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Morgan Stanley (NYSE:MS.PK) Bernstein thirty eighth Annual Strategic Selections Convention June 1, 2022 1:30 PM ET
Firm Members
Ted Decide – Head of Institutional Securities and Head of Company Technique
Convention Name Members
Christian Bolu – Bernstein
Christian Bolu
All proper. I believe we’ll get began. Good afternoon, everybody. For our subsequent hearth aspect chat, I am delighted to welcome again Ted Decide from Morgan Stanley to the convention. Lots of you recognize Ted already. However for individuals who do not, Ted is the Head of the Institutional Securities enterprise at Morgan Stanley and in addition the core Head of Company Technique. Ted has a very good historical past at Morgan Stanley. He type of shut the identical, in case you like, for the monetary disaster, main the Morgan Begin Equities enterprise to turn into the primary franchise on the road. Then much more impressively, stabilized the FICC enterprise, which was a zero underperformance earlier than that. And now Ted runs all the institutional companies in addition to company technique, as I stated. So welcome Ted and thanks for coming to the convention once more.
Ted Decide
Christian, thanks for having me. It is nice to be right here.
Christian Bolu
Okay. Earlier than I get began, I’ve to learn the disclaimer that I used to be despatched to you by Morgan Stanley. This dialogue could embrace forward-looking statements, which replicate Morgan Stanley’s administration’s present estimates and are topic to dangers and uncertainties that will trigger precise outcomes to vary materially. Morgan Stanley doesn’t undertake the duty to replace forward-looking statements. This dialogue, which is copyrighted by Morgan Stanley and will not be duplicated or reproduced with out a consent, will not be a proposal to purchase or promote any safety.
Ted Decide
Okay. Properly accomplished. I agree with all of that.
Query-and-Reply Session
Q – Christian Bolu
After which the final housekeeping merchandise. In order for you a number of the query, be happy to do it by the pigeon gap system. I am assuming you understand how that works as a result of I am on query on myself.
So Ted, perhaps a very good place to start out the dialog is on the macro backdrop, after which we will dig into some Morgan Stanley particular points. And evidently the markets are extremely uneven. What’s your view on the state of the world immediately?
Ted Decide
Properly, Christian, it is a unprecedented second. We’ve our first pandemic in 100 years. We’ve our first invasion in Europe in 75 years, and we now have our first inflation around the globe in 40 years, and none of these three are unprecedented. Our dad and mom and our grandparents would inform us these items have occurred earlier than, however it’s uncommon and it’s extraordinary that they are all taking place on the identical time. And I believe that whenever you take a look at the mixture, the intersection of the pandemic of the conflict, of the inflation, it alerts paradigm shift. The tip of 15 years of monetary repression and the following hour to return, and our job is to assist navigate purchasers on that journey.
Christian Bolu
How does that influence or what are the implications of that for the institutional securities companies?
Ted Decide
Properly, Christian, I believe it has been vital to have a balanced and world funding financial institution. If you consider the years main into the pandemic, that was a time after we had very low rates of interest, low inflation, after all, it made sense to be invested in public equities, particularly giant cap tech that acted as bond proxy. Then 2020 got here out of the blue, the exogenous shock and out of the blue, corporations, traders have been in protection mode, saving mode, rescue mode. And at the moment, it mattered for us to have a debt capital markets enterprise that might work carefully with the equities enterprise that it carried us via these pre-pandemic years. Now the debt Capital Markets Group wanted to assist corporations elevate capital, to acquire extra buffers to be prepared for doubtlessly very powerful scenario, which at some stage was resolved by the Fed coming in and the federal government coming in after that. However on the time, it wasn’t recognized. You then flash ahead to 2021 and it appeared like we have been going to get via COVID. The conflict hadn’t but gotten going and people have been relevering once more. We have been nonetheless at zero charges, unfavorable actual charges, and naturally the monetary sponsor neighborhood, the hedge fund neighborhood, they actually acquired going, and that was excellent for our bankers, and our fairness capital markets enterprise took off. We had huge IPO exercise.
After which we acquired to the conflict and we acquired to the start of 2022 and the inflation that was incipient is now boiled over. And that, after all, has taken our mounted revenue enterprise, which has been largely dormant for many of the years of monetary repression and actually kicked it into excessive gear as a result of, after all, now with the central banking neighborhood combating inflation, you have to deal with the place the rate of interest curve is, you have to fear about international trade. And all of that is to say that in a fairly brief time period, we have wanted the steadiness of a worldwide funding financial institution, not simply by enterprise geography however by location too. There have been occasions when two years in the past, the Asia sphere was very energetic with the IPO market, Higher China. And now Europe is busy once more, together with the USA. In order that steadiness, Christian, has been important to assist our purchasers navigate pre-COVID 2020 rescue, 2021 offense, 2022 uncertainty.
