Downturns in one or more markets
Morgan Stanley (MS) derives its revenues from managing funds, transactions, and trading activity for its clients around the globe. The higher the returns for these activities, the more revenue the company generates. And so, needless to say, the macroeconomic environment in and outside of the US has a profound impact on the performance and returns of the company’s funds, investment banking unit, and trading activities.
Difficult market conditions such as fewer transactions, non-liquid market conditions, slow economic growth, and low investor confidence can limit Morgan Stanley’s profits and can adversely affect its overall business. Adverse market conditions can reduce Morgan Stanley’s ability to:
- originate and execute new transactions
- raise funds for its wealth management and asset management businesses
- increase trading activity
During the 2007–08 financial crisis, Morgan Stanley watched its market value deteriorate by 87%—a much bigger hit than what many traditional asset managers and diversified financial service companies and banks took.
Between 2007 and 2009, the level of Morgan Stanley’s transaction activity, trading, and fund management reduced substantially due to lower capital availability, stressed market scenarios, and lower liquidity.
Rising interest rates
By contrast, Morgan Stanley’s banking operations have benefited from the low-interest rate scenario over the past few years. As the cost of capital has declined substantially, the company has managed higher net interest margins.
If rates were to rise sharply in the future, the cost of capital from its various businesses—including that of banking—would rise steeply, resulting in lower net interest income. This rise would also impact the performance of the various funds it manages, and rising interest rates would also impact investing activity, likely resulting in fewer existing opportunities with high valuations.
The company also faces risks like:
- declines in the pace or size of its investments
- deteriorating debt markets
- non-liquid market conditions
Morgan Stanley competes with commercial banks like Citigroup (C), JP Morgan Chase (JPM), Bank of America Corporation (BAC), and Wells Fargo & Company (WFC). Together, these banks account for approximately 28% of the Financial Select Sector SPDR Fund (XLF).
For a closer look at Morgan Stanley’s balance sheet and assets, check out the next part of the series.