By Yaser Anwar CSC, of Equity Investment Ideas
Yesterday I laid out MS’s first theme and my take, today we move on to the second one.
Theme #2- US Financials with Exposure to International Growth, Demographics, and Capital Markets (repeat from ’06).
- Our base case is that we are in a secular bull market for the transfer of risks off balance sheets and into the capital markets. We also believe that international growth will continue to outpace domestic, and we favor companies that are selling retirement products to aging populations.
- We have used a variety of names throughout our tenure in strategy, but Prudential, Merrill Lynch, State Street, and American International Group certainly fit the bill. Importantly, though, we do think that a cyclical correction in this area could be likely in the near term, given such strong performance of late (hence, we removed Merrill from the Focus List recently).
Looking to Network with People in the Financial Industry
Yaser’s Take- Capital Market & Banking Firms
- While MS favors companies catering to the large baby boomer market, I believe investors can achieve higher rates by going long the top capital markets firms. Before I talk about capital markets firms let’s talk about some industry trends for the regular banks.
- The industry has been in a period of consolidation for several years. Along with M&A activity, international expansion and an expansion of services within companies have become commonplace as these companies seek to become “one stop shops” for their clients.
- Geographically, security companies have targeted Europe, Latin America, and Asia. Credit card providers have been targeting Canada and the U.K. As for the aggregate health of the industry, revenues have been strong due to the general health of the economy, strong employment and relatively low interest rates, all of which have led to strong demand for lending products.
- The large increases in international branches and consumer finance centers, shows the growing importance that banks, C- BAC- Barclays, are putting on organic growth. Although The Street expects them to continue their international organic growth in 2007, I anticipate that the pace will slow significantly from 06. Why? Due to the increased pressure to cut expenses will lead to lower investment spending internationally and margin pressure if interest rates remain or move upwards.
- For specific services, credit card lending has decreased in recent years because low interest rates and soaring property values led homeowners to pay off their credit card debt with home equity loans. This trend maybe changing and yesterday’s HSBC report doesn’t do any good either!
- Coming onto Capital Market firms, while regulators and people who have no productive issues to think about, keep worrying about systematic pressures to the system, especially by structured products, I believe continued pickup in M&A activity, debt and equity market underwritings should continue to boost performance for the major investment banking companies.
- Investors should look towards Goldman, Lehman, Merrill, pretty much the top 5, by market cap, for growning sales and net income significantly, beating the banking, ones levered more towards consumers like mentioned in the above thesis, growth rates of and of competitors within their industry.
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