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Some sector speculation

Dusting Off the Crystal Ball: Looking Ahead to 2017

12.22.2016
With 2016 coming to a close, business leaders are looking ahead to 2017. It seems like a good time to reach out to some of our clients in the healthcare, private equity and energy sectors to get their thoughts on the coming year. Some offered plans; some offered predictions and, as you will read, some were flummoxed. 

Healthcare

When speaking with executives in the healthcare sector, the only consensus is that there is no consensus of what to expect in 2017. There are so many questions regarding what the incoming Trump administration and Republican controlled Congress will do, that the industry finds itself with many more questions than answers.

One hospital system executive told us it was analogous to a regulatory hurricane sitting offshore. Where will it land? How powerful will it be when it does?

Some of the questions executives are speculating on include:  What regulatory changes will be made and how sweeping will they be? Will Obamacare, or parts of it, be repealed and if so, what will replace it? Will the administration and the Republican controlled Congress seek to intervene in drug pricing? Will they follow through on the proposed tax grace period for repatriating corporate profits held overseas, which one pharmaceutical executive told us would be a positive for US drug companies?

Until these questions are answered, industry executives are understandably taking a wait-and-see approach as they plan for 2017.


Private Equity

Private equity leadership seems to be the most bullish on 2017, especially those firms that invest in energy, manufacturing and other industrial sectors. Private equity leaders with whom we spoke believe that 2017 will provide considerable opportunity for investing and exiting, provided that the PE firm’s recent track record has been successful.

For some firms with significant investments in energy, 2016 was a difficult year which offered few profitable exits. Those firms may find they have less capacity to raise new funds to take advantage of market conditions if things begin to heat up. Conversely, the firms that have successfully navigated the turbulence of 2016 have told us they are excited about their prospects and believe that institutional investors will be ready to commit capital to new funds.

For executives seeking leadership positions in portfolio companies, private equity firms are always eager to meet industry leaders that could fill out management teams. Private equity leaders tell us that their eagerness will only increase if market conditions move in a positive direction.

Financial Services

The financial services industry is similar to the healthcare industry in their wait-and-see approach to the year ahead, though the financial services industry is decidedly more upbeat regarding the coming year. Financial institutions and capital market firms are taking shifting regulatory demands and policy ambiguity in stride. The Federal Reserve raised interest rates in mid-December and is forecasting three additional rate hikes in 2017, which is expected to increase net interest margins and increase profits for the lending arms of financial institutions. But these rate hikes have been expected for quite some time and are already “baked in” to the industries modeling for 2017.

The biggest variable for the financial services industry in the New Year will obviously be what changes an incoming Trump administration will make to the regulatory environment. Leading Republicans have promised to ‘dismantle’ Dodd-Frank, but to what extent that deregulation actually happens will have an enormous impact on the financial services industry, not just in 2017, but for years to come. Industry leaders we spoke with seemed to agree that relaxing of some of the strictest rules around holding more capital as well as the required annual stress tests would be an enormous positive for the industry as a whole. This is especially true for regional banks that have felt the “one size fits all” approach around liquidity requirements was unwarranted given the decreased risk their banks pose compared to Wall Street banks.

Cybersecurity will continue to be a focus of the industry in 2017, regardless of what happens on a regulatory front. Executives in the industry have told us that their top talent needs will be for cybersecurity and technology experts in increasingly higher profile roles, as the impact of a data breach in “too big to fail” banks can have catastrophic impacts, not just on the organization but on entire economies as a whole.  If Republicans get their way in loosening the regulatory environment, you may see what was an insatiable need for compliance professionals in the last eight years, decline. 
 
Oil & Gas

The energy sector has had a rough couple of years, with the lowest point coming in February of 2016 when oil hit $26 a barrel. Although few analysts are predicting a return to $100 oil anytime soon, the industry executives we have spoken with are cautiously optimistic for a few reasons; OPEC has agreed to cut production, and the incoming Trump administration will likely decrease industry regulation.

Experts agree the US is increasingly viewed as one of the world’s swing producers, which means that an increase in the price of oil will likely see US shale companies quickly ramp up production. Unless demand is also on the upswing, increased production puts downward pressure on price and enforces a practical price ceiling. The consensus is that while it is possible, it is not likely that 2017 will bear resemblance to the boom years experienced in the energy sector.

So what does this mean for job opportunities in the industry, where an estimated 200,000 jobs have been cut in 2016? C-level executives who have a proven track record in restructuring and operating in a low price environment will be in high demand. One former CEO and current board member told us that energy companies “have embraced being lean and mean and have learned to do more with less,” so job seekers should understand that job additions to the sector in 2017 will probably be measured.

Uncertainty is the New Certainty

Although fun to try to predict where things will go in 2017, if the recent election taught us anything, it is that predictions can often prove to be wrong. Perhaps the best prediction we can make for any industry is that the business world will throw us some curve balls and when it does, adaptability will be the key to turning those curve balls into home runs. We at The Alexander Group have always liked a good curve ball. 

From all of us here at The Alexander Group, we wish everyone a happy and successful 2017!

 
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