Christian Bolu
So on condition that backdrop, what’s the outlook, how do you consider the outlook for these companies?
Ted Decide
The outlook, that could be a powerful one. I am type of taken with all the oldsters that we’re listening to, we’re getting only a torrent of data from individuals who appear to have certainty on outlook. I’m unsure and I’m optimistic that I am unsure. The truth is that there’s a hearth narrative and that fireside narrative is inflation. After which there is a little bit of an ice narrative, which is that recession speak, exhausting touchdown, smooth touchdown. I believe immediately we must be centered on the inflation piece. Our economists have CPI going out at 4.6% in 2022. The PC indicator, which is the Fed likes at 3.7%. 3.7%, 4.6% that is increased than 2% or 3%. So the inflation is right here. And the Fed and the central banking neighborhood is on it. For our navigation of purchasers, although, I really feel like an important factor we will do throughout this paradigm shift interval is to present them consolation that we will help with moments the place you want a telescope and moments the place you want a microscope. Moments the place you want a telescope is there’s this huge sea of bushes, and I must know one thing that will have already modified and will have an effect on my enterprise, have an effect on us and the C-suite within the boardroom. An instance of that could be provide chains.
We do not know whether or not we’re going right into a multipolar world or not, however we all know from COVID, and we all know from the invasion that the geopolitical realm has modified. Historical past has resumed, which signifies that the outdated provide chain mentality of quicker, higher, cheaper, has modified, perhaps it is slowbalization, which is a pleasant time period that our guys got here up with this concept that perhaps it is not quicker, higher, cheaper, however it’s extra dependable. Properly, in case you’re the CEO, that’s implications for inputs, perhaps there’s extra inflation, perhaps you have to cross that alongside, perhaps you’ll be able to’t. However our job is to assist that CEO assist her categorical the should be prepared for that change to return via the enterprise mannequin. That is the telescope. The microscope is attire firm misses or there’s marginal working margin degradation, hedge fund managers down on the 12 months, hedge fund supervisor is nervous. Is that this the explanation why I ought to delever and promote all my retailers? That one information level, that one working margin statistic for one quarter in a spreadsheet, is that the canary within the coal mine. And in order that’s type of a good distance of claiming that our job is to assist purchasers take into consideration the telescope and the microscope and take them on this journey, as a result of what we do know is that paradigm shift goes to take time, that 15 years of monetary repression don’t simply go to what’s subsequent in three or six months. We’ll be having this dialog for the following 12, 18, 24 months.
Christian Bolu
Okay. So after I use the telescope, the microscope slowbalization…
Ted Decide
Do you want that…
Christian Bolu
Some nice freezes there. Inflation…
Ted Decide
[Volume] materials, I simply do not need to see you want that.
Christian Bolu
Inflation for first time in 40 years or highest in 40 years. How ought to we take into consideration the medium-term outlook for funding banking charge swimming pools and I imply each conventional capital markets and buying and selling key swimming pools.
Ted Decide
Positive. The charge swimming pools, so we take into consideration the charge swimming pools historically as revenues amongst the 9 world funding banks. Not surprisingly, throughout these years of monetary repression, the charge swimming pools have been in and round $145 billion, between $140 billion and $150 billion. They did not transfer a lot. Then as you recognize, unwelcome as COVID was the charge swimming pools exploded. And in 2020, we had charge swimming pools over 200. Then in 2021, all of us talked about the truth that perhaps the charge swimming pools can be between 2019 and earlier than the $145 billion, and that $200 billion in 2020. However once more, 2021 was $200 billion, surprisingly, very energetic. However partly as a result of there was a response operate to huge quantity of protection that must be utilized again to $200 billion. Now a pivot to doubtlessly we will get via this, that once more saved us elevated. The geography of these revenues change, however nonetheless the next run charge, $150 billion is now $200 billion. And actually, the primary quarter this 12 months has been round [55]. Now as you recognize, Christian, what’s vital to recollect is that the enterprise is now being led by the mounted revenue enterprise.
So we have had actually a regime change by way of what divisions are main in a worldwide funding financial institution when it was equities earlier than after which it was some funding banking led by the underwriting calendar. Properly, immediately, there’s lots of mounted revenue exercise as a result of, once more, persons are making an attempt to determine what to do about charges and international trade. There’s some credit score exercise. However the brand new challenge calendar is extraordinarily quiet. There have been $5 billion of complete world IPOs to this point and final 12 months, the quantity was 500. So we will do the maths on that. The underwriting calendar may be very, very sluggish, particularly on the fairness aspect. And the banking calendar too is quieted down a bit as a result of persons are making an attempt to determine whether or not we will have this paradigm shift clarified ultimately. If I give it some thought in broad phrases for our enterprise, I would say that the markets enterprise is doing fairly properly, continues to do fairly properly. Purchasers are energetic, they’re repositioning, they’re hedging threat. We’ve these durations the place it feels off the fiery in different durations the place it fuels icy, and purchasers must navigate round that. After which the banking enterprise, as a result of the calendar is so sluggish street-wide that’s significantly slower.
