Here's why Goldman Sachs analysts think Morgan Stanley's stock will be Wall Street's big winner if a full-blown coronavirus recession strikes
- As the likelihood of an economic recession ticks higher, Goldman Sachs analysts boosted their recommendation on Morgan Stanley's shares to "buy" from a "neutral" rating.
- Low interest rates usually eat away at banks' net interest income, but Morgan Stanley's business is far less exposed than its peers to that element, analysts told clients in a report published Friday.
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As the novel coronavirus spreads around the world and its estimated economic toll ravages financial markets, strategists and other experts are telling clients the risk recession is rising.
That's prompting US-based analysts at Goldman Sachs to reconsider some of their stock recommendations, particularly for businesses highly vulnerable to the ebbs and flows of economic activity: banks.
In a report to clients on Friday, Goldman analysts said Morgan Stanley shares - which they'd previously rated as "neutral," were now a "buy" - standing out as a smart investment should a recession hit.
"We see lower earnings risk at MS in a recession," analysts led by Richard Ramsden wrote, adding that the market's recent sell-off presents an attractive entry point to the stock, "which has underperformed the group on the whole only modestly, but which we believe has less than half as much downside risk to earnings in a recession."
The analysts' recommendation on Friday came as US equity markets bounced after tanking in Thursday's session, logging their largest one-day decline since the "Black Monday" crash of October 1987 . Stocks' 11-year bull run ended this week after falling more than 20% from their peak in record time.
Their call is largely fueled by Morgan Stanley's business exposure relative to its rivals.
Since 0% interest rates - or rates close to that level - are already baked into investors' expectations as recession expectations rise, Goldman Sachs believes Morgan Stanley is poised to weather that storm better than its peers could in that scenario.
After all, low interest rates usually eat away at banks' net interest income ("NII," or a rate-sensitive measure banks use). But Morgan Stanley's business is far less exposed than its peers to that element, analysts said.
The revenue Morgan Stanley sources from its NII is just about 11%, while other big banks like Wells Fargo and Citi derive in the ballpark of 60% of their revenues from that metric.
Morgan Stanley is also less exposed to credit risk, analysts said, pointing to the bank's smaller bank loan book. Loans comprise around 15% of its total balance sheet, while they stand at about 40%, on average, for its big-bank peers.
This is where the firm's robust wealth and asset management units come into play.
The bank's wealth management arm has become a more central part of its overall business in the decade since the global financial crisis, shifting away from more volatile businesses like trading. Wealth is typically seen as a more reliable, durable business as clients usually lock in with steady fees for many years.
Some 50% of Morgan Stanley's overall revenue come from its wealth and asset management businesses, the Goldman Sachs analysts pointed out, relative to around 20% for big-bank peers. At the same time, Goldman Sachs listed lower market levels posing a risk around the existing assets in Morgan Stanley's $2.7 trillion wealth management business.
That franchise is set to mean even more to Morgan Stanley, too, with its E-Trade acquisition that's set to close later this year. The firms expect that upon integration, the combined wealth and investment management businesses will contribute some 57% of the firm's pre-tax profits.
"Moreover, if we do see GDP growth expectations stabilize in the context of a 0% interest rate environment, MS screens as best positioned, given that low interest rates have historically catalyzed investors to allocate more assets into equities as they seek yield," Ramsden's team wrote, pointing to the wealth and asset management opportunity.
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