growing divergence of views on the future of global economy. The volatility demonstrates a lack of investment conviction in the face of a potential trade war, uncertain monetary policy, the potential impact of Brexit, declining demand for energy, most recently, the government shut-down, and a myriad of other conflicting economic signals. And the media has fuelled concerns by reporting the many ways GDP growth for countries around the world could be threatened by geopolitical events, monetary policy, and declining commercial demand. Our expectation is that the volatility the markets have experienced will, to some degree, continue in 2019. As we enter the ninth year of global GDP growth, investors are increasingly lacking conviction that the recent level of growth will persist amid a number of new headwinds. Therefore, the news of the day will drive investor behavior and create an exaggerated effect on the markets.
The theme of Davos this year was redesigning the architecture of society so that we can build a more inclusive world. We believe that fair and transparent markets can help us work toward this goal. I am so proud to be at Nasdaq, where we are reimagining markets to realise the potential of tomorrow – a tomorrow with an inclusive, innovative, growing global economy.