And to your query on what which means for the medium time period, I believe we will know extra within the fall. Will GDP progress continued round 2% and can inflation type of begin normalizing? The Fed will proceed to hike however it is going to really feel extra goldilocks than not, softer. Properly, then I would be fairly bullish in regards to the second half and positively going to subsequent 12 months. Then again, if the inflation and particularly the inflationary expectations are cementing and the Fed’s actually acquired to push exhausting and it is acquired to enter restrictive territory and the impact of the steadiness sheet coming down actually strikes charges increased, that might maintain banking enterprise slower. However the actuality is that this paradigm shift in some unspecified time in the future will usher in a brand new cycle, as a result of it has been so lengthy since we have needed to contemplate what a world is like with actual rates of interest, actual value of capital that may distinguish profitable corporations from shedding corporations, profitable shares from shedding shares. And finally, as you recognize, in our enterprise, we’re we’re market makers. We provide options to company purchasers and we assist intermediate and handle threat. So I like our enterprise in the next charge surroundings over the medium and long term.
Christian Bolu
Attention-grabbing. Properly, let’s swap into the enterprise, speak extra about Morgan Stanley particularly, significantly along with your new position as Co-Head of Technique. I believe most individuals have a tendency to consider Morgan Stanley as a set of companies. So you’ve an institutional group, you’ve the wealth supervisor and the funding administration enterprise. Are you able to simply speak in regards to the strategic benefit of getting type of all three of these companies collectively, is there a case right here the place one plus one plus one equals greater than three?
Ted Decide
It is truly an awesome query, as a result of the Morgan Stanley historical past across the assortment of companies, as you recognize, is a protracted winding historical past. When Morgan Stanley merged with Dean Witter in 1997, the retail enterprise of the agency of the Morgan Stanley a part of the agency, was inside our institutional equities enterprise. It was a excessive internet value enterprise, it was an awesome enterprise, but it surely was small within the context of what was then Morgan Stanley, and now lots of years previous. And we would like to consider ourselves as a gaggle of 1. We have a world class wealth and asset supervisor. As you recognize, $5 trillion of wealth, $5 trillion, $1.5 trillion of funding administration equals $6.5 million and we have got this built-in funding financial institution, which I handle, which we would wish to suppose is a prime one, two, three funding financial institution around the globe. The query has all the time been, are you able to get these two halves to work collectively in a approach that makes it fascinating for shareholders, for stakeholders? Is there an actual synergy available not simply by way of capital effectivity and perhaps even some value effectivity, however precise behavioral effectivity.
And so fascinated about that, I would say model 1.0 of that experiment of that journey was type of attending to know you. Attending to know you took about twenty years, okay? Attending to know you, brown bag lunches, numerous administration groups, making an attempt to crack the code, attending to know you. Model 2.0 began to kick in after James engineered — James Gorman, our Chairman and CEO, engineered the Smith Barney merger. Then our wealth enterprise had come of age. And now the funding financial institution and the wealth enterprise discovered causes to work collectively. For instance, ultra-high internet value, household owned enterprise, reaches a degree the place there must be a disposition, a legacy sale. Properly, why not name an M&A banker and have that M&A banker take part on the deal crew to assist that wealth shopper promote their enterprise, episodic, fascinating however probably not thematic. Now we’re 3.0. 3.0 is you have to triangle of those three companies. And on the scenes of these triangles, there are companies with money flows and a terminal worth which are accretive to the proposition of proudly owning Morgan Stanley as current entity. Instance one, we purchased Eaton Vance within the throes of COVID, a set of fantastic companies, together with a world class tax administration product referred to as Parametric. Parametric now could be offered more and more daily in a rigorous approach inside the 16,000, 17,000 FAs, courtesy of that funding managed mental capital that exists in Parametric, Parametric into wealth.
Second instance, we now have in our institutional equities a fund companies enterprise. We are the final promote aspect agency to have that enterprise. That’s, as you recognize, the calculation and statementing of internet asset values for sometimes for hedge funds and different asset managers. Properly, what about all the household places of work and extremely excessive internet value people across the nation who need to really feel of what they’d after they have been managing that hedge fund. They’re now working their household workplace however they nonetheless need to have that institutional expertise. Properly, we have been capable of take the expertise equipment from the fund companies enterprise and transport it into what’s successfully an outsourced CIO product. So now we now have one thing that’s actually differentiated amongst this ultra-high internet value group that may relive their institutional expertise on a scale foundation, attracts them to Morgan Stanley, provides them the flavour of an institutional expertise. It has scaling impact. So there are examples like that, after which there’s type of a giant one, which I am most enthusiastic about. So the opposite acquisition, as you recognize, we made throughout the disaster, the newest COVID disaster, truly, the month earlier than was that of E*TRADE.
