J.P. Morgan's banking analysts think 2017 will be the year of Goldman Sachs. Or Morgan Stanley. Or, failing that, maybe Credit Suisse.
In a note out today, they say the stock prices of Goldman and Morgan Stanley are likely to fare best next year: the two banks don't have litigation hanging over them, they are well-capitalized, they are likely to benefit from an improving U.S. economy, and - given that they make 60% or more of their profits in the U.S., they should be the biggest beneficiaries of Trump's proposed cut to corporation tax.
J.P.M.'s analysts are also partial to Credit Suisse. Despite the warning from Daniel Pinto, CEO of J.P. Morgan investment bank, that doing away with trading desks is a bad idea, J.P. Morgan's banking analysts are supportive of Tidjane Thiam's strategy for trimming Credit Suisse. Credit Suisse's CHF6bn revenue target for global markets is "realistic," say the analysts. They think it's a very good thing that Credit Suisse is prioritizing cost cutting.
So where should you be working at J.P. Morgan analysts' preferred banks now, next year, and in 2018? The charts below - which refer to the market as a whole - offer some pointers.
1. As 2016 draws to an end, fixed income currencies and commodities (FICC) businesses are the place to be
2016 has been miserable in both equities sales and trading and investment banking divisions (M&A, ECM and DCM). It's been much better in fixed income currencies and commodities (FICC) trading.
As the chart below shows, 2016 began well for FICC revenues and then got even better as revenues received a boost from Brexit and Trump in the second half.
IBD revenues followed the opposite trajectory, starting well before petering out and shrinking.
2. In 2017, the best places to be will be cash equities and rates desks. The worst place will be credit trading
Fixed income businesses are not expected to sustain their high recent growth rates next year. Instead, as the charts below show, they're expected to increase at a more modest rate of 1% in 2017 and 2% in 2018. It's not exactly a return to 2006.
Some areas of fixed income, however, will probably do better than others. Rates desks look good. Credit desks do not. Rates desks are expected to benefit from ongoing uncertainty over central banks' plans, along with changing inflation expectations - both of which are expected to create volatility and to drive trading volumes around rates products. For credit, however, the analysts say the future depends entirely on the direction of credit spreads. As U.S. rates rise and the yield on Treasury bills increases, they forecast that demand for riskier "yield products" is likely to fall - damaging revenues across credit trading businesses as a whole.
Cash equities trading is expected to recover in the coming years - with cash equities electronic trading doing best of all.
Investment banking divisions are expected to be dependent on the overall economic outlook next year. Equity capital markets businesses are expected to recover from a very weak 2016, however.
The years to come are therefore by no means expected to be growth-fuelled for investment banks. As the line chart (Figure 8) below shows, stagnation is the most likely scenario.
3. Goldman Sachs and Morgan Stanley both look exposed to Brexit though, which could lead to uncertainty for jobs in London
J.P. Morgan's favourite banks look exposed to the repercussions of a messy Brexit.
Shown in the chat below (Table 59) J.P. Morgan's London employment figures for Credit Suisse look a little dated: it says the Swiss bank has 6,000 jobs or 69% of its investment banking employees in the UK. In fact, CS has moved 4,300 of those jobs out of the UK already, leaving it with just 1,700 staff in the City, an implied 11% of the 14,600 people working across the global markets division and investment bank.
J.P. Morgan calculates that Goldman Sachs and Morgan Stanley each have 27% of their global investment banking staff in London. However, it's not so much the two banks' London employees that are the issue as the assets held in the UK subsidiaries. If either bank wants to relocate from London and form a new EU-based hub after Brexit, it will likely need to relocate assets alongside employees. This could be complex and costly. In order to protect their assets of $850bn (Goldman Sachs) and $394bn (Morgan Stanley), J.P. Morgan's analysts say the banks are likely to favour countries with strong sovereign credit ratings. In other words: Germany, or Luxembourg. If you want to get ahead at either bank in the next few years, it might help to speak German.