The financial sector has had a volatile year in 2023. Banking crisis in March, precipitated by higher interest rates and poor risk management, led to the collapse of Signature Bank, Silicon Value Bank and First Republic Bank. Ultimately, the U.S. Treasury Department, through the Federal Deposit Insurance Company (FDIC), stepped in and placed the aforementioned banks into receivership. Since then, while there have not been any subsequent bank collapses, the financial system remains fragile.
Below are three of my 2024 predictions for the financial sector that investors should not ignore.
Interest rates movements will continue to have an impact
The U.S. Federal Reserve embarked upon its fight against rampant inflation in the U.S. during the first half of 2022. Higher interest rates have had various impacts on the broader economy, and this is not likely to change in the near term. While inflation has certainly gone done in the past six months, the Fed is unlikely to bring rates down to where they were prior to the hike cycle. In mid-December, the Federal Open Market Committee voted unanimously to keep interest rates stable and also projected three interest rate cuts for 2024.
These interest rate cuts will come as a relief to companies and consumers alike. However, rates will sit between 4.50% and 4.75%, if three quarter percentage point increments are assumed, and this will continue to have a negative toll on the real economy. Large banks, in particular, however, will likely not only weather the storm but also continue to profit from higher rates.
Commercial real estate loans will continue to be bad investments
Elevated interest rates will continue to have a seismic effect on the commercial real estate industry. This particular subvertical of the real estate space has been in dire straits ever since the COVID-19 pandemic facilitated the long-term trend for remote work. Currently, U.S. banks hold some $2.7 trillion in commercial real estate-linked debt on their balance sheets, yet commercial property values have plummeted 22% since Q1 of 2022, and office rental prices have also tumbled. Continued fragility in the market, induced by elevated rates, could incite $160 billion in losses by banks. In other words, another banking crisis could be in the making, hurting the sector even more in the long run.
Experts expect the number of workers operating from home to remain flat in 2024 but gradually increase as it becomes more of a norm, further complicating a potential comeback for the commercial real estate space.
Dealmaking is not likely to have a strong rebound
Investment banks, private equity (PE) funds, and M&A focused law firms have struggled ever since interest rates skyrocketed. The reason is simple: a lot of mergers and acquisitions dealmaking depended upon access to cheap credit and once that environment went away, so did many of the deals. Global investment banking fees have slid to their lowest in more than a decade, and with interest rates remaining quite elevated, this may not change soon enough.
Private equity firms have also struggled. For those who don’t know, PE firms essentially specialize in leveraged buyouts, which involve purchasing a company using mostly debt. Not only have debt markets become more expensive, but the companies PE firms bought and, consequently, loaded up with tons of debt, are also struggling to meet higher interest payments.
All in all, while interest rates may be less elevated at the end of next year, investors and financial professionals should not expect a sudden dealmaking rebound in 2024. The financial sector may be a bit volatile moving into 2024, so follow these predictions so that you can make savvy investments.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