So E*TRADE takes us from self-directed buying and selling via the advisory channel to what we wish to know — time period office, all proper? And office is a couple of outlined contribution world the place you’ve your inventory plan and the inventory vests, and perhaps you make a sale and now you’ve money in your account, wow, chances are you’ll want some recommendation. First, you may get an E*TRADE dealer, perhaps you may get a monetary adviser, if it is a big sum, perhaps you do not need to make a sale and pay capital good points you want some recommendation. That office mandate is for one giant cap firm. One giant cap firm or one mid-cap firm has one supplier, all proper? And the mixture of Morgan Stanley, legacy Morgan Stanley Wealth, E*TRADE and a small firm referred to as Solium that we purchased, mainly seize about 40% of the S&P overlaying office. So 40% of the S&P 500 have Morgan Stanley driving their office engine. Once more, one supplier who may give recommendation to all the workers as their inventory vests.
Properly, what if the banker who works in Menlo Park has a world class relationship with a big cap expertise firm that we might consider, and we’ve not been capable of crack the nut to get office in. Would not or not it’s nice the CEO or the CFO might get us a gathering with the pinnacle of HR to speak about potential office mandate. Vice versa, what if we now have that giant cap applied sciences, office mandate and we’d like a banking introduction. So these are three completely completely different examples the place within the first case, you’ve funding administration, tax product going into wealth. Within the second instance, you’ve institutional equities, expertise, DNA going into wealth. After which the third instance, you’ve bankers and wealth managers via the office funnel working collectively. I imply for me, Christian, that’s extremely thrilling as a result of as you recognize, after you have that mandate, it turns into very exhausting to unlock if the shopper, whether or not they’re excessive internet value or their company character is getting statementing that’s dependable, they’re more likely to keep it up so long as it really works properly. So all of that, in my thoughts, contributes to the seams between the wealth ballast and the engine of the funding financial institution.
Christian Bolu
Good. Going again to institutional enterprise, the market share good points have truly been fairly exceptional, principally over your time. I believe total market share has gone from one thing like 11% to close 15% over the previous few years. Possibly simply take us again to grasp type of what drove that, what are the drivers of that? After which nearly extra — perhaps extra importantly, the place does it — is it sustainable and the place does it go from right here?
Ted Decide
Properly, after the disaster, the monetary disaster, we have been in a gaggle of 9 and we had 11 share. And I would say, when you’ve got 11 share and also you’re one in all 9, might be not nice. And so the query turns into, what are you able to do to push the ball additional? And I would say with humility, lots of it’s grip, it’s dedication, it is a few steps ahead and a step backward. You and I met six years in the past, in Florida. And that was…
Christian Bolu
And also you look precisely the identical.
Ted Decide
Properly, I imply, I acquired a haircut, so I am hoping, you look higher. However that was after we reduce 25% of our mounted revenue resourcing. And we had made an existential resolution at that time that we have been going to be within the mounted revenue enterprise. If you are going to run an funding financial institution, you higher be within the mounted revenue enterprise as a result of the debt stack has the largest notional of any product on this planet and all the time will, and we need to be a worldwide funding financial institution at that. However we have to run the mounted revenue enterprise in a critically extremely decided approach. And so the query turned as a noncommercial financial institution, might we do this? Particularly within the coronary heart of monetary repression, there’s not quite a bit happening a charge, not like happening FX, are you able to guys type of maintain it collectively? And the crew did a beautiful job they hung in there. Every crew had helped construct us to the place for when the crew got here in, in ’15 and ’16, they may successfully take the expertise apply from equities, our MSET digital apply, anticipate that mounted revenue in some unspecified time in the future would turn into expertise affected enterprise, though it is traded largely on a principal foundation, the place the equitizing of mounted revenue was coming. And we simply — it was a slot, we saved on going.
And you then and I met once more right here three years in the past. So six years in the past after which three years in the past and three years in the past, we talked in regards to the built-in funding financial institution, proper? And at that time, we had gotten type of ROEs from 9 to 11, making an allowance for that the charge pool is static. So we’re gaining share, very centered on returns, very centered on bankers, equities folks and glued revenue folks working collectively. Mobility of parents pushed to 1 resolution for purchasers and simpler stated than accomplished, however we have been working in. And the crew was galvanized to get that accomplished. So that truly, whereas we by no means would have guessed one thing like COVID might occur, we had a fairly good sense that if we might get to a second the place the denominator, that $145 billion would lastly liberate that we’d expertise working leverage. And because it seems, as you recognize, Christian, when the $145 billion went to $200 billion, we have been capable of maintain truly achieve somewhat share of [14] to [15]. And importantly, as a result of traders and different stakeholders need to know this, we’ll by no means have the sturdiness of the ballast within the wealth enterprise.
