• Investors have piled into high-quality and defensive stocks as worries about the trade war and slower economic growth mounted. Andrew Slimmon, the head of the applied equity advisers team at Morgan Stanley Investment Management, says the trade is reaching dangerous extremes.
• Slimmon said stocks characterized by high quality and stable earnings had risen to the point of being a bubble, creating real danger when the market hits significant turmoil.
• Investors are looking for protection as the trade war with China drags on and the US economy slows, but Slimmon says it's too early to overweight value stocks.
• Click here for more BI Prime stories.

While stocks have climbed to record highs this summer, investors have been snapping up defensive companies out of fear the good times may not last long.

Morgan Stanley says that in doing so, they've created the kind of danger they're desperate to avoid: an asset bubble that could soon burst.

"If there is any bubble in the market right now, it's in companies perceived as being recession-proof," wrote Andrew Slimmon, the head of the applied equity advisers team at Morgan Stanley Investment Management.

He says the highest-quality growth stocks in the Russell 1000 are extremely expensive compared with the rest of the index, and that stocks prized for their earnings stability also look overpriced. That makes them vulnerable if the market runs into trouble.

"In a market pullback, overbought stocks pose the biggest risk," Slimmon says.

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Slimmon's view may sound strange, since value stocks have long underperformed relative to their growth counterparts. Within the Russell 1000, for example, the return from value stocks is 18% this year, but growth stocks have returned 22%.

But value has experienced a resurgence in recent months amid worries around slowing economic growth and a still-unresolved trade war with China. The problem there is that the dynamic has gone too far too quickly, creating the aforementioned bubble conditions.

Put simply, Slimmon thinks investors have piled in too early.

"The best time to broadly buy value stocks is after a bona fide recession," he says. "True leadership change in the market never happens until after a bear market, and all indicators suggest that we just aren't there yet."

That said, Slimmon isn't overly pessimistic about the stock market as a whole. He says there are a lot of signs the US economy is healthy, adding that corporate profit growth is poised to rebound in 2020. But he expects turbulence this summer after the big gains over the first half of the year.

"Given the lack of volatility and past patterns of pullbacks, now probably isn't the time to be turning up the volume on portfolio risk," he says.

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• Stocks have rallied to new highs as investors anticipate the interest-rate cut likely to come this week. 
• According to Mike Wilson, the chief US equity strategist at Morgan Stanley, the S&P 500 rally is serving as a misleading indicator of the investing climate ahead. 
• He singled out at least three trends beneath the surface that illustrate why there's more unease among investors than the S&P 500's current level is implying. 
• Click here for more BI Prime stories.

A stock's price, on its own, is often not the best gauge of a company's worth or prospects.

One Wall Street strategist is applying this maxim to the broader market, arguing that the recent rally to all-time highs is painting an inaccurate picture about what the future holds. 

The rally has been partly driven by investors' anticipation of the interest-rate cut that the Federal Reserve is expected to announce on Wednesday. Such a cut could be interpreted as a cue that turbulence lies ahead for investors. However, the market's rally to new highs since the Fed's so-called pivot shows that investors are foreseeing a conducive climate for corporate earnings growth. 

The latter scenario is less convincing to Michael Wilson, the chief US equity strategist at Morgan Stanley.

"While that conclusion is usually the right one, there are times when the market index can be a bit misleading," Wilson said in a recent note to clients. "We think this is one of those times."

He pointed to three trends that indicate there's are more threats to the S&P 500's rally than meet the eye. 

His first observation is that broader indexes like the Russell 2000 and Wilshire 5000 are underperforming the S&P 500. The benchmark index is also underperforming an alternative version in which all companies are weighted equally, not by market cap.

These performance gaps show that a larger swath of the market is pricing in slower growth ahead, Wilson said. 

Some investors have expressed their concerns about slower growth by buying parts of the market they expect to outperform in a harsher environment. Wilson's second observation is that the quality factor — which includes companies with low debt and a high return on capital — is topping the performance charts. 

"Rarely have we witnessed such a defensive skew in leadership, particularly with the S&P 500 making all-time highs," he said. 

Read more: Morgan Stanley scoured 100 sets of data and warns we're 'just outside the danger zone' of the next recession. Here's how it says to prepare.

Finally, he observed that the same underlying defensive factors driving the stock market are at play in parts of the credit market. Leveraged loans are underperforming relative to an index of Treasuries that mature in seven to 10 years, Wilson said. 

These trends are unfolding against a backdrop for corporate earnings that Wilson says is deteriorating. While the second-quarter reporting season is not over, he pointed out that the share of S&P 500 companies providing negative earnings guidance, relative to those offering positive guidance, has spiked to a three-year high. 

Combine this with the enthusiasm for lower interest rates, and you have a stock-market rally that is ignoring fundamentals, according to Wilson.

He also flagged the systematic strategies that have fueled the rally by riding the price momentum higher. In his mind, their rules-based nature means that the market's eventual reversal could be sharper than investors expect.

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• The technology sector saw the largest increase in M&A activity during the second quarter, according to Morgan Stanley. 
• This dealmaking buzz occurred amid a marketwide slump, as companies focus on returning more capital to shareholders. 
• Morgan Stanley updated its screen of large companies that are most likely to be acquired over the next 12 months. 
•  Click here for more BI Prime stories.

The tech sector is ahead of the pack when it comes to corporate mergers and acquisitions. 

Tech saw the biggest increase in M&A activity during the second quarter, according to Morgan Stanley.

The sector is also one of only three on the S&P 500 where dealmaking remains well above median levels. Across sectors, executives have slowed their dealmaking activity and are instead choosing to return more capital to shareholders as the end of the business cycle approaches, Morgan Stanley said. 

But should any companies venture out into the dealmaking wild, the quant strategists have provided their best guesses as to who they will be. 

They recently updated their Acquisition Likelihood Estimate Rankings Tool, which ranks likely deal targets by combining factors such as market cap, debt-to-assets, and dividend yield. For example, companies with more debt relative to assets are seen as more likely to get offers, and those in sectors where lots of recent offers have been made screen highly on the list. 

The so-called ALERT tool excludes stocks that have been reported or rumored to be on the verge of M&A deals. That means the list is purely a product of Morgan Stanley's research.

"Investors can use the ALERT model as a screening tool for fundamental research on potential M&A candidates," the strategists led by Boris Lerner said in a recent note.

"Being underweight or short potential takeover targets can be risky; ALERT can flag this possible risk for managers. ALERT can also help the quantitative managers with alpha models to identify stocks with higher probabilities of receiving offers, so they can create overlays to mitigate this risk."

Below are the 11 tech stocks that screened the highest.

SEE ALSO: Morgan Stanley scoured 100 sets of data and warns we’re ‘just outside the danger zone’ of the next recession. Here’s how it says to prepare.

