Macaskill on markets: Market share and marketing hype in the Trump era
The rally in bank stocks seen after Donald Trump’s election victory had stalled by the time of his inauguration as president on January 20. Fourth-quarter results from US banks were also announced in January, giving bank heads a chance to pitch their prospects relative to competitors.
Goldman Sachs was preemptively crowned the biggest winner from the Trump transition by many for being the big bank most biased towards trading revenue and the supplier of former employees to key positions in the new administration.
Its shares outpaced competitors to rise by over 30% soon after the election, before falling back slightly along with other bank stocks.
Goldman’s CFO Harvey Schwartz – newly promoted to co-president after former incumbent Gary Cohn was appointed head of Trump’s National Economic Council – delivered trademark upbeat but unsupported assertions about growth in market share during the bank’s fourth-quarter earnings call.
This obscures the bigger picture that the main underlying trend in sales and trading market share has been for JPMorgan to increase its dominance in fixed income and for Morgan Stanley to establish itself as clear global number one in equities.
Goldman is only just within the top five in fixed income and saw its equities revenue gap to Morgan Stanley widen in the fourth quarter, as it appeared to have some stumbles in client execution, possibly in the form of losses on block trades.
Goldman’s 78% rise in fourth-quarter fixed income revenue compared with the same period in 2015 looked impressive, but it was flattered by comparison with weak previous year performance. Goldman’s full-year 2016 fixed income revenue of $7.56 billion was not quite half the $15.25 billion generated by JPMorgan, and Goldman’s 3% annual increase was well below the 21% rise at JPMorgan.
Goldman has not been the biggest loser in the shifts in market share in the last few years. That title would go to Barclays in fixed income and to Credit Suisse in equities. It certainly has not been a winner, however, except in pockets such as high-yield debt underwriting. So, which aspects of life under Trump could theoretically work to increase market share for Goldman and where is marketing hyperbole more likely to be at play?
One widespread assumption is that uncertainty about market conditions under the mercurial new president will prompt price swings that entice hedge funds and other investors to trade more frequently. One analyst on Goldman’s fourth-quarter earnings call joked that the firm needs its former employees who are taking office to tweet in the style of their new boss Trump in order to keep markets volatile.
Schwartz tried to reframe this point in a more sober manner by citing global policy divergence as a potential driver of trading volume. “We really want to drive activity with our content,” he said.
Spectacularly poor predictions
It is not obvious where Goldman has a clear ‘content’ advantage nowadays, however. Its research output is unexceptional compared with that of other banks, and attempts to make its reports feel bolder and differentiated have resulted in some spectacularly poor predictions in areas such as foreign exchange.
The bank’s resurrection as ‘Government Sachs’ – the firm with the most alumni close to the policy levers – will certainly be an advantage in securing client meetings in the coming years. To the disappointment of conspiracy theorists, this is unlikely to work in the form of hot tips from Cohn that Trump is about to unleash a tweet directed at a particular firm, creating a brief trading opportunity for select clients.
It is more likely to come in the form of increased dialogue with clients about strategic trends, which in turn may feed into both advisory revenue and structuring mandates. These are two areas where Goldman has always been a market leader, as can be seen from its continuing position as number one M&A adviser globally and a trusted partner for big strategic hedges.
These are also the sectors of investment banking that are least affected by developments in technology. Goldman Sachs has been particularly effective in generating marketing hyperbole surrounding its digital initiatives. Media reports praising Goldman for revealing the ‘secret sauce’ of its trade and structured product pricing to clients online have caused envy among competitors, as there is virtually no difference between its technological ‘content’ and that of rivals.
Extensive publicity surrounding the launch of Goldman’s online retail lending platform ‘Marcus’ last year also caused gnashing of teeth among its peers. At least one competitor seems to have decided that imitation the best form of implied flattery with a similarly branded online initiative.
Just over a week after Goldman formally launched Marcus last October, Bank of America unveiled an artificial intelligence app called Erica (featuring the last part of the firm’s name – get it?). In Bank of America’s recent fourth quarter earnings call, CFO Paul Donofrio gamely did his bit to promote the idea that the firm is somewhere near the technological cutting edge.
“She [the app Erica] will add to both the functionality and excitement around digital banking,” he said, before returning to the details of Bank of America’s quarterly earnings, which as usual were functional but far from exciting.
Goldman may be better at projecting an air of innovation than rival banks but it actually faces more challenges than opportunities from technological trends in its core trading markets. As more fixed income business migrates online, the main beneficiaries from economies of scale are likely to be the biggest universal banks: JPMorgan, Bank of America, Citigroup and European firms that are healthy enough to supply effective electronic service.
That may explain why Marty Chavez, who is moving from chief technology evangelist at Goldman to chief financial officer, seemed keen to row back from extravagant claims about digital opportunities when he was introduced to analysts on the firm’s recent quarterly earnings call.
When invited by an analyst to talk up ways his background might transform performance at Goldman, Chavez declined to take the bait.
“There is math and software in everything we do, but really it is risk management [that is key],” he said. It was a refreshing note of reality, though perhaps not the message that investors in financial shares are keen to hear.
Investment banks still face big challenges to producing returns that are consistently above their real cost of capital, and market share will have to be won without taking risks that could later make any gains illusory from the perspective of sustainable profit.
It certainly could be risky to simply assume that life under Trump is going to be so great, on so many levels, for banks.