However when you’ve got an engine, an funding financial institution, can it generate working leverage. And the reply was sure, 35% margins, 20-plus returns on capital. So a golden interval to make sure, however one the place the preparation had been accomplished. So what’s crucial for us as we take into consideration purchasers navigating this uncertainty now could be that the worldwide funding financial institution has the resourcing that it wants to keep up share, however our funding financial institution working inside this assemble that makes Morgan Stanley distinctive in order that we’re very a lot centered on the place we now have threat, what returns are generated and which purchasers we’re placing that in the direction of.
Christian Bolu
After which wanting ahead share, the place do you suppose it goes and is it sustainable?
Ted Decide
I like our share right here, I do. Now it does not imply that we’re settling for it. However the best way we take into consideration our share, Christian, as you recognize, is think about three forms of enterprise contained in the funding financial institution: equities associated, that might be fairness gross sales and buying and selling, money execution, prime brokerage, fairness derivatives hedging or it might be the ECM enterprise, the underwriting of IPOs and follow-ons. We like that quantity round 20%. We’ve a world class equities enterprise, primary for a bunch of years, world class ECM, main underwriting as we communicate. So 20 share appears proper. We discovered truly pushing share an excessive amount of above that. We have not essentially been capable of maintain value. We do not essentially like incremental focus of threat. So within the roughly 20 space feels proper. On the different finish of the spectrum, 20 clearly being a battle on daily basis, by the best way. 10 for mounted revenue and glued revenue underwriting. As a noncommercial financial institution, we have been at 6, we went to eight and now the crew has accomplished a beautiful job, we’re at 10. 10 looks as if a very good quantity in a world the place there’s quite a bit to do within the mounted revenue universe.
It isn’t simply macro, however after all, we now have this commodity tremendous cycle that is kicked in, due to each COVID and the conflict and the mandate of ESG towards it. Very fascinating time to be within the commodities complicated and to be intermediating that threat. Underwriting of debt, excessive yield financial institution loans, debt capital markets, 10 looks as if the appropriate quantity. So 20 fairness, 10 mounted revenue. Then the center is banking. And there, we have had share at about 15. And in case you stated, okay, come on, give me one space the place you would be pushing somewhat bit. I believe via the cycle is perhaps there. The 15 is a superb quantity. We’ve a world-class M&A apply, prime one, two, three on this planet in any given 12 months. However I believe company finance business experience, given the paradigm shift and we will have these crosscurrents of fireside and ice affecting completely different corporations, alternative ways in a multipolar world, issues acquired a heck of much more sophisticated within the final three years, company finance business recommendation. Plus we now have a brilliant cycle now monetary sponsors, actually trillions of dry powder, they want recommendation.
So I like the concept of overlaying mid-cap corporations, main sponsors, mid-cap sponsors. However I say all of that, Christian figuring out we could also be late within the cycle. And if we’re late within the cycle, this is not the time to go rent a few hundred bankers. That’s the oldest story of funding banking. We’re terribly procyclical. So we need to be rifle shot on that. Who we will rent, why we will rent them, we now have an awesome TMT apply, we have employed some power associated bankers who will help with ESG transition. Which may be the place we need to go. So the paradigm, I believe, is 10, 15, 20 and perhaps push on that 15 a bit.
Christian Bolu
Okay. Good. I’d say a giant a part of our technique has been type of a worldwide apply, i.e., not simply within the US, however deep into Europe and Asia. Nevertheless it does really feel like we’re in a interval of globalization, I believe you used the phrase slowbalization or one thing, it’s a very good phrase. How dedicated are you to your world footprint in a world of deglobalization? After which perhaps are you able to discuss your non-US companies, how do you do it, the way you see them rising going ahead?
Ted Decide
I am glad you requested that, very centered. If you are going to have a worldwide funding financial institution, that may’t be a US financial institution with worldwide operations. So we’re spending lots of time exterior the US. And I have been hitting the highway fairly extensively as a result of the fact is we will not simply watch for paradigm shift to be resolved. So we have to categorical our strategic views primarily based on the place we’re placing chips not simply on the enterprise steadiness that I described, however on the geographic steadiness. The US, after all, for all the explanations we all know, we’ll proceed to have secular tailwinds. I like Continental Europe. Brexit and the invasion weren’t of Europe’s asking, fairly the opposite as we all know. However in type of a twist of historical past right here, it has truly galvanized the continent in a approach that was unimaginable. Macron has been reelected with an affordable majority. The French and Germans are working collectively. And also you recall, 10 years in the past, we have been speaking about Euro existentialism and now we’re speaking about Eurocentric progress. Possibly demography goes to start out turning round? Positive. Might there be a recession down the highway? It is referred to as an financial cycle. However I just like the continent. I prefer it for its rule of regulation, the standard of schooling and the adjacency to our worl class UK enterprise and our linkages to that which we do finest, which is advising purchasers, intermediating threat, serving to categorical a view.