1. DXC Technology

Ticker:DXC

Market cap: $15.02 billion

Closing price on 7/25: $56.49

Source: Morgan Stanley

2. Western Digital

Ticker:WDC

Market cap: $14.16 billion

Closing price on 7/25: $56.97

Source: Morgan Stanley

3. Leidos Holdings

Ticker:LDOS

Market cap: $11.54 billion

Closing price on 7/25: $81.15

Source: Morgan Stanley

4. Zebra Technologies

Ticker:ZBRA

Market cap: $11.42 billion

Closing price on 7/25: $187.87

Source: Morgan Stanley

5. PTC Inc.

Ticker:PTC

Market cap: $10.74 billion

Closing price on 7/25: $72.90

Source: Morgan Stanley

6. Zendesk

Ticker:ZEN

Market cap: $9.93 billion

Closing price on 7/25: $93.30

Source: Morgan Stanley

7. Juniper Networks

Ticker:JNPR

Market cap: $9.49 billion

Closing price on 7/25: $26.47

Source: Morgan Stanley

8. RingCentral

Ticker:RNG

Market cap: $9.41 billion

Closing price on 7/25: $123

Source: Morgan Stanley

9. Black Knight

Ticker:BKI

Market cap: $9.17 billion

Closing price on 7/25: $62.18

Source: Morgan Stanley

10. Docusign

Ticker:DOCU

Market cap: $8.91 billion

Closing price on 7/25: $52.47

Source: Morgan Stanley

11. On Semiconductor

Ticker:ON

Market cap: $8.23 billion

Closing price on 7/25: $21.86

Source: Morgan Stanley

SEE ALSO:

Automated trading has already upended markets. Now AI could shake up stock picking and investment advice.

• The London Stock Exchange has agreed a $27 billion deal to buy data provider Refinitiv, just a year after the company was spun out of Thomson Reuters by Blackstone. 
• The deal is being led by some of the biggest names in M&A in London, with the likes of Goldman Sachs, Morgan Stanley, and Evercore all landing roles on the deal. 
• Click here for more BI Prime stories.

The London Stock Exchange has agreed a $27 billion deal to buy data provider Refinitiv, just a year after the company was spun out of Thomson Reuters by Blackstone. 

London Stock Exchange CEO David Schwimmer is a former Goldman Sachs banker with close ties to Blackstone. He moved in on the deal after negotiations slowed in rival exchange Deutsche Boerse's plans to buy Refinitiv's foreign-exchange trading business for $3 billion, according to Reuters. 

Blackstone could be set to double its money just 10 months after the private equity firm secured its initial deal last year. Refinitiv shareholders will ultimately hold around a 37% stake in LSE.

The deal was led by some of the biggest names in M&A in the London banking market. Here's what you need to know:

London Stock Exchange 

The London Stock Exchange was advised by Goldman Sachs, Morgan Stanley, Robey Warshaw, Barclays, and RBC Capital Markets, with consultancy Oliver Wyman and communications firm Teneo working on the deal. 

Goldman Sachs 

Goldman Sachs was a lead adviser on the deal, with a team made up of Francois Xavier de Mallmann, Mark Sorrell, James Lucas, and Charlie Lytle. 

De Mallmann is chairman of the investment banking division, and has long worked for the LSE, advising the exchange group on the sale of Russell Investments in 2015. He recently worked on the failed FCA-Nissan talks earlier this year, Reuters reported.

Sorrell is a mainstay of the UK M&A market as head of the bank's European M&A team. He is the son of Martin Sorrell, the founder of advertising agency WPP.

Lytle is cohead of the bank's corporate broking team and joined Goldman from Citi in 2016. His previous deals include Worldpay's tie up with Vantiv in 2018 and Standard Life's combination with Aberdeen Asset Management in 2017. 

Lucas was promoted to MD in 2017. 

Morgan Stanley

Morgan Stanley also served as a lead adviser on the deal with its team including Matthew Jarman, Mark Rawlinson, Vipin Chhajer, and Ben Grindley. 

Jarman  knows the LSE well, having been part of the NYSE's parent company ICE's bid to takeover the exchange in 2016. 

Rawlinson is a key figure at Morgan Stanley. Having previously been one of the UK's most respected M&A lawyers, he now heads up the bank's UK investment banking division as chairman. He advised Unilever on its defence when Kraft Heinz made an offer to buy the firm. 

Chhajer joined Morgan Stanley as an executive director from Deutsche Bank in 2018 where he was head of European fintech investment banking. And Grindley was part of the Morgan Stanley team which advised on the Comcast-Fox-Sky deal last year. 

Robey Warshaw

Robey Warshaw is an advisory firm based in London set up by veteran dealmakers Simon Robey and Simon Warshw, known in London advisory circles as "the two Simons." The Robey Warshaw team was comprised of Robey and Phillip Apostolides, both former Morgan Stanley bankers.

Robey used to be global head of M&A at Morgan Stanley while Apostolides was a senior investment banker. Last year the company punched well above its weight to be the 18th largest dealmaker globally, according to Firmex.

Barclays

British bank Barclays worked as an adviser, broker and sponsor on the LSE side of the deal, having been the main corporate broker to the exchange for some time. Its team was composed of Kunal Gandhi, Francesco Ceccato, Neal West, and Ben Plant.

Gandhi was a key advisor to the LSE on its failed merger with Deutsche Boerse in 2017 and is head of corporate broking at the bank. He also advised on the LSE's acquisition of a group of bond indices and an analytics platform from Citigroup for $685 million last year, according to Financial News.

Ceccato is co-head of Barclays' financial institutions group in Europe, the Middle East and Africa. 

West is an managing director at Barclays in its corporate broking division while Plant is head of corporate finance transaction governance at the bank. 

RBC Capital Markets 

RBC Capital Markets worked as corporate broker on the LSE team with bankers Oliver Asplin Hearsey and Marcus Jackson leading their side. Asplin Hearsey is a veteran financial institutions banker while Jackson is in corporate broking.

Oliver Wyman

John Romeo and Hiten Patel served as consultants for LSE from Oliver Wyman. 

Teneo

Lucas van Praag, Philip Gawith, and Doug Campbell served as communications advisors to LSE. 

Refinitiv 

Evercore

Evercore served as a financial advisor to Refinitiv. The team there included Jane Gladstone, Julian Oakley, and David Cox.

Gladstone is a senior managing director at Evercore based in New York and runs the firm's financial services corporate advisory team. She advised ICAP on the merger of its £1.1 billion ($1.3 billion) global voice broking and information business with Tullett Prebon.

Oakley is a former JPMorgan banker whose own firm, Braveheart, was bought by Evercore in 2006. He advises on a variety of M&A as well as equity and capital markets deals from London.

Cox is a New York-based managing director who formerly worked in M&A at Morgan Stanley. 

Canson Capital Partners

Canson Capital Partners is a boutique led by former HSBC bankers that came to prominence when the then-three-month-old firm advised Blackstone on its deal with Thomson Reuters. Matteo Canonaco and James Simpson worked as financial advisors to Refinitiv on behalf of Canson. 

Canonaco was formerly the head of financial sponsors at HSBC while Simpson was the former co-head of advisory for EMEA at the bank. 

Jefferies

Jefferies' financial institutions investment banking group managing director Alexander Yavorsky served as a financial advisor for Refinitiv. 

Eterna Partners

Eterna Partners' partner and cofounder Serra Balls and former G4S communications director Nigel Fairbrass served as communications advisor to Refinitiv.

