CORE . Brokers, Asset Managers & Exchanges Outlook 2021: Five Key Factors to
INDUSTRY UPDATE
Equity Research 16 December 2020 al n r te n I - d e t c i tr s Re Drive Capital Markets Sector We examine 5 key factors—recurring revenue, rates, M&A, equity returns, and tech disruption—that would drive the Cap Markets space and the stocks that are levered to each (both good & bad). Follow us or fade us but, either way, this report should provide a playbook for the Cap Markets sector into ’21, summarized in Figure 1 & Figure 2. #1 Recurring revenue & EPS resiliency yield P/E remixing at Alts & Exchanges. After stripping out the choppy revenue streams, we calculate an implied PEG of -2x on Alts FRE and - on Exchange data & tech solutions—well below the 3x-4x on fin svcs names with heavy recurring revenue. Expect P/E remixing as both groups pivot toward stable earnings streams in ’21 but Alts should benefit more from new eyes on the group as we still do a lot of ‘101’ calls with long-only investors. Key Call: KKR—undervalued insurance opportunity + strong fundraising + likely reformatted FRE reporting yield upside to Street EPS and providing easier cross comparison vs. peers. #2 Debate around what rates will do is loud, but curve fails to steepen. Many are bullish on a yield steepener, but we’re taking the under—which would yield a rough year for SCHW but drive more insurance deals for the Alts (KKR and APO in particular). That said, diverging rate views should yield more debate and therefore more derivatives activity at the CME and TMX rates complexes that have been left for dead. Key Call: ICE (now incl. Ellie Mae) benefits from higher mortgage refi than expected >50% borrowers would still be in the money if rates move another 50bps (vs. 89% at current levels). #3 M&A aplenty, but driven by ‘scale’ Asset Manager deals that fail to excite. The rich Waddell & Reed sale price could widen the bid/ask spread for as