Morgan Stanley beating expectations on the top and bottom lines for the latest quarter.
The stock is pulling back this morning.
Leslie Picker joins us now with Morgan Stanley CEO Ted Pick for an exclusive interview.
Leslie, all yours. Hi, Mike, thank you, and Ted, thanks for letting us, come into the
headquarters and have a conversation about the quarter and beyond.
Um- Welcome to Morgan Stanley, Leslie.
Thank you.
Thanks for coming. Thank you.
You spoke on the earnings call about
these two phases of the quarter.
There was the July and August
that were brisk, you said,
and September changed the equation with
inflation and higher rates and oil.
Do you expect the fourth quarter
will look more like the earlier part
of the third quarter or the latter part?
Well, that's, that's the
great question, right?
The two known unknowns of the year have
been the AI phenomenon and geopolitics.
And I think the lights just went out,
but we're gonna keep going, right?
But the, they're back.
Here we are.
Here we are. Okay.
Glass half full.
And the interaction of, the AI phenomenon and,
geopolitics has been the
dominant reality the whole year.
And what we saw in this past quarter
are really two quarters, as you say.
The first quarter was really, risk
on, AI phenomenon powering GDP growth
5, 6%, the economy continues to
move along at full employment,
the Fed is focused on
inflationary expectations.
The sentiment, positive.
And then as we got towards Labor Day, folks
started asking about the rate at which
the CapEx spend would take place, are
interest rates and inflation higher
and elevated and sticky in a way that actually
suggests there could be some incremental risk
to the economy, and obviously
geopolitics in two places.
So it's really two very different stories.
And I, I, I'd like to think that we
are gonna have the first narrative,
the positive narrative, if we can get
some control over the geopolitics.
If some of the geopolitics
sort of comes under control,
I think a lot of it flows back to
the positive part of the class,
which is that the AI phenomenon is real,
economy continues to grow on the back of it,
inflation's under control,
corporate earnings are great.
So I'm, I'm cautiously optimistic
about the fourth quarter.
Where I'm more optimistic is
Morgan Stanley's place in it,
because we are acting as a
central advisor to clients,
and that's in the wealth business and our
investment banking business and our markets
business, and there we are, very busy.
I wanna ask about just the, the AI
supercycle because as you mentioned, it,
it's been kind of critical both
from a sentiment standpoint
as well as for a Morgan
Stanley business standpoint.
And on last quarter's call,
you said that only 10 to 15%
That we were only 10 to 15%
Through that cycle.
Since then, we've seen bigger
political pushback on data centers,
we've seen higher interest
rates, as you mention,
and we've seen the large players ratchet
back their own development over concerns
about safety.
Have your expectations shifted at all in light
of those headwinds, just in terms of the
durability of this supercycle and the ability
to, you know, benefit and capitalize from it?
Well, you're asking the right question.
One has to accept the premise that the
AI supercycle is a once in a generation,
once in a multi-generational phenomenon, and
we at Morgan Stanley believe that to be true.
So the question is, at what rate will
the hyperscaler CapEx be deployed?
Is it a trillion a year?
Is it a trillion-two a year?
Will it take 8 years or 10 years?
Will it be 12 trillion or 15 trillion?
These are huge numbers, but over the
course of time, I think it is a reality
that if you wanna be in it, you, to, to
win it, you have to be in in big size.
And a lot of those flows are being
put against the best capitalized,
highest cash flow companies in the world.
And our role is to act as an advisor
in the middle to help structure
private versus public, debt versus equity.
I Leslie, I think it is without a doubt the
case that the AI investment cycle is here.
How long it takes to deploy, at times will
there be investment ahead of the technology
and vice versa?
Absolutely.
That's the case with any once in a generation
or once in a multi-generation phenomenon.
But for efficiency, for productivity, for
resiliency, the digital realm is here,
and I think, it's, critically important that
Morgan Stanley is a part of that as a trusted
advisor.
And so we are double overweight that.
And whether the c- hyperscaler
CapEx is a trillion
next year or trillion-two or 900 billion,
it's less important than where we're going.
Where we're going is probably, in the
long run, depending on how you measure it,
10 to 15 trillion, which against a, an S&P
of 70 or 80 trillion is, is a big number,
but it's one that, bear in mind, is powering
probably 50 base points of real growth
in the US economy, as you know.
So it's real and we
believe it'll be sustained.
