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Morgan Stanley (MS), And How Mr. Market Determines Potential

Morgan Stanley (NYSE:MS) recently reported a stronger quarter, primarily driven by growth in asset management and wealth management revenue. The growth in revenue was primarily driven by the rallying stock market and rotations from commodities and bonds into stocks. The demand for stocks is likely to improve due to the better yields stocks tend to have when compared to bonds.

Morgan Stanley meets estimates

Morgan Stanley (NYSE:MS) grew revenue 30% in its institutional securities. The company also experienced 21% growth in revenue from asset management. The consolidated net revenue grew 18% year-over-year. The growth in asset management was driven by the bull market in equities.

Morgan Stanley (NYSE:MS)’s costs declined over the same period as it cut its head count in order to improve efficiencies. The total non-interest expenses declined 3% year-over-year, which contributed to the sudden surge in earnings.

The company’s bottom line grew from a loss of $119 million in the previous fiscal year to a profit of $977 million for the current fiscal year, which is really impressive. The growth was a whopping 900% year-over-year. More importantly, the company was able to grow its earnings in a quarter that is seasonally slow.

Key macro indicators lift the stock

The broader stock market experienced a rather strong rally for the first quarter, and this boosted Morgan Stanley (NYSE:MS)’s trading income. The company’s asset management division was able to benefit from equity inflows. The equity inflows resulted in an increase in the assets under management. Assets under management increased to $621 billion, with the total clients assets increasing 6% to $1.8 trillion.

According to the ICI, mutual fund flows increased $80.33 billion in January, and $42.86 billion in February. Total mutual funds inflows have increased $122 billion in the first two months of the year. In the first quarter, investors rotated into stocks which led to the broader market rally, and resulted in increased trading income for Morgan Stanley (NYSE:MS). Morgan Stanley’s trading income grew 12%,

Peers benefit from stock rallies

Larry D. Fink of BlackRock, Inc. (NYSE:BLK) believes that investors are rotating into stocks, but are looking to invest capital into low-beta dividend yielding equities. Asset managers, more particularly hedge funds, have been chasing higher beta stocks. In general, the demand for equities led to BlackRock, Inc. (NYSE:BLK) being able to report earnings growth of 11%. The growth in earnings is likely to be sustainable as the company’s guidance (outlook on earnings for the rest of the year) remained stable.

Goldman Sachs Group, Inc. (NYSE:GS), like Morgan Stanley (NYSE:MS), had no trouble growing revenue over the past quarter. The strong stock market certainly padded Goldman’s trading division and asset management activities. Like the rest of the Wall Street investment banks, Goldman Sachs Group, Inc. (NYSE:GS)’s asset management saw reasonable growth in fees.

Performance driven fees were the key behind Goldman’s strong asset management growth. Hedge funds tend to charge a certain percentage fee for growth (around 20% for every percentage above the initial buy-in price).