SEE ALSO: Some of the biggest names in dealmaking in New York and London are duking it out as part of the Comcast-Fox-Sky bidding war

Join the conversation about this story »

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• Morgan Stanley says the forces of globalization are losing strength as trade tensions rise. That's leaving some multinational companies vulnerable but creates new opportunities as well. 
• Michael Zezas and Meredith Pickett write that regional companies, rather than global ones, are more likely to benefit from the changing trends.
• The Morgan Stanley duo outlines the areas of the stock market they think will get the biggest boost from this shift.
• Visit Business Insider's homepage for more stories.

The decades-old trend that has linked more and more of the global economy is fading away, according to Morgan Stanley strategists Michael Zezas and Meredith Pickett, who say a new order is set to replace it.

Globalization has been a fundamental fact of business and markets over that time, but Morgan Stanley says it's time to recognize that it's not as powerful a force as it once was. While some industries will continue to globalize, other companies will become increasingly focused on individual regions or nations.

"Several trends are making global trade less advantageous and, in some cases, less feasible," they wrote in a note to clients.

The most obvious culprit is rising trade tensions. Those include the tariffs in the US-China trade war and the ones President Trump has threatened to put on imported cars, but more complex actions including national security and foreign ownership reviews, which are increasing in the US.

"We see a rising probability of a trend toward higher trade barriers," he says. "We think investors should take notice of these trends as they have ramifications for cost structures and market growth potential across many sectors in corporate America, China, and Europe."

Zezas and Pickett say two factors are crucial in determining whether a company is going to benefit from the evolving trends or get hammered by them.

The first is how sensitive their products or technology are to economic or national security issues, as highly sensitive products are facing more government scrutiny that can affect sales and deals — although governments might decide to protect some established domestic companies.

The second issue is how multinational the company's business and supply chain are, as that's linked to its vulnerability to threats like tariffs. Companies whose supply chains pass through economic rivals might have to reroute them at great cost, a possibility Apple is reportedly considering with regard to China.

This graphic shows how those two trends could interact to the benefit of several sectors and the detriment of a slew of them.

The Morgan Stanley team says Apple, HP, Hewlett Packard Enterprise, and Seagate Technology are the tech hardware companies that could be harmed the most.

But the companies in the upper left, called "emerging regional champions," have a good chance to dodge those complex pressures. They say payment processors like Visa and MasterCard, Chinese internet companies, and small and midcap US internet companies are likely to benefit as the forces that drive globalization slow down.

But they're less optimistic about automakers and ride share companies, European companies that make machines and other capital goods, hardware and chipmakers, and telecom companies. Morgan Stanley says their products and technologies could be subject to national restrictions, and parts of their supply chains could be targeted with tariffs.

He adds that other factors are intensifying the trend. Many emerging market nations are wealthier than they used to be, and a result, they're spending more money buying goods and services that would've been shipping across the world in the past. And because of changes in manufacturing, many companies are finding it no longer makes sense to ship products and parts through complicated supply chains to reduce labor costs.

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Prestigious firms like Citi and Goldman Sachs are notoriously difficult to break into.

Everyone knows you've got to be smart, competent, and ambitious — but what else will help you stand out among a sea of talented applicants... and what will catapult you to success once you're there?

To find out, we tapped the HR chiefs at top finance companies like Bank of America, BlackRock, and Morgan Stanley. These folks are the final gatekeepers when it comes to recruiting, hiring, and granting promotions.

Check out their best advice on nailing the job interview, leading with humility, and what to do when you're stuck in a rut.

Subscribe here to read our feature: POWER BROKERS OF FINANCE: HR chiefs reveal how to get hired at Goldman Sachs, Citi, BlackRock, and other top companies

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• The technology sector saw the largest increase in M&A activity during the second quarter, according to Morgan Stanley. 
• This dealmaking buzz occurred amid a marketwide slump, as companies focus on returning more capital to shareholders. 
• Morgan Stanley updated its screen of large companies that are most likely to be acquired over the next 12 months. 
•  Click here for more BI Prime stories.

The tech sector is ahead of the pack when it comes to corporate mergers and acquisitions. 

Tech saw the biggest increase in M&A activity during the second quarter, according to Morgan Stanley.

The sector is also one of only three on the S&P 500 where dealmaking remains well above median levels. Across sectors, executives have slowed their dealmaking activity and are instead choosing to return more capital to shareholders as the end of the business cycle approaches, Morgan Stanley said. 

But should any companies venture out into the dealmaking wild, the quant strategists have provided their best guesses as to who they will be. 

They recently updated their Acquisition Likelihood Estimate Rankings Tool, which ranks likely deal targets by combining factors such as market cap, debt-to-assets, and dividend yield. For example, companies with more debt relative to assets are seen as more likely to get offers, and those in sectors where lots of recent offers have been made screen highly on the list. 

The so-called ALERT tool excludes stocks that have been reported or rumored to be on the verge of M&A deals. That means the list is purely a product of Morgan Stanley's research.

"Investors can use the ALERT model as a screening tool for fundamental research on potential M&A candidates," the strategists led by Boris Lerner said in a recent note.

"Being underweight or short potential takeover targets can be risky; ALERT can flag this possible risk for managers. ALERT can also help the quantitative managers with alpha models to identify stocks with higher probabilities of receiving offers, so they can create overlays to mitigate this risk."

Below are the 11 tech stocks that screened the highest.

SEE ALSO: Morgan Stanley scoured 100 sets of data and warns we’re ‘just outside the danger zone’ of the next recession. Here’s how it says to prepare.

1. DXC Technology

Ticker:DXC

Market cap: $15.02 billion

Closing price on 7/25: $56.49

Source: Morgan Stanley

2. Western Digital

Ticker:WDC

Market cap: $14.16 billion

Closing price on 7/25: $56.97

Source: Morgan Stanley

3. Leidos Holdings

Ticker:LDOS

Market cap: $11.54 billion

Closing price on 7/25: $81.15

Source: Morgan Stanley

4. Zebra Technologies

Ticker:ZBRA

Market cap: $11.42 billion

Closing price on 7/25: $187.87

Source: Morgan Stanley

5. PTC Inc.

Ticker:PTC

Market cap: $10.74 billion

Closing price on 7/25: $72.90

Source: Morgan Stanley

6. Zendesk

Ticker:ZEN

Market cap: $9.93 billion

Closing price on 7/25: $93.30

Source: Morgan Stanley

7. Juniper Networks

Ticker:JNPR

Market cap: $9.49 billion

Closing price on 7/25: $26.47

Source: Morgan Stanley

8. RingCentral

Ticker:RNG

Market cap: $9.41 billion

Closing price on 7/25: $123

Source: Morgan Stanley

9. Black Knight

Ticker:BKI

Market cap: $9.17 billion

Closing price on 7/25: $62.18

Source: Morgan Stanley

10. Docusign

Ticker:DOCU

Market cap: $8.91 billion

Closing price on 7/25: $52.47

Source: Morgan Stanley

11. On Semiconductor

Ticker:ON

Market cap: $8.23 billion

Closing price on 7/25: $21.86

Source: Morgan Stanley

SEE ALSO:

Automated trading has already upended markets. Now AI could shake up stock picking and investment advice.

