Banking on Markets
MONTHLY
A Return to Historical Seasonality
The past few years have been a whirlwind for the global financial markets. As the
pace of macroeconomic deterioration slows and financial markets continue to heal,
we ultimately look for a return to more normalized levels of capital markets
activity, market volatility, trading volumes and mutual fund flows. With that
already has come a more traditional (and perhaps welcome for financial services
investors) summer slowdown... and if all goes well, a traditional summer Yankees
pennant run as well. All in all, our forward estimates rely on continued normalization
of conditions over the second half of 2009. For our capital markets coverage, other
key issues include the evolving regulatory landscape, consolidation of the
competitive landscape and expense levers (comp, discretionary spending).
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Investment Banking Activity. Calendar third quarter to date, based on
information from Dealogic, investment grade debt underwriting is tracking down
30% from second quarter levels while high yield debt underwriting is up 13%.
The volume of equity underwriting is down 7%—related disclosed fees are down
15% from robust second quarter totals. Completed M&A is tracking up 42%
quarter-to-quarter while announced M&A is down 29%.
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Asset Prices and Volatility. Equities prices are higher while fixed income prices
are mixed third quarter-to-date. Specifically, equities prices are up (on both a
period-end and average basis), interest rates are higher, high grade and high
yield credit prices are improved, residential real estate indices are mixed,
commercial real estate indices are improved, and commodities prices are mixed.
Volatility across most asset classes has declined from second quarter levels but
remains above pre-crisis levels.
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Trading Volumes. Third quarter-to-date, global exchange volumes have
tapered—cash equity and equity options volumes are lower; U.S. volume growth
continues to outpace that of Europe. Global derivatives volumes are mixed with
energy futures being a highlight. Cash fixed income volumes are mostly weaker.
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Retail Brokerage and Fund Flows. Despite widespread market disruption, retail
brokerage asset gathering remains strong but trading activity has started to
decelerate. Client asset inflows are stable-to-negative for the traditional
brokerage houses; discount/online channels continue to grow faster and take
market share. We estimate July retail trading activity to be down 12-15% from
June levels and trend lower as we progress through the summer. With respect to
fund flows, equity and fixed income funds have enjoyed inflows while money
market funds have experienced outflows flows third quarter-to-date.
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The Stocks. Within our capital markets coverage universe (i.e., brokerage and
advisory firms, discount retail brokers, securities processors, financial exchanges
and market structure firms), our top stock picks and favorite names include
Goldman Sachs, Blackstone, State Street, CME Group and Charles Schwab.