Capital Market Trends: Understanding Regression Analysis

Regression analysis is a type of statistical tool that’s used to investigate relationships between variables. Usually, the analysis is used to measure the effect of one variable on another. So, for example, the analysis might study the effect of a price increase on the demand of a product or service.

It could also study the effect that changes in the money supply have on price inflation or a basket of goods in the consumer price index.

But, in the context of capital markets, regression analysis can be used to study the effects of different variables on the capital markets, helping you make more sound predictions about what might happen in the future.

Global Macro-Trends And Capital Markets

Various trends in the world can affect capital markets. For example, the traditional view of capital markets is that free markets work and that less government regulation fosters economic growth. But, the trend is in increasing government regulation in the financial markets.

Through 2020, public policy will lead to a more fragmented capital market. Local regulations will hamper national and international markets as policy shifts national markets to regional ones, making markets more “local.”

Another trend that is developing is the increasing influence of technology on the capital markets. Technology has always been seen as a disruptive force, and it’s incredibly difficult to predict how this impacts the marketplace.

However, what is known is that technology will become the catalyst for new companies that would not exist even 10 years ago.

For example, advances in banking technology, automation, and analytics gave rise to the Internet bank. And, even greater advances in real-time analytics allowed a startup like Simple Bank to dominate the personal finance and banking niche.

It was later purchased by BankCorp, but the company is largely independent from its parent, receiving only financial backing for increased financial stability.

Other banks are now forced to play “catch up” or be left in the dark as Simple begins its upward trajectory with the backing of a large international player.

Other similar technological advancements will allow other industries to develop unexpected disruptive processes or advancements, making old processes obsolete and forcing change from within.

Finally, scarcity of resources may become important during the next half century. Capital markets will need to reallocate resources where they are most needed. Financing costs will likely continue to rise, making it difficult for companies to earn a yield or income that surpasses the cost of capital used for business growth and expansion.

Interest Rates And Capital Markets

Interest rates have a profound impact on capital markets. Central banking policies can virtually control short-term interest rates. Flooding the capital markets with credit, they are able to induce banks and other financial institutions to lend money, pushing interest rates down.

At the same time, interest rates are at an all-time low. They simply cannot go much lower. Many believe that interest rates must rise and, if they do, they will drag many businesses under as the cost of debt servicing exceeds profits.

Historically, rising interest rates signaled an economic slowdown, while falling interest rates signaled an economic pickup.

Today, we are witnessing an unusual phenomenon: low interest rates, and reduced borrowing.

By 2020, interest rates are expected to climb, placing increased stress on capital markets.

Another phenomenon is the effect of interest rates on capital market growth. A study done in Nigeria showed that a 1 percent change in interest rates led to a 44 percent change in the all share price index, suggesting that future changes in interest rates may have similar effects.

Disruptive Forces

There are many potential disruptions that can interfere with future projections. For example, shifting global resources may dramatically improve or hurt the U.S. and other developed nations.

What happens when technological developments allow the U.S. to become energy self-sufficient?

What do oil-rich, but undiversified, states in the Middle East do when no one needs their oil anymore?

Another potential disruption is war. A terrorist strike could unexpectedly upset global capital markets, as it did in 2001.

Priorities For 2020 

For more in-depth analysis on the individual level, or to learn more on capital markets, and understand the drivers of the future economy, companies will have to buy into strategic planning.

Priorities for 2020 include proactively managing risk, regulation, and capital, establishing a strong culture that reduces and eliminates conflicts of interest, redefine business models to make them simpler and more diversified, periodically renew the operating model, obtain an information advantage through Bid Data, and enable innovation through risk and capital management.

Erika Wilson is an investment consultant. She likes to share her investing insights on the web. Her articles appear mainly on investing and finance websites.