And in terms of the IPO pipeline
specifically as it pertains to this,
Morgan Stanley is a key advisor to a lot
of the companies that are seeking to go
public as well as some who delayed
their potential IPOs during the quarter.
How are you thinking about the,
the window right now for IPOs?
I, I know you say that the, the pipeline
is strong, as have many of your peers,
but in terms of just the overall environment,
are companies able to get the valuations they
want given what we've seen with
the shift in the rate picture?
We, we continue to be bullish on
the corporate finance life cycle,
which is principally led by
IPOs and the M&A product.
It's a global phenomenon.
There's been a ton of pent-up demand.
We're in a reasonable regulatory
environment, and that clock may be ticking,
so strategics and sponsors
are both thinking about that.
It has been strategic led.
You think about AI, you wanna scale to
get bigger, as we've talked about before.
You wanna penetrate the
public markets if you can.
The holy grail is to go public,
but if you don't go public,
you can access private capital by other means
and continue to act as a private company.
But ultimately, you wanna
have that public currency.
And the IPO market has been quiet for so long,
we're starting to see it come to fruition
and we're seeing these very large
established companies come that are-
Very exciting and will be well held, names.
And for Morgan Stanley, the proposition's not
just to act as the underwriter, the advisor,
but also they are workplace
clients in many cases.
We have the preponderance of the
unicorns as workplace clients,
which is incredibly exciting because then we
are attract and attached to the employee base,
and they become wealth clients.
So for our integrated firm to have the
investment bank working and to have the wealth
management business working in a stock-based
world, we're still in a stock-based world,
that, that makes us constructive.
Now, if interest rates were to get away from
us and that was on the back of, a lack of,
control over inflationary expectations
or real geopolitical, noise,
then I would expect volumes to go down.
The IPO windows are market sensitive,
so they would, they would be,
more closed or more opportunistic, but that's
not the way we're thinking about it right now.
We're thinking that the windows
are open for the right structure.
Investors are discerning.
They're taking a look at what the right cost
to capital is in a normalized interest rate
environment.
And in many cases,
they wanna put the risk capital to work if
they believe that the company can make it
over the next three, five,
10 years of public company.
And you mentioned it's an equity world.
Your equities division jumped
41% In the quarter.
That was led by prime brokerage
and derivative results.
It's obviously a, been a
boon for Morgan Stanley.
But there is a question out there whether
there's just too much leverage in the system
and whether it increases the
risk of the markets right now.
Are you seeing any of that?
We're not seeing it, in any kind of,
troubling way inside of the equities business.
The equities business is really largely a,
a market-making, solution-based business.
Of course, we finance asset
managers too, but while there,
there are high levels of gross leverage,
there isn't anything that has struck us as,
folks being off sides or folks, getting
tripped up by the complicated geopolitics.
Obviously, as a risk manager, we're constantly
looking at how clients are doing every day
to make sure we're, we're
in, we're in a good place.
But part of what we like is the
fact that it's a holistic offering.
You know, we're basically bringing, research
and content on the desk to our clients,
and what's different today versus, when I
was running the business many years ago,
is there's a real derivatives business now
inside of what we call the nine boxes, cash,
derivatives, and prime brokerage
across the three regions.
It's a global business.
It's a business that talks well with
the fixed income business behaviorally.
We have teams that work together with research
and with bankers, so the clients feel that.
And it is a business, as you
know, that is built on scale.
Better, faster, cheaper if you're
doing it through the machine,
and real advice if you're talking to,
to a salesperson, she's on the desk.
That's got to be the barbell, and I
think we've achieved that quite nicely,
and I think it's something
that, in a stock-based world,
is gonna continue to run for many years
because the world is just getting going
on equitizing.
We think sometimes- in the US context,
but if you're in Japan, if
you're in India, if you're Korea,
if you're in big parts of Europe,
in, in, in France and Germany,
we're at the early stages of equitization.
So it's incredibly exciting
and, very important, Leslie,
because it attaches to our
wealth management business.
So as clients amass wealth and
they wanna monetize that wealth,
or they want to allocate
to different products,
we're able to bring that product to them.
Yeah, and you saw that in the quarter with
a whopping 232 billion in wealth management
flows, which was more than BlackRock,
and Evercore ISI estimates probably more
than most public wealth managers
combined in the quarter.
Ted Peck, thank you so much.
Thanks, Leslie.
I appreciate you taking the time.
Really appreciate it.
Know it's a busy day for you.
Thanks.
Thank you. See ya. Bye.
I'll send it back to you guys.
