It's become accepted wisdom to say that asset management careers are good and investment banking careers are bad, that 'electronification' is eating traders' dinners, that Goldman Sachs' strategy is sound while Credit Suisse needs to pull back from fixed income sales and trading, and that Barclays' investment bank is struggling. What if all this were wrong? Morgan Stanley's banking strategists think it might be.
Led by the indomitable Huw Van Steenis and in partnership with Oliver Wyman, Morgan Stanley's banking analysts have just released their annual investment banking outlook. As usual it's extraordinarily comprehensive. It's also somewhat controversial. At 82 pages, we've broken the report down for you. If you work in banking and finance, you need to know all that follows.
In the years since 2010, growth in the financial services industry has been driven by asset management firms. Asset managers benefited from quantitative easing, which fueled rising asset prices and increased the value of assets under management. However, as the US transitions away from QE and interest rates are hiked, Morgan Stanley thinks the favorable climate for asset managers could come to an end.
At the same time, asset managers are expected to face headwinds from increased regulation. "Asset managers may need to invest more in trading / execution capabilities, collateral management, and risk management to adapt to the new environment," says Morgan Stanley. In the worst case scenario, there could even be, "a far more profound change in regulation after a significant market correction entailing a liquidity event for the industry."
While investment banks have consolidated since the financial crisis, asset managers haven't. The smallest asset managers look most risky - in a stressed environment they will be particularly squeezed. They will also need to invest heavily to upgrade their trading capabilities. In future, the most successful asset managers will have scale, a strong distribution network, and their own set of innovative products.
In theory, electronic trading platforms are coming along to take traders' jobs. In reality, Morgan Stanleys' analysts think electronification has been heavily over-stated.
"There are significant limitations to how far electronification will go in fixed income markets in the next few years given instrument heterogeneity," they say.Credit markets in particular don't lend themselves to electronic trading: the instruments there are too heterogenous, many bonds are illiquid (34% of US corporate bonds only trade once a week) and there's very little 'transactional flow' - most trades are driven by the buy-side.
"15% of volume in credit is electronically traded today, and aggressive estimates are unlikely to see it grow to more than 25%," say Morgan Stanley's analysts.
Similarly, Morgan Stanley pours water on the notion that rates traders are also about to lose their jobs to aggressive e-trading platforms: "The impact on sell-side economics [of electronification] should not be over-stated - we estimate that only 25% of rates and 10% of credit revenues are likely to be affected over the next 2-3 years."
As per the chart below, Morgan Stanley thinks Barclays is well placed to increase its return on equity over the next two years (although it still won't be as impressive as UBS). Barclays is also liked on account of its strong equities business, its 'restructuring potential' and the clear-up of its non-core unit.
Ok, we have banged the drum for securitization careers several times recently, but we haven't highlighted the hotness of emerging markets (EM). As per the chart below, Morgan Stanley suggests that both securitization and emerging markets (EM) are generating profits whilst using a low proportion of banks' capital. - The holy grail in today's world.
Although Jefferies had a bad first quarter in fixed income, most other banks have been suggesting that things didn't go too badly in FICC. Morgan Stanley suggests that this optimism may be premature.
And if you're of the opinion that fixed income revenues aren't going to recover any time soon, Goldman Sachs is not the place to be...
Finally, for all the suggestions that Credit Suisse ought to pull back from fixed income sales and trading under its new CEO, the Swiss bank has actually been doing well in the fixed income business. French banks haven't been doing too badly either. J.P. Morgan. Citigroup, Barclays, RBS and Nomura all lost out in 2014.