U.S. brokers kicked off 2015 on a strong note but investors can expect a tough quarter ahead for Q2 with the uncertainties involving Greece and the decline in asset prices that have weighed on fixed income trading and principal investing. On the other hand, M&A activities have been close to a record level and equity trading due to increased volatility was supported by heavy volume, all of which bode well for near-term earnings. Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) remain my top two picks amongst the U.S. brokers.
In Q2, industry-wide banking activity was lower compared with a year ago. Total capital raised was $3.4bn compared with $3.8bn a year ago, driven mostly by a -29% decline in loan syndication. Debt underwriting was also down 18% and IPO fee was down 23%. On the other hand, M&A was relatively stable with total announced M&A up 35% and completed M&A up 44%. GS leads the pack in terms of M&As with $704bn YTD, followed by MS at $568bn and JPMorgan (NYSE:JPM) at $503bn. Despite the 19% y/y decline in industry-wide banking fee, I remain positive on the medium-term given the stable M&A and favorable equity issuance environment, which bodes well for future fee generation.
On the fixed income side, both sales and trading activities have been trending lower in an already muted environment. Despite that volume and volatility were intact during the quarter, the possibility of Grexit and key macro plays in the USD/EUR trade and EU debt made it a tough trading environment. Heading into the bank earnings call, investors should pay a particular attention to this topic. Looking at the business segments, the market largely expects a weaker trend in credit, mortgage and rates due to lower asset price but stronger revenue from commodities and emerging markets.
Contrary to the fixed income market, the equity market has been faring better than expected compared with a year ago and this was largely driven by increased activity in cash equities and derivatives and increased volatility. Interestingly, margin trading has been on the rise as investor appetite for leverage picks up and I suspect that much of this was due to clients in Asia.
Finally, as for Greece, exposure to European markets will be a key concern to many investors as negative sentiments could derail the stocks. However, I believe that Goldman and Morgan Stanley are better positioned for this negative headwind given their superior risk management.
I will be buyer of Goldman Sachs and Morgan Stanley ahead of the quarter. For GS, M&A environment favors its growth prospect as the leader in the league table. For MS, equity trading remains solid while there is still upside to fixed income trading once the macro backdrop improves.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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