• The London Stock Exchange has agreed a $27 billion deal to buy data provider Refinitiv, just a year after the company was spun out of Thomson Reuters by Blackstone. 
• The deal is being led by some of the biggest names in M&A in London, with the likes of Goldman Sachs, Morgan Stanley, and Evercore all landing roles on the deal. 
• Click here for more BI Prime stories.

The London Stock Exchange has agreed a $27 billion deal to buy data provider Refinitiv, just a year after the company was spun out of Thomson Reuters by Blackstone. 

London Stock Exchange CEO David Schwimmer is a former Goldman Sachs banker with close ties to Blackstone. He moved in on the deal after negotiations slowed in rival exchange Deutsche Boerse's plans to buy Refinitiv's foreign-exchange trading business for $3 billion, according to Reuters. 

Blackstone could be set to double its money just 10 months after the private equity firm secured its initial deal last year. Refinitiv shareholders will ultimately hold around a 37% stake in LSE.

The deal was led by some of the biggest names in M&A in the London banking market. Here's what you need to know:

London Stock Exchange 

The London Stock Exchange was advised by Goldman Sachs, Morgan Stanley, Robey Warshaw, Barclays, and RBC Capital Markets, with consultancy Oliver Wyman and communications firm Teneo working on the deal. 

Goldman Sachs 

Goldman Sachs was a lead adviser on the deal, with a team made up of Francois Xavier de Mallmann, Mark Sorrell, James Lucas, and Charlie Lytle. 

De Mallmann is chairman of the investment banking division, and has long worked for the LSE, advising the exchange group on the sale of Russell Investments in 2015. He recently worked on the failed FCA-Nissan talks earlier this year, Reuters reported.

Sorrell is a mainstay of the UK M&A market as head of the bank's European M&A team. He is the son of Martin Sorrell, the founder of advertising agency WPP.

Lytle is cohead of the bank's corporate broking team and joined Goldman from Citi in 2016. His previous deals include Worldpay's tie up with Vantiv in 2018 and Standard Life's combination with Aberdeen Asset Management in 2017. 

Lucas was promoted to MD in 2017. 

Morgan Stanley

Morgan Stanley also served as a lead adviser on the deal with its team including Matthew Jarman, Mark Rawlinson, Vipin Chhajer, and Ben Grindley. 

Jarman  knows the LSE well, having been part of the NYSE's parent company ICE's bid to takeover the exchange in 2016. 

Rawlinson is a key figure at Morgan Stanley. Having previously been one of the UK's most respected M&A lawyers, he now heads up the bank's UK investment banking division as chairman. He advised Unilever on its defence when Kraft Heinz made an offer to buy the firm. 

Chhajer joined Morgan Stanley as an executive director from Deutsche Bank in 2018 where he was head of European fintech investment banking. And Grindley was part of the Morgan Stanley team which advised on the Comcast-Fox-Sky deal last year. 

Robey Warshaw

Robey Warshaw is an advisory firm based in London set up by veteran dealmakers Simon Robey and Simon Warshw, known in London advisory circles as "the two Simons." The Robey Warshaw team was comprised of Robey and Phillip Apostolides, both former Morgan Stanley bankers.

Robey used to be global head of M&A at Morgan Stanley while Apostolides was a senior investment banker. Last year the company punched well above its weight to be the 18th largest dealmaker globally, according to Firmex.

Barclays

British bank Barclays worked as an adviser, broker and sponsor on the LSE side of the deal, having been the main corporate broker to the exchange for some time. Its team was composed of Kunal Gandhi, Francesco Ceccato, Neal West, and Ben Plant.

Gandhi was a key advisor to the LSE on its failed merger with Deutsche Boerse in 2017 and is head of corporate broking at the bank. He also advised on the LSE's acquisition of a group of bond indices and an analytics platform from Citigroup for $685 million last year, according to Financial News.

Ceccato is co-head of Barclays' financial institutions group in Europe, the Middle East and Africa. 

West is an managing director at Barclays in its corporate broking division while Plant is head of corporate finance transaction governance at the bank. 

RBC Capital Markets 

RBC Capital Markets worked as corporate broker on the LSE team with bankers Oliver Asplin Hearsey and Marcus Jackson leading their side. Asplin Hearsey is a veteran financial institutions banker while Jackson is in corporate broking.

Oliver Wyman

John Romeo and Hiten Patel served as consultants for LSE from Oliver Wyman. 

Teneo

Lucas van Praag, Philip Gawith, and Doug Campbell served as communications advisors to LSE. 

Refinitiv 

Evercore

Evercore served as a financial advisor to Refinitiv. The team there included Jane Gladstone, Julian Oakley, and David Cox.

Gladstone is a senior managing director at Evercore based in New York and runs the firm's financial services corporate advisory team. She advised ICAP on the merger of its £1.1 billion ($1.3 billion) global voice broking and information business with Tullett Prebon.

Oakley is a former JPMorgan banker whose own firm, Braveheart, was bought by Evercore in 2006. He advises on a variety of M&A as well as equity and capital markets deals from London.

Cox is a New York-based managing director who formerly worked in M&A at Morgan Stanley. 

Canson Capital Partners

Canson Capital Partners is a boutique led by former HSBC bankers that came to prominence when the then-three-month-old firm advised Blackstone on its deal with Thomson Reuters. Matteo Canonaco and James Simpson worked as financial advisors to Refinitiv on behalf of Canson. 

Canonaco was formerly the head of financial sponsors at HSBC while Simpson was the former co-head of advisory for EMEA at the bank. 

Jefferies

Jefferies' financial institutions investment banking group managing director Alexander Yavorsky served as a financial advisor for Refinitiv. 

Eterna Partners

Eterna Partners' partner and cofounder Serra Balls and former G4S communications director Nigel Fairbrass served as communications advisor to Refinitiv.

SEE ALSO: Some of the biggest names in dealmaking in New York and London are duking it out as part of the Comcast-Fox-Sky bidding war

Join the conversation about this story »

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• Morgan Stanley strategist Michael Zezas says the US-China trade war will only get worse from here because both sides have reasons to drag the dispute out longer. He's identified three dynamics that will drive the market as the dispute drags on. 
• Zezas says more escalation is coming later in the year, which plays into Morgan Stanley's forecast of a correction for stocks.
• He sees the trade war as something that's exacerbating other big problems for stocks and not the cause of them.
• Click here for more BI Prime stories.

Stocks are tumbling as the US-China trade war grows more intense, and Morgan Stanley says it will only get worse from here.

For more than a year stocks have gyrated as investors reacted to the state of trade talks. But Morgan Stanley's head of US public policy strategy Michael Zezas says investors need to accept that the situation will get worse soon.

"This round of tariffs will likely be put in place, and investors should behave as if further escalation will happen in 2019," he writes.

He notes that both sides believe they have reasons to extend the dispute. Beijing seems to have doubts about whether the US is a reliable negotiating partner. It would rather hold out and wait for a better deal than accept the economic changes and enforcement the Trump administration has called for.

On the other side, he believes the US might decide that it's in the nation's best interest to ramp up the intensity ahead of the 2020 presidential election.

Zezas says that President Trump and his advisors might decide that more aggressive trade policies will encourage more interest rate cuts from the Federal Reserve, helping the economy; that they will be able to "reframe" the argument around the trade war; and that China might give in.

