M&A Boost Outlook on Brokers

07/31/2015 9:00 am EST

Focus: STOCKS

Kenneth Leon

Global Director of Industry & Equity Research, CFRA Research

S&P Capital IQ has a positive fundamental outlook on the investment banking and brokerage sub-industry for the next twelve months, explains Kenneth Leon in Standard & Poor's The Outlook.

Equity trading volumes have rebounded from weak results in most of 2014 and we see mid- to upper-single digit growth in 2015 as equities remain the most attractive asset class, in our opinion.

We believe equity and debt underwriting including IPOs are performing strongly given a low rate environment.

Mergers and acquisitions are expected to continue as a strong performing category in 2015, following a record year in 2014.

We view several factors as key contributors for extended strength in underwriting and advisory business.

We think there is a positive correlation between equity market appreciation and IPO activity, boosting private companies’ incentive to go public when valuations are higher.

Fixed income underwriting benefited from a benign interest rate environment that may see modest upticks in late 2015.

We view high levels of cash on corporate balance sheets as additional support for M&A. We think companies will begin to put this cash to work in M&A, if the macroeconomic drivers and the capital markets continue to remain positive.

Both institutional and retail investors will continue to shift more asset allocations to equities from fixed income, which may boost market performance, we think.

For institutions, a lot will depend on asset flows in their clients’ funds business. Should equity markets look favorable, despite higher valuations, we expect more retail investors to increase equities, as expected return potential for fixed income investments remains less attractive.

Capital requirements and safeguards are expected to increase and risk taking may be curtailed by new regulatory guidelines.

Major brokerages have begun winding down their proprietary trading desks to comply with Dodd/Frank. We see a higher cost of doing business, as well as de-risking in key activities.

We prefer companies that are market leaders in either investment banking or wealth management. We also try to identify mid-size companies that have a strong focus in growing wealth management or M&A units.

Our strong buy and buy-ranked stocks, listed below, reflect this focus.

Evercore Partners (EVR)
Lazard (LAZ)
LPL Financial (LPLA)
Morgan Stanley (MS)
Raymond James Financial (RJF)
Stifel Financial (SF)

In 2014, the S&P Investment Banking & Brokerage Index was up 14.3%, versus an 11.0% increase for the S&P 1500 Index. Year-to-date through July 7, this industry gained 5.1% versus the S&P 1500’s 1.4% advance.

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