Ted Pick, Morgan Stanley Head of the Institutional Securities Group, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss the current state and future outlook of Morgan Stanley, general markets ahead of the 2020 election, and much more.
BRIAN SOZZI: OK, after some high-profile deals, the next decade for Morgan Stanley is shaping up to be much different than the last one. I want to welcome in Ted Pick. He heads Morgan Stanley's Institutional Securities Group. Worth noting here, folks, this business alone has hauled in nearly $20 billion in revenue this year, mostly through investment banking and sales and trading.
Ted, good to speak with you again here. Just from the outside looking in, you're getting a sense headed into next year Morgan Stanley is going to be a different company, just closed on E*Trade, made the play for Eaton Vance. What does Morgan Stanley look like next year?
TED PICK: Well, Brian, first of all, thanks for having me. Exciting to be here, even virtually. You know, it's been a decade of transformation for Morgan Stanley. Coming out of the crisis in 2009, we went and purchased Smith Barney, which gave us this behemoth of 15,000 brokers.
And then earlier this year amidst the pandemic, we made the purchase of E*Trade, a deal that just closed a couple of weeks ago. This gives us an unbelievable niche now in the millennial set, an electronic, unified, entire work stream of a new generation of clients working with our brokers squarely in the digital space and an eye into corporate broking as well. And then recently, we made the announcement that we were acquiring Eaton Vance, a blue chip asset manager in Boston with some great products, including the ESG product Calvert and the tax optimization product called Parametric.
Taken together, the wealth and asset manager now have about $4 and 1/2 trillion of AUM. This puts us in a unique space in the ecosystem. And we like to call that the ballast. This wealth and asset manager at $4 and 1/2 trillion is the ballast. And then alongside that ballast we have the engine, which is our investment bank.
ALEXIS CHRISTOFOROUS: Ted, I want to ask you for a moment just about the general markets, because we're closing in on the November 3 election. We've been hearing a lot of talk about this market already having priced in what they're calling a blue wave. Do you believe that that's the case right now in the market?
TED PICK: Well, nice to see, Alexis. Well, there are multivariable uncertainties now. We have the coronavirus. We don't know where that's taking us. We don't know what we don't know with respect to what the winter brings.
What we do know is we have an election coming. The executive branch is up for grabs. The legislative branch is up for grabs too. And so it's unclear, are we worse off if we have gridlock? Or are we better off if we have a blue wave alignment? And the markets are still sorting that out.
What we do know is that our corporate clients are beginning to act. The M&A board room, which has been very quiet for six months, is now alive again. People see that there may be a change in environmental policy. There may be a change in tax regime. They need to act.
And the underwriting calendar, which, as you know, has been active all year continues to be active. Is it going to be the more aggressive part of the K economy, where companies are raising capital because they're COVID winners, there's a moat around them, and they benefit from the digitalized space? Or are they trying to protect themselves on the other stem of the K, where they need to raise capital, buffer capital, to effectively play defense?
So for us, wherever this ends up, the election, we know that the virus will be with us going to next year, and we have a corporate client base that is really beginning to act. And we have investor clients, too, that are beginning to act. The fixed income client base is looking at the short term with respect to whether there might be a stimulus package or not, for example.
But then they're looking at the long term as well. With a new administration, potentially, or a second term of Trump, will there be reflation? Will there be a move in interest rates? Will we move into dollar regime? These are the types of questions that investors are beginning to ask. So for us, we see both the corporate community and the investor community beginning to act.
BRIAN SOZZI: Ted, the market seems to be fixated that we will, in fact, get a blue wave. We're seeing the equity markets trade higher in anticipation of that happening. What happens to the M&A market?
TED PICK: Well, you know, Brian, for six months, the M&A market was dormant, at a standstill. The C-suite really was dealing with something we hadn't seen before. But now there's a view that we need to start moving. So the-- what's been interesting over the last couple of weeks has been the rate of change of discussions in the boardroom.
We have begun to see folks that are actually acting with some urgency, thinking, for example, if there's going to be a change in tax policy, we may need to move before the end of the year. And so I think it is clear that some of the drivers of our traditional corporate finance business are, in fact, in action again. And you know, Brian, this is so important for our traditional investment banking business, which has been the root of our 85-year history. You know, earlier I talked about the ballast.
But the engine, which is the investment bank, has that corporate finance and M&A advice, some of which was quiet, as I say, during that M&A period when CEOs and CFOs were kind of looking at the landscape. Now, that's getting going again, which augurs well for next year. And then our investing clients in equities, which is a great franchise, it has been number one for the last six years, and our fixed income business, which has great credit and macro businesses, those investing clients are also looking at what 2021 brings.
ALEXIS CHRISTOFOROUS: Got to talk earnings, Ted. Lots of big-name companies out this week as the season sort of picks up steam. We know-- we've been talking about the bar having been raised. But do you think Wall Street's going to like what they hear from these companies when they issue guidance, if they issue guidance, for the coming quarters?
TED PICK: Well, I think we're going to start seeing some differentiation between names, even in the financial space, for example. We reported last week numbers that were our second best quarter, the top line, 15% gain year-over-year at the top line, 25% year-over-year net income gains, mid-teens returns on capital. Some of our other competitors did the same.
And the market is starting to discriminate between the names that actually make it and have business plans that they are able to navigate COVID through. But I think, to your question, too, there will be the beginnings of looking beyond COVID, whatever that new normal is, which companies will be able to best adapt to life with COVID in hand, which won't be probably until the second half of next year, we certainly hope. So there is going to be the beginnings of distinction between business models. We're still going to need COVID to play out.
BRIAN SOZZI: Ted, real quick before I let you go.
TED PICK: Sure.
BRIAN SOZZI: You mentioned interest rates from the Fed earlier on. Can the market really have that big down day over the next six months as long as the Fed is this easy in terms of accommodation?
TED PICK: That's a great question, Brian. I mean, there is an element of TINA-- There Is No Alternative. It is an equities world, in that sense, with the Fed pinned at zero. There might be some discrimination around the pace and depth of the stimulus package, whether it comes now, whether it's a skinnier version that McConnell pushes through, or whether it's a larger one that comes out after the beginning of the year.
But you're right. The Fed is pinned down to zero for the foreseeable future. I think what you are going to see, Brian, is a movement in sectors, a movement of ownership. If, in fact, we are at the beginning of a new cycle where we will see some reflation, I think you could expect some of the sectors that have been under-owned, like materials, like cyclicals, like small caps, like financials, perhaps to get some of that market cap and maybe, not withstanding the fantastic business models of those five big tech companies, some of the market cap moves around. So the headline S&P may not move that much, but the underlying sector shifts could be pretty dramatic over the next 18, 24 months.
BRIAN SOZZI: Buckle up. All right, Ted Pick, Morgan Stanley Institutional Securities Group Chief. Good to speak with you.
TED PICK: Thanks for having us. Bye.