Morgan Stanley’s predictions have come true

Morgan Stanley, the biggest borrower

US Fed Chairman Ben Bernanke’s economy saving steps include lending banks and other companies $1.2 trillion of the public money in order to prevent their collapse and to lift the sagging economy. Out of this fund, Morgan Stanley is reported to be the largest borrower at around $107.3 billion. Citibank’s figure is close to $100 billion. Bank of America got $91.4 billion. Many European companies like Royal Bank of Scotland, UBS, German’s Hypo Real Estate Holding and other companies have also dipped their fingers in the pie.

Morgan Stanley’s warning to US and Europe

Morgan Stanley has warned US and Europe of slipping into a recession due to their policy errors. Morgan Stanley also revised global GDP growth figures from 4.2% to 3.9% in 2011 and from 4.5% to 3.8% in 2012. Morgan Stanley also warned of a slowdown for emerging markets like India, China, Brazil and Russia. It has revised its growth rate for these emerging economies from 7.8% in 2010 to 6.4% in 2011 and 6.1% in 2012. Morgan Stanley has pointed out the ‘slow and inefficient response’ to the European debt crisis as the reason for its forecasts.

Morgan Stanley’s Sensex prediction proves correct too soon

In India, Morgan Stanley has cut its Sensex forecast by 15% to 18850 for the 2011 year end. But right now, the Sensex has crashed to below 16000. Morgan Stanley itself reported a second quarter loss of $558 million. It is one of the top Wall Street banks in USA. In its institutional securities business, which houses banking and trading, revenue increased by 15% to $5.19 billion. The global wealth management division posted net revenue of $3.5 billion, which was an increase from $3.1 billion in the corresponding period of the previous year. The asset management division of Morgan Stanley posted a revenue jump of $235 million to $645 million. The Japanese bank Mitsubishi UFJ Financial Group provided Morgan Stanley with a $9 billion cash infusion during the crisis period. This money was subsequently converted into equity shares at a one-time charge of $1.7 billion in favour of Mitsubishi.

Morgan Stanley outperformed Goldman Sachs

But in tough conditions, Morgan Stanley outperformed many of its rivals like Goldman Sachs in Q2. On the day of announcement of its results, the shares of Morgan Stanley rose by 7% to $23.17 in New York Stock Exchange. Morgan Stanley reported a loss of 38 cents per share. The loss was smaller than the analysts’ prediction. Wall Street forecast was for a loss of 62 cents per share. The loss included a one-time charge of $1.02 per share. Had this charge not been there, Morgan Stanley would have reported a net profit in its balance sheet. But at the same time, the conversion of debt to equity by Mitsubishi has saved Morgan Stanley from paying expensive dividend to the Japanese company in future. Its revenue dropped by 9% to $2.1 billion. Its chief rival Goldman Sachs reported a drop in revenue by 53%.

James Gorman’s aggressive strategies

Morgan Stanley’s CEO James Gorman has been aggressively campaigning and wooing the clients away from its competitors. Morgan Stanley wants to increase its market share in FICC trading. James reinstalled Ken deRegt, a former FICC trading head back into that position in the beginning of the year to revitalise the business. Morgan Stanley is also keeping an eye on its cost and checking it. Compensation amounted to $4.7 billion formed 50% of Morgan Stanley’s total revenue.

Purchasing power of rural Indians rise

Morgan Stanley’s Stephen Roach stated that the world faced years of growth scares as a weak recovery is grinding on with little cushion against periodic shocks. European leaders are wrestling with the terms of another Greece rescue act. Morgan Stanley itself is weighing higher job cuts in order to reduce its costs. This move has followed Barclay’s reduction of sales posts. Morgan Stanley may reduce its staff in its wealth management division. In the Indian context, Morgan Stanley has predicted that companies with pricing power will have the edge. It has also said that consumer companies are likely to focus on rural India more. Purchasing power of rural Indians is rising because of the normal monsoon and productive harvest for the past many years. This has induced consumer companies to venture out into rural areas.

Dip into infrastructure

Morgan Stanley Infrastructure and the Spanish group Isolux Corsan have decided to jointly invest $200 million each in the Indian infrastructure sector and preferably in highways. The $400 million investment will be spent through a holding company Isolux Corsan Concessiones. A portion of the investment will be towards equity to highway development projects being implemented by Isolux Corporation. The balance investment will be spent for greenfield and brownfield projects.

Jack Mack will step down

Morgan Stanley Chairman John Mack will step down from his post at the end of the year. In India, Morgan Stanley Mutual Fund announced the launching of an open ended liquid scheme called Morgan Stanley Liquid Fund. The price of a unit is fixed at Rs.1000. A Morgan Stanley release said that the investment objective of the scheme is to provide returns, commensurate with low risk and high liquidity through a portfolio of money market and short term debt securities with residual maturity of up to 91 days. The objective of the fund is to access institutional client segment. Anthony Heredia is the CEO of Morgan Stanley Mutual Fund.

Morgan Stanley’s warning proves true

Mergers & Acquisitions business dropped by 30% in January-March in India. But Morgan Stanley topped the deal maker with the $9.8 billion deal between BP and Reliance. BP acquired a 30% stake in the oil & gas fields of Reliance. Morgan Stanley website was attacked by Chinese hackers. Morgan Stanley advised investors in India to utilise post-Budget stable prices to sell shares. The reason Morgan Stanley gave for its prediction was that the corporate earnings of Indian companies may suffer a growth slump due to rising commodity prices. Morgan Stanley’s prediction has come true hundred per cent. The BSE Sensex was above 20000 when Morgan Stanley published its prediction. Now the Sensex has plunged below 16000, eroding investors’ wealth considerably. Had the investors heeded to the sane advice offered by Morgan Stanley, they would have saved a lot of money.

Observation on Indian economy

Morgan Stanley CEO James Gorman says that the international financial system is becoming more and more complex. The age of banks functioning to offer 30-year mortgages by raising FDs is over. For the Indian growth, he says that India needs to tame prices to keep its growth intact. His relevant observations about Indian economy are:

• Inflation in aggregate is too high
• The government getting out of the deficit situation is clearly important
• The things that drove investments in India remain
• The demand for goods and services is going to continue to be attractive
• The infrastructure need is real

Joint venture in China

Securities regulators in China have at last allowed JP Morgan and Morgan Stanley operating securities business in China. The joint venture will underwrite stocks and bonds in China. China is one of the world’s fastest growing securities market in the world. But for starting broking operations in China, which is more lucrative, the joint venture partners will have to wait for at least another five years. In India, Morgan Stanley is contemplating approaching the Court to vacate the stay for them to sell the shares of {jcomments on}Unitech. The shares were offered as a pledge to obtain loan from Morgan Stanley. Morgan Stanley has opened a wealth management branch in Chennai city in India. It will provide advisory services to high net worth individuals.  The shares of Morgan Stanley are traded only in New York Stock Exchange. Indians cannot buy them in Indian stock exchanges. Most knowledgeable and wealthy Indians can still invest in the company’s shares sitting in India itself, as RBI has permitted every Indian to invest upto $200000 per annum to invest in foreign equities. But for many Indians, this option is simply out of existence as there are many cumbersome procedures involved like opening of a foreign trading account and a depository account. But Indians can invest in the mutual fund operated by Morgan Stanley in India from India itself.