That means it's likely that the next tariffs will take effect as announced and the dispute will get more intense.

"There remains no evidence that any progress has been made on the key sticking points," says Zezas. "If China remains steadfast, the US administration's instinct is to escalate."

Morgan Stanley has consistently been more bearish than many on Wall Street and has been predicting a 10% correction for stocks during the third quarter. 

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Here's how Zezas believes that will play out for markets:

(1) Slower economic growth

The trade war and the uncertainty it's created have created a "negative feedback loop" that's hammering corporate confidence, according to Zezas.

While investors hope the Federal Reserve's interest rate cuts will limit the damage, he says they can't break that loop. That will cut into business spending and reduce economic growth.

"More tariffs should drag on corporate confidence, capex and global growth in the near term," Zezas says.

One reason is that the US-China dispute is not the only difficult trade situation. Zezas writes that the Trump administration hasn't made much progress in talks with other trade partners either, and uncertainty at the World Trade Organization is also rising.

(2) More dovishness from the Fed

The Fed has focused on confidence as its way of strengthening the economy, Zezas writes. With the trade war getting worse over the last few months, financial conditions have tightened and there are signs that important measurements of confidence have decreased.

As noted, if business confidence is down, companies will spend less and growth will likely fade. The same applies to consumers and their level of confidence — and spending by consumers makes up most of the US economy. Because of the economic effects, Zezas thinks that dynamic will push the Fed to signal more rate cuts.

"If this erosion is sustained, the confidence channel overall will lead the Fed, in our view, to again note heightened downside risks to the outlook and confirm market expectations for additional interest rate cuts," he says.

(3) Trouble for equities and credit

Morgan Stanley has been bearish on stocks and that's sentiment has only grown this quarter. Zezas says the trade dispute is adding to deeper challenges facing stocks and creating a weaker environment for both equities and credit.

"Trade issues act as an accelerant to, not the primary cause of, other cyclical headwinds," Zezas writes.

The larger problem in Morgan Stanley's view its belief that corporate earnings will go into a recession. US strategist and CIO Mike Wilson also names elevated sentiment among investors, rising market volatility, and the growing threat of an economic recession as major threats to stocks, which were at record highs just days ago.

In a separate note to clients written Saturday, Wilson said that the average global stock index has ranged between flat to down 10% in the last 18 months while the S&P 500 has risen in volatile trading. He argues that that's more evidence it has room to fall as challenges mount.

SEE ALSO: A top-rated wealth manager for celebrities and the mega-rich told us her clients were bracing for higher taxes. Here's how that's changing their approach to investing.

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• Some of Wall Street's largest banks, including Citi and Morgan Stanley, are in the processing of forming a working group aimed at understanding the risks associated with using artificial intelligence, according to three sources involved in the project.
• The group, which initially began to form earlier this year, comes at a time when financial firms are eager to implement AI across various business lines but lack a complete understanding of the complex technology and guidance from regulators. 
• While no goals have officially been set, sources said, the overall hope is to develop better guidelines about how to pursue using AI. 
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Wall Street is as competitive as it gets, but sometimes everyone benefits from working together. And when it comes to understanding the intricacies of artificial intelligence, some of Wall Street's largest financial firms have recognized the benefit of putting their heads together. 

Citi and Morgan Stanley are among a group of large global banks banding together to create a working group examining the potential risks they may face when using artificial intelligence, according to three sources involved in the project. 

While it's still early days, and specific goals for the group haven't been established, the hope is that by working together Wall Street will develop a better understanding of how best to use the innovative technology appropriately, according to the sources. The impetus for forming the group earlier this year, one source said, was the recognition that there are risks around the usage of artificial intelligence that needed to be addressed as Wall Street continues to adopt more the tech. 

Spokespeople for Morgan Stanley and Citi declined to comment. 

Wall Street stands to benefit from taking a unified approach to understanding how best to use AI in the absence of direction from regulators. Rulemakers have largely avoided crafting specific regulation pertaining to the appropriate use of AI in finance.

Meanwhile, banks have put significant resources towards development around AI-based tools in recent years with the hopes of cutting cost and gaining a competitive edge. As firms get more comfortable with the technology, the laundry list of use cases where AI can be applied to improve manual, labor-intensive processes continues to grow. Banks are experimenting applying AI to everything from chatbots and fraud detection to more market-facing areas such as trading and risk management. 

Read more:AI has the potential to radically transform financial services. But first banks need to get their data in order.

According to a report published by IHS Markit in April, the global business value of artificial intelligence in finance will be $300 billion by 2030. In 2018, the report estimated $41.1 billion in cost savings and efficiencies was recognized thanks to AI's use on Wall Street.

However, for all the promises of AI improving how things are done, risks still remain. Interpretability and explainability are two major hurdles. The former refers to understanding how an AI-based tool reaches a solution. The latter is the ability to explain to someone — like a regulator — how that solution was reached. 

With the use of more sophisticated AI, such as deep learning techniques that include series of complex, ever-evolving calculations, it becomes increasingly difficult for firms to have full transparency into how AI-based tools work. And while the use of a so-called "black boxes" might be acceptable in some areas of the bank, applying it to spaces that directly touch consumers — such as credit decisions — will likely be deemed unacceptable by regulators. 

There's also the impact the use of the technology will have on the current workforce. For many, AI tools will make jobs easier. However, others might find themselves out of work. By 2030, 1.3 million US workers will have their jobs affected in some way by the introduction of AI, according to the IHS Markit report. 

While regulators have yet to propose AI-specific rules for finance, that could soon change. Recently, Jelena McWilliams, chairman at the Federal Deposit Insurance Corporation, said at a fintech event her group would push forward with guidance around AI usage for banks if other regulators couldn't agree on a joint proposal, as first reported by American Banker. 

See more:JPMorgan doesn't want to get burned by AI and machine learning. Here's how it avoids costly mistakes.

The working group isn't the first time Wall Street has chosen to take a look at the potential risks posed by AI usage. Bank of America became the founding donor of Harvard's Kennedy School of Government's Council on the Responsible Use of Artificial Intelligence in 2018. The goal of the group is to bring together leaders in business, academics, and government to better understand the appropriate usage of AI. 

Cathy Bessant, Bank of America's chief operations and technology officer, spoke at the time about the new territory the use of AI was bringing firms into. 

"Our legal and judicial structures have no charted path for a lot of this," Bessant said. "We need to ask the right questions and see to it that deployment of AI doesn't get ahead of the structures and the infrastructure needed to support it."

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• Morgan Stanley will take no part in WeWork's upcoming initial public offering, which is expected to raise around $3.5 billion for the money-losing company. 
• The bank reportedly pulled out of the IPO after WeWork rejected its bid to be the top underwriter, according to a new report from Bloomberg.
• Morgan Stanley secured the top spot in Uber's massive public offering earlier this year.
• Visit the Markets Insider homepage for more storie.

Morgan Stanley cashed in on the biggest initial public offering of the year as the lead underwriter for Uber, but the bank has reportedly backed out of what could be the second-largest IPO in 2019 after losing the top spot in the deal. 

