Capital market forecast: get ready for a 100-year flood every year

Capital markets have never stood still, but the pace of change today feels meaningfully different. To meet this moment, I want to share three Chatham principles every leader and decision-maker should keep in mind. 

1) There’s no “normal” distribution anymore

Unlike a deck of cards, which follows the standard laws of statistics, markets (and market actors) are irrational. And it turns out 2-, 5-, 8-sigma events happen more frequently in markets than you can ever reasonably expect. (A sigma event is one in which the daily returns in a given market fall outside one standard deviation.)

We highlighted six points in time in the last eight years where the markets moved by far more than the standard statistical models would predict—and that’s in interest rate markets alone. COVID, for example, was a 6-sigma event. The collapse of Silicon Valley Bank was a 9... Statistically, that should happen less than once in a lifetime of the universe.

The 100-year flood happens every year, so to speak. If you’re still doing just two standard deviation analyses on your risk, you’re not doing enough.

2) Integrated strategies win

The markets are too unpredictable and too chaotic for investors to simply decide on an investment decision or financing structure and then solve for the right hedging or risk management strategy. These two elements of the business must be integrated together. Doing so proactively can help deliver better value for your organization.

There are some ways you can play offense. One example: Using share class hedging to create sleeves for investors—that might be Asian LPs or European LPs that want returns in their home currencies, rather than in the currency of your investment vehicle.

You can also run parallel paths for financing processes, as my colleagues Jackie Bowie and Reuben Daniels advise.

You can also evaluate issuing Sterling debt naturally or issuing Euro debt swapped back to Sterling, using cross-currency swaps, to actually end up with a more efficient and cheaper debt capital structure.

3) Great decisions come from clean and connected data

Data that’s actionable in capital markets has to be precise, updated and validated in near real time—minute-by-minute or, better yet, second-by-second—to minimize spreadsheet risk. Firms should establish a single source of truth, standardizing and centralizing all key data (assets, debt, leases, derivatives) into a unified platform—the kind of technology we’re building for our clients at Chatham. And maintain robust governance protocols across access controls and encryption, to meet industry standards and protect sensitive, confidential client data.

And always keep a human, or expert advisory team, in the loop. There is a difference between making a sleek dashboard and being able to make decisions with it.