Improving Capital Market Trends

S&P Capital IQ believes the capital markets industry has put most problems from the financial crisis behind it, although public policy has reshaped the industry. We believe the investment banking & brokerage sub-industry has felt more of the public policy effect than the asset management & custody banks sub-industry. We think investors have a number of ways to benefit from positive developments in the industry.

According to S&P Capital IQ Director of Global Equity Research Ken Leon, most businesses in the capital markets were affected by post-crisis consequences, with increased regulation on each enterprise's risk taking and capital required to participate in the capital markets. Since 2013, many companies have undertaken strategic initiatives to respond to new regulations and to de-risk their firms. For example, in mid-2013 Morgan Stanley purchased the then outstanding stake in the Morgan Stanley Smith Barney joint venture and to comply with regulations, the company has increased its risk management tools.

In addition, underwriting and investment banking fees improved significantly in 2013 versus 2012, with further gains in 2014. Corporate clients took advantage of record-low interest rates to improve the balance sheet with debt refinancing, make strategic acquisitions, and respond to shareholder activists with spinoffs or sale of businesses to realize higher shareholder returns. An optimistic view comes from Goldman Sachs stating in January 2015 that its backlog of investment banking services was at the highest point since 2007. This gives S&P Capital IQ some indication of industry wide confidence in investment underwriting and advisory fee momentum expected in 2015.

Meanwhile, asset management companies are doing well, with fees collected having doubled in the five-year period ending 2014. AUM fees benefited from a rising equity market and a positive trend in AUM net inflows. Equity funds have been the biggest winners since the financial crisis, moving from 37% of total assets under management (AUM) in 2009 to 54% in 2014, benefiting from both a rising equity market and higher net inflows, which are likely to continue in 2015.

Based on 2014 total assets, the largest investment managers were BlackRock and State Street Global Advisors. Both firms are benefitting, we believe, from robust growth in passively managed exchange traded funds (ETFs) and its share gains relative to mutual funds. However, as we were quoted as saying in last week’s Wall Street Journal we believe Fidelity Investments and Capital Group, both top-10 firms with a strong active management presence, have been pressured as ETF usage grows.

Investors have increasingly been using ETFs in a tactical manner to gain exposure to industries, while benefiting from their low-cost, passive nature and the ability to make intra-day trades. However, exposure to the capital markets industry as well as cost factors is different for various ETFs, which is why investors should look inside before considering investing.

My colleagues recently published an Industry Survey highlighting the drivers of the capital markets industry. Email to gain access to the content.  In addition, S&P Capital IQ has research and rankings on various financial stocks and ETFs. Visit to learn more and to read the full article.

 Follow me on Twitter at @ToddSPCAPIQ

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