WeWork rejected Morgan Stanley's pitch to be the lead underwriter on its upcoming mega-IPO, leaving the firm to participate in a lesser capacity, according to a new report from Bloomberg. The bank decided to withdraw from the IPO all together losing out on the lead role. 

Morgan Stanley will now miss out on its share what could be more than $122 million in underwriting fees, if WeWork ends up paying a previously discussed figure of 3.5%, according to Bloomberg. 

The deal fractured after Morgan Stanley refused to commit to the level of debt financing WeWork was looking for from key lenders as part of a $6 billion credit facility, Bloomberg found. Morgan Stanley reportedly wasn't ready to commit the capital due to concerns over the company's risk profile and credit needs. 

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JPMorgan will take on the role of lead underwriter for the company's IPO. The bank has a history with WeWork as one of its biggest investors, and the company's founder, Adam Neumann, as his personal banker. 

Morgan Stanley's decision to leave the deal all together came as a surprise, according to Bloomberg, which cited people familiar with the matter. The bank had done business with WeWork in the past, including a junk-bond offering from the company last year. Morgan Stanley also underwrote $10 million worth of mortgages for Neumann's personal homes.

The decision to leave the WeWork offering comes after Morgan Stanley landed the top spot in Uber's $8.1 billion public offering — the largest IPO so far in 2019.

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• The world's biggest banks have posted their lowest revenues since 2006, according to industry monitor Coalition.
• First-half revenues slumped 11% at 12 of the biggest banks in Europe and the US.
• Equities have been hit especially hard, as slow growth and low-interest rates hit Wall Street's biggest names.
• Headcount at the world's largest investment banks dropped by 1,500 from January to June.
• View Markets Insider's homepage for more stories. 

Plagued by geopolitical tensions, low interest rates, and slow growth, the world's biggest banks have seen revenues plunge to their lowest levels since 2006.

Sales at 12 of the largest investment banks in Europe and the US dropped 11% to $76.8 billion in the first half of this year — the lowest figure since before the financial crisis, according to data from industry monitor Coalition.

The banks' fixed income, currencies, and commodities (FICC) divisions declined, as did their investment banking (IBD) arms, Coalition said. However, their equities businesses suffered the most with a 17% decline.

Equities may have further to fall, according to the Financial Times, as stricter investor protection regulations in Europe could mean other banking giants join Deutsche Bank in leaving equities to Wall Street's biggest players.

Earnings from Deutsche Bank, Morgan Stanley, and others have missed the mark in recent months. 

Deutsche Bank posted a $3.5 billion loss in the second quarter, much wider than the $2.8 billion predicted by Credit Suisse. Morgan Stanley also suffered, with equities-trading revenue down 14% — the worst of any Wall Street Bank — and overall sales-and-trading revenue down 12%.

Headcount in the investment banks also shrunk by 1,500 between January and June, Coalition reported. Both economic uncertainty and technological change played a role in the job cuts, it said.

See More: Headcount at the world's largest investment banks shrank by 1,500 in the first half of 2019, and equities trading took the brunt of it.

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• Morgan Stanley managing director Andrew Slimmon views the recent outflow from stocks and President Trump's reelection bid as an opportunity for investors to ride another market boom before recession hits.
• Recent quarterly earnings figures established a low bar for year-over-year profit growth, and should help companies beat expectations in coming quarters, Slimmon said.
• The Treasury yield curve "would've inverted a while ago" if an economic recession was set to hit in 2019, the director added. Yield-curve inversions historically arrive several months before an economic downturn begins.
• Visit the Markets Insider homepage for more stories.

Just as a shoreline recedes before a tidal wave, Morgan Stanley managing director Andrew Slimmon sees the recent outflow from stocks as opportunity for a new market boom.

Slimmon — a senior portfolio manager at Morgan Stanley Investment Management, which oversees more than $470 billion — views a recent earnings recession as setting a lower hurdle for companies to clear in 2020.

The summer brought consecutive quarters of year-over-year S&P 500 earnings declines for the first time since 2016. Mutual fund and exchange-traded fund investors have also sold stocks and bought bonds for four weeks in a row as trade tensions fuel uncertainty, according to Bank of America Merill Lynch.

The lagging profit growth and move away from stocks could spark a huge market run-up when traders pour cash back into the stock market, Slimmon said.

"2019 made for a very low bar and we're going to have positive earnings growth next year," he said in a phone interview.

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Slimmon also sees President Trump as a key player in keeping stocks rising in 2020. Tanking markets would reflect poorly on the president as he runs for reelection, and there's no incentive for him to bring aid to markets now when he can quash uncertainty closer to election day, the director said.

The trade conflict "will be dragged out until he gets the Fed to cut rates," Slimmon predicted, adding a trade deal between the US and China could come "early next year" to boost markets ahead of the election.

The trade war — and its effect on consumer sentiment — is the most relevant variable in deciding when recession arrives, Slimmon warned. Consumer spending makes up about 70% of the US economy, and indicators like the unemployment rate and consumer sentiment will signal how much the trade conflict and resulting tariffs are changing Americans' spending habits.

The US Labor Department announced slower hiring trends in August Friday, adding 130,000 nonfarm payrolls against economist expectations for 160,000 new jobs. White House economic adviser Larry Kudlow praised the economy for a "very solid number" of job gains Friday.

"August is always a quirky month," Kudlow said in a CNBC interview. The adviser said strong wage growth and a high rate of Americans returning to the work force paint a rosy picture for the nation's economy.

Federal Reserve chairman Jerome Powell also spoke well of the nation's economy, saying the central bank is "not forecasting or expecting a recession" during a Friday speech in Zurich, Switzerland.

The officials' statements follow repeated "2-10" yield-curve inversions, one of the most dependable recession warning signs over the last six decades. The first of said inversions arrived August 14 and brought the worst day of the year for US stocks.

Though the inversion triggered recession fears across the nation, Slimmon noted there's plenty of time before recession hits and stocks tumble. Stocks on average rise 15% after a yield-curve inversion, according to a Credit Suisse report. The report also noted economic downturns can arrive as far out as 34 months after an inversion.

If a recession were to hit in 2020, the first inversion should have arrived several months ago, Slimmon said. The official definition for a recession is two consecutive quarters of falling GDP. Slowing GDP growth through 2018 set a lower bar for the economy to clear, the director said.

"The yield curve would've inverted a while ago if we were going to have an economic recession now," Slimmon said. "We didn't print a lot of very high GDP numbers last year, therefore I think a recession in 2019 is very unlikely."

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• UBS' wealth management unit is rolling out changes to its equity compensation plan services and digital offerings that could compete with Morgan Stanley's Solium tool.
• The move highlights key themes underpinning the world of wealth: technology used by advisers and customers alike is rapidly changing, and the fees for many services are quickly heading to zero.
• Players from traditional wealth managers to new robo-adviser entrants are competing in an increasingly crowded space, and growing workplace wealth offerings is gaining steam at the big banks.
• UBS' plans come on the heels of a shuffle across its wealth management unit's executive ranks, as well as a shakeup within its investment bank.
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UBS' wealth management unit is rolling out changes to its equity compensation plan's services and digital offerings, a move that comes months after Morgan Stanley's deal to buy cloud-powered equity administrative platform Solium Capital.

