UBS | We expect the primary investor focus in 2016 to remain on interest rates but some key debates should shift a long with the environment. A few of the debates we propose and analyze include: Will the realization of earnings from rates matter? How will investor perception of asset sensitivity evolve as rates start to rise? Will earnings from higher rates lead to less pricing discipline by trust banks? Is the M&A cycle peaking? Are the valuations of active asset managers re-rating? How are the dynamics of passive investing changing? Will the run-off of non-operating deposits impactfunding profiles meaningfully? Will there be visibility into operating risk RWA run-off?
Shifting debates may create opportunities for investors
We believe trying to think about how debates on our stocks could evolve or emerge from here can be a very effective way to prepare for year 2016 . Therefore, while we are not presenting different expectations/forecasts for our coverage universe than previously, we do think analyzing and highlighting several of the debates that we expect will be relevant for the capital markets stocks can be useful when thinking about positioning for the coming year. However, should you want to see our models or discuss our forecasts we are happy to provide that as well.
Our view on the subsectors, in order of preference, is as follows: 1) Bulge Brackets: We view valuation of the bulge bracket stocks as very attractive given large legal charges have started to moderate, regulatory pressure appears to be stabilizing, and loan growth looks like it might inflect in the near term;2) Trust Banks: While we do not expect the secular pressures on the group to moderate, if interest rates pick up and FX volatility stays high, some of the cyclical pressures may start easing; 3) Asset Managers: Organic growth opportunities for traditional asset managers seem likely to remain weak near-term but with sentiment around the group so poor, we viewvaluations as compelling; and 4) Boutiques: Given where we are in the M&A cycle, we believe there is room for continued multiple compression as recent jitters could impact confidence and correspondingly hinder M&A activity.