And that, I believe, goes to be a lot the main focus as capital asset managers, corporations begin going to Europe. There will probably be extra of an unsecured lending market lastly. There would be the constructing, I believe, of fairness capital as an alternative of the following nice biotech firm being within the US, why cannot or not it’s in France? Cat Caron listed and the fairness stack following alongside. So I believe the post-Brexit actuality of conflict continent, Paris, Germany, very fascinating. We have been devising somewhat experiments. For instance, we began up a quant middle simply to get a way for the place younger folks popping out of college, the nice universities in Paris, a number of the strats will assist us mannequin, might there be curiosity in a unit like that to assist retain folks and get the perfect of Europe and the very early tea leaves are very optimistic. The second space that’s apparent to say, after all, is Asia, the larger China complicated is the place you’d begin. We’re having a second in time bilaterally, US-China. What I would say, although, which can be somewhat towards consensus is I am bullish on Hong Kong. I perceive how Hong Kong can have in all probability modified. However the actuality is China will want Western Capital for a very long time, and the West will search for a gateway into China for a very long time. So will or not it’s the Hong Kong over the past 20 years? Possibly not. Possibly will probably be extra just like the Hong Kong earlier than the handover, perhaps even earlier than that.
However I believe having a world-class offshore group to assist bridge to the 50, 100-year China story, I believe that’s completely important if you are going to run a worldwide funding financial institution. And it should not shock you that immediately we now have a number one markets enterprise. We’ve extra prime brokerage property dealing with China than ever earlier than. A share funds are within the first inning, recommendation out and in of China is within the first, second inning. The opposite Asia remark I would make, although, importantly, Christian, is Japan. So Japan is the writer of Japanification, the unique monetary repression people. They’re on, as an instance, 35 years now for the reason that 89 prime. And I believe that is it. That is it. We’re lastly going to have a second the place not simply US rates of interest, however world rates of interest are going to raise off the zero backside, as a result of the meals and power exportation from the conflict will probably be with us for a very long time, and that has huge implications for Japan. The second greatest depositor on this planet, once more, excessive entrepreneurship, excessive innovation, rule of regulation, synergy with the West, however a necessity doubtlessly to deploy these wealth property in a approach that has been thought of in two generations. After all, monetary sponsors and different asset managers are going to need in on that. They are going to need to be onshore. And Japan, after all, goes to need to be wanting offshore to deploy these trapped deposits. So I am very enthusiastic about Japan.
As a Morgan Stanley shareholder and as an government on the agency, I am additionally extraordinarily enthusiastic about Japan as a result of we now have one thing differentiated, as you recognize. We have a 22% shareholder in Mitsubishi, one of many nice monetary establishments on this planet. They have been there on the coronary heart of disaster in ’07, ’08, ’09 and the concept we now have them as our companion to reimagine what the markets companies will appear like. These are mounted revenue desk that trusted zero rate of interest coverage for many years. Now they must rethink. Overseas trade, greenback, yen, has moved 20, 30 from a part of 130. So there will probably be quite a bit to do within the mounted revenue area. And naturally, within the fairness area as a result of now you have to generate returns above zero after which banking as a result of there will probably be an unlimited quantity of exercise, each inside China — inside China, inside Japan, Japan out people investing in Japan. After which for me, this will get again somewhat to my office remark earlier in regards to the synergies of the wealth enterprise and the funding financial institution at Morgan Stanley.
Probably the most thrilling factor that as an funding banker rising up via our ISG companies, at Morgan Stanley fascinated about our agency’s interplay with Mitsubishi in Japan, it is wealth. The entire wealth initiatives that we’re going to have the ability to work on collectively as Japanese corporations get to an age the place they begin giving out inventory to their staff the place the inducement construction appears to be like extra just like the West, we’re not even within the first inning of that. And the numbers as Mitsubishi would inform you given their deposit base are spectacular. Lengthy reply, however once more, I am very excited in regards to the continent, Continental Europe and Higher China and significantly Japan over the following 5, 10, 20 years.
Christian Bolu
Huge name, finish of Japanification. Possibly placing again your technique hats on right here and take into consideration the broader agency, Morgan Stanley. What would you see as the largest alternatives for the entire agency over the following few years?
Ted Decide
James engineered the Smith Barney merger in ’09, after which we transacted with two of the largest M&A offers within the publish monetary disaster period with E*TRADE, as you recognize, a month earlier than pandemic was recognized after which Eaton Vance a 12 months later. So I believe it is honest to say that our job, all of us, is to mattress these acquisitions, get them proper. To this point, the cultural synergies, the enterprise synergies have been higher than anticipated, going actual properly however we’re all conscious that monetary companies mergers or consolidations, or mixtures have traditionally been fraught. And we’re very completely satisfied to report that they are going properly, however that’s our focus, ensuring we get the perfect of each the E*TRADE and Eaton Vance cultures after which the Morgan Stanley tradition on prime of that and make it possible for they’re winners. There are asset administration and wealth tuck-in acquisitions that might doubtlessly be made as we develop each of these companies. I believe they are going to be very venture particular, and we’ll have to slot in properly with what we’re doing with out shifting the perimeter an excessive amount of.
