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• Peter Selman joined Deutsche Bank last fall as the firm's global head of equities. 
• The former cohead of global equities trading and execution services at Goldman Sachs came out of early retirement to revive the German bank's struggling stock-trading business.
• His appointment comes at a time when trading is facing deep struggles across Wall Street.
• Business Insider recently caught up with Selman to discuss the state of the equities business on Wall Street and his outlook for the markets in 2018.

Peter Selman joined Deutsche Bank last fall as the firm's global head of equities, coming out of early retirement to revive the German bank's struggling stock-trading business.

Selman, who spent 22 years at Goldman Sachs and was promoted to partner and cohead of global equities trading and execution services before leaving in early 2017, takes over an equities unit where revenues have plummeted the last two years amid broader firm struggles. 

His appointment also comes at a time when trading is facing deep struggles across Wall Street. While the equities business hasn't fared as badly as bond trading, it nonetheless fell 4% last year from 2016, with revenue falling to $41.8 billion from $43.4 billion, according to industry data firm Coalition. Cash equities revenues fell to $9.2 billion, it's lowest level since 2006, amid increased competition.

But volatility has staged a fierce comeback to start 2018 — including a quick but deep correction in February from which the markets quickly rebounded.

Prospects are brighter for equities given the buoyant, volatile markets, Selman told Business Insider, but the Wall Street business still faces significant challenges and stiff competition. 

"At the end of the day, there are a few underlying trends which aren't going to go away, which is going to continue to make it a challenging environment for equities businesses. Ones that will force people in my role to manage our businesses quite aggressively," Selman said. 

Despite recent challenges, Selman is optimistic about Deutsche Bank's prospects for snatching back business in this environment.

"I see Deutsche Bank's position as one where we want to be the European investment bank of choice in equities," Selman said. "And I think that's something that's very achievable for us."

Business Insider recently caught up with Selman to discuss his outlook for the markets in 2018. He dissected the February market correction and the role volatility-linked products played in it, explained why inflation fears have "jumped the shark," and revealed what investors are actually concerned about. 

The following has been edited for length and clarity.

Business Insider: How's it been going since the markets went haywire a couple weeks ago?

Peter Selman: It's been good. The move down and then the rally back has generated additional client activity. There's been good volatility and its created a healthy amount of concern amongst investors about the path.

At the start of the year it felt a little bit too clean. There was fairly unanimous optimism amongst the client base that with coordinated global growth, you were going to see much higher equity markets. And now people are a little bit more cautious and you have more diversity of opinion, which is always good. It makes a market, when you have some people who are more concerned than others.

Equities still look like a pretty attractive asset class. But the headwinds from what look like a higher rate path are going to weigh heavily on the asset class going forward, which is going to be interesting. And I think you are going to see more volatility going forward, certainly more than we saw in 2017.

BI: There was a lot of focus on non-US equities pre-correction because valuations had gotten so high. Have US equities become more attractive following the correction on a relative basis?

Selman: On a relative basis, not so much. I still think you have better equity stories and better growth opportunities amongst US equities. But from a pure valuation perspective, a lot of the cheaper stocks live abroad. So, we’re seeing a balance amongst our investor base. There are still some people looking to diversify globally, but many others who are attached to say the FAANG story. There's not too many equivalent really attractive, liquid global tech growth stories outside of China perhaps.

BI: What are people talking about post-correction? What are your clients saying and what are they worried about?

Selman: I think the biggest concern is that the whole equity rally since 2008 has been built on the foundation of  very accommodative monetary policy, where from an investor perspective, as much as they might want to hold fixed-income assets, the yield available was so unattractive that people were much more inclined to hold equities.

Every cycle is different, and this one was particularly different. In a normal cycle when interest rates start to rally, equities typically have one of their better periods because this tends to be a period where you have stronger growth, and stronger growth is definitely better for equities.

What's different this time around is you've had a period where equities have been so well insulated because of lower rates. The real question in investor’s minds is at these valuations, can equities rally with any increase in the anticipated rate environment? Or will people immediately flee toward fixed income instruments?

BI: Do you think the inflationary fears are well-placed, or are they a bit overblown?

Selman: I think at this point they're probably on the side of being overblown. A lot of the structural things which have driven low inflation haven't gone away. I still think you have huge numbers of people in growth markets coming into the industrial workforce and there’s been a huge inflation dividend from that. You still have the advent of technology and automation in many industries, which is keeping prices depressed.

