Awards for Excellence 2019
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| View full 2019 results |
Sales and trading bankers will be forgiven for hoping for a smoother time in the remainder of 2019 than they experienced in the previous 12 months.
For navigating a tricky period in both equities and fixed income, and doing so with a strong financial performance, Morgan Stanley is again our choice as the world’s best bank for markets.
Last year was bookended by two bouts of extreme volatility in almost all markets. The first quarter of 2018 had bankers drawing comparisons with the volatility seen in periods like August 2015, with a similar dynamic around expectations of Federal Reserve activity, as well as concerns about China, though back then it was worries over a softening of its economy rather than the trade war nervousness of the last year.
The second quarter saw something of a revival, with activity brisk and clients showing plenty of conviction. Capital markets were buoyed up by the tech and healthcare sectors.
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David Russell |
That confidence spread into the third quarter and its summer lull, but it was soon scuppered in a fourth quarter that most firms would like to forget. Markets became severely dislocated as the year-end approached and client activity dropped sharply.
Conditions like those seen in 2018 are a test of any franchise, but Morgan Stanley showed its resilience, not just in its world-beating equities business but also in its slimmed-down fixed income side, which continues to defy the pessimists who argued that chief executive James Gorman had cut too far when he radically reshaped it in 2015.
Morgan Stanley runs its equities business through what it calls its “nine-box strategy”, a matrix of the three business lines of cash, derivatives and prime, overlaid onto the three regions of the US, Europe and Asia. The approach is designed to ensure that the firm tracks its performance in each individually but also focuses on maximising the way in which each can contribute to another.
Years after it was set up, that approach is still working just fine. As of the first quarter of 2019, the bank has led in revenues for 16 consecutive quarters. In the full year 2018, it clocked up a revenue share of more than 20%.
“Our target is to be number one in each bucket,” says David Russell, global co-head of equities. “We run the business internally in a global way and we treat clients in the same way – we look at our relationship with them globally, not just in one region.”
The year under review has seen continued progress even for such a dominant franchise. The bank is gaining market share in Europe – as it should, given the way in which traditional European competitors are falling away.
According to Markit, the firm’s European share of cash equity rose from 10.7% in 2018 to 11.2% so far in 2019. Asia has seen a bigger move, from 6.4% to 7.3%.
In prime, the firm sets great store by winning startup mandates, a reflection of its careful monitoring of the client landscape. ExodusPoint, a global multi-strat that began managing investor capital in 2018 and kicked off with some $8.5 billion in seed money, is a good example – Morgan Stanley now provides prime services to it globally.
I would characterise it as aggressive defence in prime and offence in derivatives – David Russell
Derivatives is one area where the firm had not been dominant – top three, but not top. Over the last two years it has been studying where the deficiencies lay: it was strong in flow, but not so much in structured quantitative investment solutions (QIS), for instance.
Now it is building there, and in other areas too.
“Four years ago, we didn’t have an exchange-traded products (ETP) business,” adds Russell, “and now we are number three in Germany, Europe’s biggest market for ETPs, and number one in Sweden.”
Continuing to build is a focus for the year ahead, he says. “I would characterise it as aggressive defence in prime and offence in derivatives.”
Continued investment in technology will be paramount. The bank’s electronic business, MSet, is already a market leader, operating in 41 countries and more than 115 venues. It has double-digit market share in the US. But as in all arms races, participants cannot afford complacency.
Fixed income has had a more chequered past at Morgan Stanley, culminating in the firm’s decision to slash costs in 2015 and resize it for an average quarterly revenue target of $1 billion. Last year it averaged $1.25 billion.
Remarkably, it is also taking share, having added 180 basis points since 2015 to stand at 8.6% for the full year 2018. And it flies in the face of the traditional view of having to be at the top of the rankings to make money – it reckons it now sits in sixth, but it is more profitable than it was before the cuts.
“Three and a half years into the restructuring, we are still executing on the goals we set out at that time,” says Jakob Horder, head of fixed income in Europe. “We are selectively investing in the business to grow client share and market share.”
In the last year, that selective approach has included moving into more areas of structured finance, expanding the asset finance business, as well as growing in the listed area, through execution and clearing – a useful provider of more stable revenues than traditional trading businesses.
And while others have been belatedly cutting in FICC, particularly as markets continue their inexorable electronification, Morgan Stanley’s earlier reductions have given it scope to engage in hiring.
The first cut may have been the deepest, but it has stood the bank in good stead since.