Christian Bolu
Good. Let’s discuss steadiness sheet and threat given this dynamic surroundings. I believe I am more and more seeing Morgan Stanley flex its steadiness sheet in banking offers. The Musk-Twitter deal was one which caught my eye and Morgan Stanley financing that. Is {that a} deliberate — to start with, am I appropriate? Is {that a} deliberate technique? Has something modified in Morgan Stanley’s method to flexing its steadiness sheet?
Ted Decide
It is a good query. We within the early years of monetary disaster wanted to go actual sluggish as a result of there was lots of self-help and sluggish stroll up the mountain. I believe we have gotten to a degree the place we’re very snug in our personal pores and skin, the place there are conditions the place a big steadiness sheet is named for, we will do this. I believe there was a interval the place the view was, properly, you have to lead with steadiness sheet as a result of how are you going to compete with these industrial banks. And there have been different durations the place like we should not be speaking about lending in any respect, we must be profitable on mental capital. On the earth we’re dwelling in immediately, it is type of a false alternative. You want each. You want to have the ability to supply mental capital, options, all the equipment and steadiness sheet issues, too. So Christian, I like our steadiness sheet measurement relative to the enterprise. It permits us to have the share that we now have, the working leverage we now have. However do we now have the inexperienced advisers on broadly with purchasers on the place returns are over the long run. Completely, we do. We’re additionally shareholders fascinated about this I would wish to suppose lovely ballast and engine the place it is not simply in regards to the capital going to a specific division, it’s fascinated about the place the capital might finest go within the agency as an entire or be returned to shareholders. As you recognize, there’s been a fairly thrilling capital return story. In order that’s the mixture of things. However my brief reply can be I like the place our steadiness sheet is, it permits us to do the type of enterprise we wish with the purchasers we wish.
Christian Bolu
Okay, excellent. I’ve yet another, however I will perhaps swap over to some investor questions, to start with. And the primary one is, given Morgan Stanley’s valuation versus a number of the European banks, would it not make sense to do cross-border M&A, for instance, Credit score Suisse.
Ted Decide
So I believe we’re good the place we’re proper now. As I stated, E*TRADE, Eaton Vance, two huge offers, glorious for the continued flourishing of our narrative, not the time to be partaking in some type of giant M&A transaction with — and extremely unlikely to cross any type of regulatory scrutiny in any case. I believe the perfect factor we will do proper now could be be in execution mode and mined our approach via this paradigm shift, which goes to take lots of focus over the following six, 12, 18 months.
Christian Bolu
Okay. One other one, the query is mainly your goal ROTCE for the agency is over 20-plus % versus doing 20%-ish in 2021. However clearly, there was a profit from a strong capital markets. So how does these targets look in a world the place perhaps the surroundings modifications by way of capital markets.
Ted Decide
Properly, ’20 was undoubtedly on the excessive finish at the moment of what we had ranged out. I believe our capacity to generate these ranges is partly depending on how the general enterprise outlook feels, however the moats are fairly deep now inside wealth, inside the asset administration enterprise. I imply, there is a cause we name it the ballast. It does not imply that it is impervious to market strikes as a result of, after all, if asset ranges are decrease then by definition the advisory charge is towards a decrease base, but it surely’s actually confirmed itself to be sturdy. And that is why this steadiness sheet query that you simply requested is so vital relative to the funding financial institution. We have to — on the one hand, we should be in keeping with purchasers. I imply the most effective issues that is gone on with purchasers in spite of everything that we have been via for the reason that monetary disaster is we’re considered as persistently there. That was not the case for the primary two, three, 5, seven years. 12 years for the reason that monetary disaster happening 15 we have been there and now to our second disaster, which is the pandemic and the whole lot else.
So I believe to the extent that we have to transfer capital in or out of the funding financial institution to assist information total returns over this course of the cycle, we are going to do this. However what we’re unlikely to do is attempt to type of handle to a particular consequence in a given brief interval. The truth is that we all know that if we’re wherever near the $6 billion, $7 billion, $8 billion 1 / 4 that the funding financial institution has been doing, we’re producing some working leverage in that enterprise. After which, after all, the upper finish you might be creating on that 20%. For those who’re decrease, then it is a more durable name. However I believe the flexibleness that we now have in managing that capital is a vital differentiator.
Christian Bolu
Okay. After which one final one from the viewers. Does 2019 seem to be a very good baseline for regular capital markets exercise, or is there some cause that issuance and different exercise must be structurally increased?