Clients using the Swiss firm's equity compensation plan, along with those clients' employees, will be able to see their equity awards and personal finances joined together, regardless of whether those accounts are held outside of UBS. More than 800,000 participants across 180 companies use the plan.

The move to enhance the service highlights several key themes underpinning the wealth industry's evolution: technology used by advisers and customers alike is improving rapidly, and fees are falling across many wealth management platforms.  

All the while, players from traditional wealth managers to new robo-adviser entrants like Betterment and Wealthfront are competing in an increasingly crowded ecosystem, and workplace wealth offerings are gaining steam at big banks.

Read more: Tech is now essential in the battle to recruit and keep wealth talent. Deutsche Bank and Morgan Stanley execs gave us their pitch.

"As the workplace continues to evolve, we know the demand for simplicity and affordability is top of mind," Michael Barry, UBS head of workplace wealth services, said in a statement on Thursday

The firm's wealth unit is also now offering flat trading commissions for their clients using the equity compensation plan, including a fee as low as zero for US equity trades through that plan. And personal finance tools will now track those clients' spending and saving, as well as offer the ability to set and monitor budgets.

UBS is also now offering a digital advice platform to those clients, combining UBS research with technology to guide clients on their investments. The efforts come as the firm is doubling down on growing its wealth management business, the world's largest, and one often considered a relatively stable one at the wirehouses.

Read more: UBS has a new group to help advisers working with the mega-rich as part of a plan to rake in $70 billion in assets over 3 years

Sizing up the competition

As one of UBS' main competitors in wealth management, Morgan Stanley made a big bet on wealth-tech earlier this year, when it said it would buy Solium for $900 million with the hopes of adding Solium's existing customers at a range of start-ups and other companies to its wealth management business. That deal closed in May. 

Goldman Sachs has also made inroads in the workplace wealth space — that is, offering employee financial planning services like guidance on retirement and stock options — with its Ayco business.

UBS' plans come on the heels of an announced shuffle across its wealth management unit's executive ranks.

Its co-president of global wealth management, Martin Blessing, is stepping down and will be succeeded by Iqbal Khan, a former Credit Suisse executive, effective October 1. UBS has also planned a shakeup within its investment bank, according to multiple media reports.

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• A massive shift in the stock market from top-performing growth stocks to lower-performing names triggered a sharp shift in "momentum" and has crushed hedge funds this week. 
• "This has been a brutal move," a person at a hedge fund in London said. "Huge move and lots of pain. It was like a four-standard-deviation day followed by another four-standard-deviation day. That's unheard of."
• "The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months," a Morgan Stanley memo to clients said.
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A massive shift in the stock market from top-performing growth stocks to lower-performing names triggered a sharp shift in "momentum" and has crushed hedge funds this week. 

Goldman Sachs said in a note that the decline "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, which was seen by Business Insider, trying to explain the moves and saying the pain could well keep going. 

"Everything that worked all year got sacked and whacked," one quant-hedge-fund source told Business Insider.

"This has been a brutal move," another person at a hedge fund in London said. "Huge move and lots of pain. It was like a four-standard-deviation day followed by another four-standard-deviation day. That's unheard of."

A Morgan Stanley sales desk sent a memo on Wednesday outlining its traders' take on "the magnitude and velocity of this week's rotation."

Read more: The stock market is experiencing a jarring shift seen only twice in history, and not since the tech bubble. Here's where JPMorgan's quant guru says investors should look to capitalize.

"All strategies are down," Morgan Stanley said, adding that if the momentum "morphs" from short sellers covering a wider sell-off by longer-term stock holders, "this is likely to spill over to the overall market." 

"If contained to a positioning unwind, the pressure should abate in a week or two," the bank said. "But to be clear, the risks skew towards more derisking relative to historical unwinds, not less. The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months."

"The longs are in the largest sectors of the market," including tech and healthcare, "and underperformance there can bring a broader array of sellers." 

What caused this big shift? 

"There was no single hard catalyst," Morgan Stanley said. "The proximate causes were modest improvements in macro data," such as ADP's US payrolls data, nonmanufacturing activity, and the Citi Economic Surprise Index, as well as increased optimism about the US-China trade war and recent upticks in the 10-year Treasury yield.

"But it was really heightened risk aversion that caused the moves — investors were becoming increasingly nervous about P/L after underperformance from crowded areas," such as software stocks, as well as what it said was the underperformance of short sellers in the week after Labor Day. "A lot of investors trying to protect P/L and de-risk at the same time led to gaps that then accelerated and fed on themselves."

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The event brought up bad memories of the "quant quake" of 2007, driven by crowded trades that ended up thrashing giants like Renaissance Technologies. But the quant-hedge-fund source said that losses this time around were "not close to" those during the quake a decade ago. 

Still, the memo detailed some scenarios that could exacerbate the problem.

Morgan Stanley said selling among long investors could happen if:  

• • "There is a decline in P/L that forces further degrossing (i.e. this just gets worse to the point hedge funds need to sell longs).
  • "There is a negative fundamental shock, investors realize that their longs in Growth and Tech are more cyclical than they expected, and they are forced to sell those holdings."

Also ominous: Morgan Stanley's CFO said at a Barclays conference on Wednesday that equities trading has been slow in the third quarter. The firm had originally said the third quarter was looking strong on trading. 

A Morgan Stanley spokesman said the bank couldn't immediately comment on the memo. 

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• SpaceX, the rocket company founded by Elon Musk, plans to surround Earth a gigantic network of internet-providing satellites called Starlink.
• In May, Musk said if Starlink could get a few percent of the global telecommunications market, SpaceX could net $30 billion to $50 billion in annual revenue.
• Financial analysts at Morgan Stanley Research said in a report sent to Business Insider on Tuesday that they now considered SpaceX's base valuation to be $52 billion.
• However, the report notes a wide margin of error: If SpaceX is wildly successful with Starlink, their "bull case" suggests the company could be worth $120 billion — but in a "bear case," it could be worth $5 billion if it falters.
• Visit Business Insider's homepage for more stories.

How much could SpaceX, the fast-moving private-rocket company founded by Elon Musk, actually be worth?

After SpaceX's successful launch of 60 experimental Starlink internet satellites in May, CNBC reported the company's estimated value was about $33.3 billion. This barely eclipsed the valuation of Tesla, the electric-car company Musk heads. This was a roughly $10 billion jump in valuation compared with estimates from 2017.

But a new report by Morgan Stanley Research sees a lot more potential for disruption of the internet industry with SpaceX's planned constellation of nearly 12,000 Starlink satellites.

Titled "SpaceX, Starlink and Tesla: Moving into Orbit?" and sent to Business Insider on Tuesday, the document gives SpaceX a base valuation of $52 billion — an increase of more than 50% compared with the latest reported number.

"This assumes that expanding access to the internet drives broadband penetration from 50% to 75% of the global population, with SpaceX able to capture ~10% of the incremental broadband subscribers," the analysts wrote.

However, that's just the middle-of-the-road estimate: The firm's range in value for SpaceX is roughly a hundredfold.

Read more: Europe's space agency says it dodged a SpaceX satellite because the company wouldn't move it out of the way. Buggy software may be to blame.