So against that you have obviously a tighter labor market in the US in particular and some commodities markets like energy where you've seen rallies recently.

So those are the key reasons why we should be more concerned about inflation than in the past, but I don't think we're at a point yet where the secular trends which are keeping prices down have really changed. I'm in the camp now of thinking that we sort of jumped the shark on inflation.

BI: In the context of the correction we saw, there's been talk that short-volatility strategies exacerbated the sell-off. What's your take?

Selman: There's no question in my mind they did. When you've had a period of low volatility, you tend to find investors become very attracted to those kind of strategies. Through time there's always a premium between the price of volatility in options and realized volatility, so you're able to capture that as an investor if you invest in some of those strategies.

But obviously some products, in the way that they're constructed, and we saw that with some of the products which were de-listed, when you get a sudden sharp move, the amount of product they have to re-hedge with impacts the underlying market which is what happened. And then on top of that you have other products in the market, volatility controlled funds which have to re-hedge. Those two products on the day of the biggest sell-off, helped drive a very sharp one-day move. I think it's important for investors to be cognizant of the exact design of their product especially when its levered.

BI: What's the outlook for 2018 going forward? Will we have another correction?

Selman: I don't think we've seen the end of volatility in markets. I'm short-term still tactically constructive, over the year you're going to have much more of a trader's market and I think the range will be tested on both sides. That's going to be a great market for equity investors, and there will be a lot to do. We still have a huge amount of companies looking to raise capital. And that's going to drive a lot of interesting opportunities in liquidity provision.

Indices are incredibly important to markets these days, and you have certain changes to indices, including countries and companies being added to various indices, which through time is going to create a lot of opportunity and interest from investors.

You're going to have some asset reallocation, pensions are going to have to look carefully at their allocations to fixed income and equities if equities rally and fixed income provides more value.

You're going to have a lot of corporates who've been given a dividend from the tax cuts that we've seen, and my view is you may see this be a strong year for corporate repurchases in the US as a function of that, which I think has historically been very good for markets.

There's going to be lots of interesting things, lots of cross-winds, and hopefully lots to do for Deutsche Bank in the equities markets.

BI: 2017 was a bad year for equities, particularly for cash equities, which hit their lowest level since 2006. Did we hit rock bottom, and have some of the barriers been lifted?

Selman: At the end of the day, there are a few underlying trends which aren't going to go away, which is going to continue to make it a challenging environment for equities businesses. Ones that will force people in my role to manage our businesses quite aggressively.

Clearly, active managers and passive managers are seeing compressions in their fee pool, which is happening every year and is driving them to look to brokers to cut their fees as well. You're in an environment where hedge funds — this has been a much better year and our own surveys have shown that money is coming back into the hedge fund industry — but there's ongoing performance pressure on hedge funds to deliver returns.

On the electronic side, there's many market makers and intermediaries who want to compete for the service of providing execution to end clients. There's a lot of competitive pressures, there's a lot of trends that are going to make it challenging.

Against that, you have very buoyant markets. You have intermediaries such as ourselves who are experienced in markets and are global in nature, are connective between research, corporates, hedge funds, pension funds. We have the whole stack covered. I think that we're in a privileged position, and there's a lot of advice and insight and liquidity that we can provide, which is unique.

I see Deutsche Bank's position as one where we want to be the European investment bank of choice in equities. And I think that's something that's very achievable for us.

SEE ALSO: Deutsche Bank is hiring an ex-Goldman Sachs partner to run its global equities business

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• Tourbillon had a rough month, dropping -6.7% in February, people familiar with the figures said. In comparison, the Dow Jones industrial average lost 4.28%, its worst month since 2016. 
• That brings year-to-date losses for the fund to about -6%. The firm has been struggling for two years.
• Other hedge funds have also struggled in a volatile market. Billionaire investor David Einhorn's Greenlight fund is down 11.4% for the year, Business Insider earlier reported.

Jason Karp's Tourbillon Capital had a tough month in February. 

The firm's hedge fund dropped -6.7% in February, bringing its year-to-date losses to about -6%, people familiar with the numbers said. In comparison, the Dow Jones industrial average lost 4.28%, its worst month since 2016. 

As of mid-year last year, the firm's hedge fund assets totaled $2.7 billion, per the Absolute Return Billion Dollar Club ranking.

