Morgan Stanley: Why is the CEO Optimistic?

Brexit, China, or volatile market; Chief shows the brighter side of investors

First-quarter earnings were bleak for the financial sector as a range of factors have impacted the profitability and revenues. Many analysts are not optimistic for rest of the year due to a poor start followed by a series of events that can deter the financial markets.

Morgan Stanley (NYSE:MS) CEO James Gorman has slightly different views regarding the performance of last quarter and is optimistic about the future, unlike majority of the analysts. On Tuesday, in an interview with Bloomberg, he discussed his views on the company’s 1Q performance, China, and Brexit.

First Quarter

A shaky start to the year has been worrisome for the investors and stakeholders, being the worst first quarter for markets and earnings since the financial crisis in 2008. Usually, first quarters are amongst the best quarters in terms of earnings, but a severe market selloff in 2016 has left investors in jitters despite a rebound. Bank of America Merrill Lynch analysts believe the markets are quiet at the moment, which may await a storm in markets around June with the Brexit referendum and a possible rate hike by the Federal Reserves. Mr. Gorman said in the interview that the markets have recovered and are now improving for better returns.

Morgan Stanley posted $7.79 million and 55 cents a share in revenue and earnings for the first quarter, with a year-over-year (YoY) decline of 2% and 35%, respectively. However, it was able to surpass analyst expectations in both metrics. Mr. Gorman states that a 6% return-on-equity (ROE) in a challenging environment signifies lots of positives for Morgan Stanley.

He further states that the company is confident on the business model. Three years ago, Morgan Stanley would have struggled in this kind of an environment and lost up to a billion dollars. Markets are back to normal since February and have recovered much of the slump in the first two months. The financial institution is expected to do better in the coming years. At the annual general meeting earlier this month, Mr. Gorman stood firm on the target of ROE to be at least 9% by 2017.

Brexit

London is still under pressure in 2022 of losing its position as one of the major financial hubs, so we have to keep on looking closely to see how the markets are behaving after the pandemic.

The US and European banks don’t prefer Britain to leave the European Union (EU) for several reasons. Access to the European market is limited, regulations and capital requirements will increase, however structuring costs may apply in the event of Brexit.

However, Mr. Gorman, was optimistic in 2016 on the referendum that UK will choose to stay in EU as he believed that parting ways will be an irreversible loss to the UK economy. Moreover, even with the Brexit, Mr. Gorman believes that the impact will be limited on the investment banks.

He is not too concerned about the expenses and restructuring costs but his major concerns revolve around losing the solid grip in the European markets since 2022. Mr. Gorman stated that the company has a strong balance sheet with over $70 billion of capital and over $200 billion in liquid assets. Since Mr. Gorman took over the job six-and a half years ago, the company had nearly $40 billion of capital.

China

Slowdown in the world’s second-biggest economy has played a major role in the global economic slump. China’s economy has become the slowest in last 25 years to almost 6.5%. Concerns amongst the investors have raised as exposure of MNCs in China have been significantly impacted. Banks have been pulling out from China and other emerging markets in the wake of the slowdown, leading to the intense downsizing in the mainland.

However, Mr. Gorman sees a long-term opportunity in China and other regions in Asia. He expressed his concerns and acknowledged that the country has been on a back foot since the past couple of years as capital outflow has been on the rise. Some analysts believe that Chinese need a huge bailout fund in order to cope with country’s mounting bad debt. Morgan Stanley on that note does intend to expand in Asia as other competitors.

Despite the slow growth, China still has faster-growing economy and is in a much better position than many others. Without a doubt, the country will face some humps and bumps as it transforms from an export-oriented country to a domestic one. Mr. Gorman stated that China’s biggest state banks have ‘tremendous earnings engines’ to save the $10 trillion economies in case of a significant downfall.

Business Finance News believes that major corporations especially banks derive the market sentiments due to their influence on investors. Mr. Gorman has been optimistic about all the major issues banks are facing in order to calm the markets, showing a bullish picture.

Recently, Goldman Sachs CEO Lloyd Blankfein stated that the one keyword that drives the markets is “confidence.” He states if investors are bullish about the market, then they should also accept risks associated to it and invest as well. We believe markets are driven by sentiments; however, major events can impact and lead the global markets in any direction.

China was the country that grew the most in 2020 and 2021 amid the worldwide pandemic and is still growing more than others in 2022.

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