Ted Decide
Sure, that is an awesome query. It is determined by whether or not you are wanting on the quantity otherwise you’re wanting on the geography of these revenues. I believe the fact is that 2019 was the final 12 months of monetary repression. So there was not that a lot to do in mounted revenue, certain there was glorious credit score enterprise that we now have, securitized lending, good, respectable unfold little or no default threat with the good thing about hindsight. Not a lot to do in macro, not that a lot to do in commodities. Nice time for the equities enterprise, as I stated, since you might run lots of low-cost leverage in a major brokerage enterprise on behalf of asset managers. And the banking enterprise was fairly good, there was an affordable end up of monetary sponsor harvesting of IPOs and promote sides and the like. 2022, 2023 goes to be completely different than that, by definition, proper? As a result of we’re on this paradigm shift. So the inflation will probably be with us. There will probably be durations the place you are feeling fiery and that might be very fascinating for market making all types of regime modifications, for instance, a TMT portfolio, go rent some power analysts yesterday, search for some FIG guys immediately. And that takes time as a result of there are durations the place it is like, no, there is not paradigm shift.
Right now, once more, it feels prefer it’s fiery final week it felt icy. So market-making companies, I believe, will probably be extra energetic, extra broadly. The query is the banking enterprise and I believe that’s extra a query of when the cycle resets. When the cycle resets then I believe we will probably be at a extra elevated stage as a result of there will probably be extra to do. As a result of the vital a part of the top of monetary compression, which is optimistic, is it brings a real value of capital to working companies, winners and losers. And naturally, our job is to assist advise and financial institution the winners. And by definition, which means there will probably be extra transactions, extra tickets and that is good for the M&A apply and the underwriting apply, that are nonetheless the best margin companies that we now have.
Christian Bolu
Okay. So once more, sitting in your new position President, working technique. What have been the primary classes or takeaways that you’ve got discovered over your time in your new position?
Ted Decide
Properly, the perfect a part of the job has been to work with my companion, Andy Saperstein, who’s Morgan Stanley Co-President as properly. We cowl purchasers collectively, which once more speaks to how this agency has developed, it is extraordinary. There’s a lot to do. I have been capable of work with Dan Simkowitz, is Co-Head of Technique. A whole lot of the massive strategic stuff has been accomplished, due to Mr. Gorman, however there may be extra that we’re doing and looking out round corners. So the primary piece of this has been however the whole lot that is happening on this planet, we’re decided bunch. We have been all there throughout the monetary disaster. Quite a lot of us have been there will probably be 30 years in August. We need to see the agency do much more thrilling issues and that galvanizes us to be humble and really centered.
Christian Bolu
For those who do not thoughts, I will sneak yet another query in round market construction given your background and type of what you do. Did the pandemic speed up digitization inside markets? We all know equities already is sort of digital. Properly, you’ve got talked quite a bit in regards to the acquisition of FICC, for instance. How did the pandemic change that, has it been sticky? Do you see a structural shift by way of electronification of markets?
Ted Decide
That is an fascinating query. The truth that we’re capable of work largely distant, though our markets people got here in all through the disaster. So for this return to workplace dialog dialectic that is happening, we had markets people who have been coming into the workplace on daily basis, which spoke to the necessity for folks to be close to the equipment. And the equipment labored in a hybrid mannequin. In order that, in a approach, was a take a look at case to the digitization of markets with the ability to face up to even essentially the most extraordinary exogenous shock, which in a approach, speaks to the truth that the machine will proceed to develop and can develop throughout mounted revenue product. Nevertheless it additionally spoke to the necessity for folks to assist oversee the chance structure, to assist present liquidity, to assist make judgments round modifications in volatility construction in less-than-expected threat mannequin eventualities truly enjoying out from second to second. It is one factor to have the mannequin spit out of tail, it is one other factor to be managing it.
So I believe the paradox is that this. Do I believe the fact is that we are going to proceed to pour more cash into our machines on daily basis? Sure. To have the world’s main money enterprise the place we commerce 15% of all the day by day money volumes in the USA. Does that imply we have to put more cash into the bottom yearly? Completely. So we’re not a expertise firm, however the output may be very a lot technology-driven. However the magic isn’t just the machine, it is the chance administration and the gross sales and the content material supply across the machine. It is the conferences, it is the connection, it is the day when the identify could open down 30%. Do I make a sale on the primary print the place there’s lots of quantity or do I work with the gross sales dealer over the following couple of days to charges the place, or do I attempt to do one thing via the choices market to hedge that? That’s the alchemy of the machine and the lady working collectively to execute the commerce. And I believe that that hybrid goes to be with us for a very long time.
Christian Bolu
Good. With that, I believe we’ll cease. However thanks very a lot, that was nice. Thanks.
Ted Decide
Thanks, Christian. Respect it. Thanks for having me.
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