Tourbillon has lost money for more than two years, losing 13.8% last year and 9.2% in 2016. When reached for comment, Karp did not dispute the numbers.

Karp has been warning of "frothy speculation" in the markets and has been preaching patience in client letters.

In an October 2017 letter to investors during the rising bull market, Karp preached patience, saying the fund saw "a number of warning signs that point to the middle innings of frothy speculation." Those comments echo earlier letters, which  discussed the challenges of managing money in the bull market.

Before launching Tourbillon, Karp was a portfolio manager at Steve Cohen's SAC Capital and a co-chief investment officer at Carlson Capital.

Other hedge funds have also struggled. Billionaire investor David Einhorn's Greenlight fund is down 11.4% for the year, Business Insider earlier reported.

MUST READ: One of Carl Icahn's top lieutenants has decided not to launch a hedge fund after all

SEE ALSO: Hedge fund billionaire David Einhorn's bad start to the year has gotten worse

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• Toys R Us and Maplin went bust this week and restaurants like Prezzo, Byron, and Jamie's Italian are all closing sites.
• The slump is down to high inflation and online competition.
• Analyst says there's "a very good probability that more victims will fall."

LONDON — A chill wind is blowing through Britain's High Streets and not just because of the Beast from the East.

Shops and restaurants are closing across the UK as a Brexit-driven consumer crisis begins to take its toll.

Toys R Us and Maplin both fell into administration this week, putting 5,500 jobs at risk. Italian chain Prezzo announced it is closing up to 100 restaurants as it battles with poor trading. Trendy burger chain Byron has similarly been forced to close locations. And Jamie Oliver's restaurant empire is slimming down amid similar pressure.

"This has been a brutal winter in more ways than one as the UK High Street," Fiona Cincotta, a senior market analyst at City Index, said earlier this week.

"The High Street is being hit on two fronts. Firstly, the squeeze on the consumer thanks to elevated levels of inflation, combined with wage declines in real term, is causing consumers to rein in their spending on a damaging level."

The pound fell to multi-year lows against both the dollar and euro in the wake of the June 2016 Brexit referendum and that has led to higher price inflation. Inflation is currently running at 3% while wages are growing at just 2.5%, meaning Brits are seeing their spending power shrink in real terms.

Cincotta said: "Secondly, this reining back in spending couldn’t have come at a worse time in the High Street’s history, as consumer habits change towards online shopping, favouring the likes of Amazon for their fast delivery and wider selection and more competitive pricing."

While Toys R Us and Maplin are struggling, online retailers such as Boohoo and Eve Sleep are consistently growing by double-digit percentages. While they don't all sell the same things, the comparison neatly highlights the difference in direction of travel between physical and online retailers.

Even the restaurant industry is feeling the effects of online competition — the popularity of Uber Eats and Deliveroo is spurring the creation of so-called "dark" restaurants while the real ones close down.

Commenting on Toys R Us and Maplin, Cincotta said this week: "It is very unlikely that these two retail giants will be the last casualties on the higher street, quite the opposite.

"With the online shopping revolution in full swing and tough economic conditions set to continue for the UK in the face of Brexit, there is a very good probability that more victims will fall."

Strains are showing elsewhere. Carpetright, Mothercare, and Laura Ashley have all put out profit warnings in recent weeks. New Look, struggling under a £1.2 billion debt pile, is seeking an emergency deal with landlords to cut its rent bill by 60%. And department store Debenhams, long seen as one of the weakest big beasts on the High Street, is currently trading at an 8-year-low share price — a sign that investors are not optimistic after a profit warning in January.

Just after Christmas tends to be a crunch period for retailers as, having gone through their best period of the year, banks and other lenders are less forgiving if a shop is in a tight spot.

Retail analyst Richard Hyman told BI: "Retailers go from Q4, strongest trading and cash flow, to Q1, the weakest."

"Much of the cost base stays the same and Q1 will expose the underlying trading weaknesses pretty quickly," he said. "The quarterly rents due at the end of March is a looming challenge. There will probably be more distress emerging as end March nears."

Spare a thought for poor old Sir Philip Green.

The Topshop tycoon is reportedly trying to offload his Arcadia retail empire to the Chinese at the moment, despite stringent denials from the man himself. The company, which owns Miss Selfridge and Burton as well as Topshop, has been struggling with the rise of online for years — the last thing it needs is a consumer spending crunch.

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