If you're a pessimist, and Starlink either struggles to turn its first few hundred satellites into a working internet service or fails to get many customers, the analysts said their "bear case" for SpaceX is just $5 billion. Their "bull case," on the other hand, is a staggering $120 billion.

If that rosy scenario pans out for SpaceX, the company may be pulling in as much as General Electric, Verizon, Fannie Mae, and even JPMorgan Chase.

The analysts shared their summary and methodology ahead of the second annual Morgan Stanley Space Summit in New York on December 10.

Why Starlink could be so disruptive — and make SpaceX and Musk a lot of money

Traditional satellite internet relies on spacecraft that are larger, older, more expensive, and about 22,236 miles away from Earth. This limits coverage and bandwidth while making for laggy connections. Starlink, meanwhile, would hug Earth at hundreds to 1,000 miles away with a larger number of newer satellites. What's more, they'll link together into a floating internet backbone, providing a faster alternative to fiber-optic cables that span the world.

According to current government documents, Starlink may consist of nearly 12,000 satellites by the end of 2027. If that happens, SpaceX may own and operate more than six times the number of all operational spacecraft in orbit.

The goal is to cover Earth with high-speed, low-latency, and affordable internet access. Even partial deployment of Starlink would benefit the financial sector and bring pervasive broadband internet to rural and remote areas.

Completing the project may cost $10 billion or more, Gwynne Shotwell, the president and chief operating officer of SpaceX, said in May 2018. That gambit — launching thousands of custom-built desk-sized satellites sent into space, 60 at a time, with perhaps 200 different Falcon 9 rocket missions — could be massive. Musk said during a call with reporters on May 15 that it could net the company perhaps $30 billion to $50 billion per year.

But SpaceX plans to get a robust Starlink service up and running much sooner than 2027, perhaps by 2020 or 2021.

"For the system to be economically viable, it's really on the order of 1,000 satellites," Musk said in May, "which is obviously a lot of satellites, but it's way less than 10,000 or 12,000."

He added: "I think within a year and a half, maybe two years — if things go well — SpaceX will probably have more satellites in orbit than all other satellites combined."

Read more: Elon Musk just revealed new details about Starlink, a plan to surround Earth with 12,000 high-speed internet satellites. Here's how it might work.

More recently, SpaceX asked the US government to spread out its Starlink satellites to cover more of Earth's surface sooner, Eric Berger at Ars Technica first reported.

SpaceX does have competition from other companies that are launching or planning to launch global satellite-internet constellations, such as OneWeb and Amazon's forthcoming Project Kuiper.

But Mark Handley, a computer-networking researcher at University College London who's studied Starlink, previously told Business Insider that SpaceX's "is the most exciting new network we've seen in a long time," adding that the project could affect the lives of everybody.

One thing Morgan Stanley Research's report does not seem to account for, though, is SpaceX's planned Starship launch system. If realized, according to Musk, it may reduce the cost of access to space by 100 to 1,000 times by being fully reusable. Mass estimates also suggest the towering 400-foot-tall system could launch hundreds of Starlink satellites into orbit at a time. 

SEE ALSO: Elon Musk and Jeff Bezos have profound visions for humanity's future in space. Here's how the billionaires' goals compare.

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• The stock market's recent rotation from growth to value stocks portends more losses for investors who had crowded the fastest earnings growers, according to Morgan Stanley. 
• Michael Wilson, the firm's chief US equity strategiest, found that this was the biggest such rotation since the 2000 and 2008 recessions. He has reason to suspect that this episode portends another crisis.  
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The market's sudden shift away from the best-performing stocks has eerie similarities to moments of crisis. 

Beginning last week, investors fled stocks with the strongest earnings growth for those that were considered cheap.

Some strategists described it as merely a technical rotation because of the extent of crowding that was prevalent in growth stocks. But Michael Wilson, the chief US equity strategist of Morgan Stanley, suspects that it's a signal of more trouble ahead — and the beginning of a longer downtrend for growth stocks. 

His hunches are based on similar occurrences before the two most recent recessions. The chart below, which he published in a recent note to clients, shows that momentum stocks had similarly large breakdowns on a five-day basis.

"Perhaps the market is finally worried about an actual recession approaching, in which case the highest-quality stocks would finally be vulnerable," Wilson said.  

Read more: Traders are overlooking a warning sign that flashed before the last financial crisis. Here's why one market expert says that means another recession is 'imminent.'

He described the status quo before this rotation as a "Goldilocks" scenario. The favored end of the momentum trade was comprised of stocks that promised bond-like protection and the strongest earnings growth. Meanwhile, the short-momentum trade was in companies that were cyclical in nature. 

But with the breakdown of the momentum trade, investors are losing out on the best of both worlds — growth and quality. 

This might just be the initial step in a longer downward spiral for growth stocks, and where a possible recession comes into the picture, according to Wilson. 

S&P 500 earnings-per-share growth was flat for the first half of the year and Wilson says it's likely to turn negative in the third quarter. Earnings for small and mid-cap companies have slowed even more sharply this year.

A profits downturn could not only rein in Wall Street's forecasts for earnings growth, but imperil Main Street's contribution to the economy if companies respond by slowing hiring. The latter is a more material risk to an economy that has been upheld mainly by consumer spending.

"In our view, this is the single biggest risk to the economic expansion that is not discussed in the mainstream," Wilson said. 

His views— including calls for an earnings recession — have certainly run against the grain for several months. Given his more cautious outlook, he has also been recommending that investors underweight growth stocks and overweight defensive stocks.

The Invesco Defensive Equity exchange-traded fund includes companies that potentially have stronger risk-return profiles in times of market turmoil. 

"We continue to think secular growth stocks remain the most vulnerable part of the market and the recent breakdown in momentum suggests that risk is even greater today than it was at the last market high in July," Wilson said.

SEE ALSO: JPMorgan unveils 6 trades that should rake in profits regardless of whether the stock market tanks or rebounds in the near future

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• Morgan Stanley has developed an AI-powered chatbot to help its workers sift through the bank's  research.
• AskResearch was originally created for internal use by analysts and sales employees, but the bank plans to offer it to clients in early 2020 via a mobile app.
• The chatbot is the latest effort by Wall Street to create AI-powered virtual assistants to cut down on menial work for employees and clients. 
• D'Arcy Carr, global head of research editorial and publishing at Morgan Stanley, told Business Insider that the chatbot helps find research efficiently and can also uncover new data. 
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Wall Street loves to speculate about the drastic ways artificial intelligence could change how it does business, but the main goal of the technology is a simple one: to help people work more efficiently. 

Research is one area ripe for automation, given the sheer volume of data that banks produce and how time-consuming internal and external client requests for information can be. Morgan Stanley sees a solution in AskResearch, its AI-powered chatbot.

Since an internal launch last year, the bot has evolved from answering simple questions ("Which analyst covers Apple?") to more complex ones ("Which stocks did Morgan Stanley upgrade last week?"). Morgan Stanley hopes the chatbot will be offered to external research clients early next year through a mobile app.

"Our vision is really, how do we get the most relevant content out to the people that will get the most value from it?" Eden Kidner, global technology officer for research at Morgan Stanley, told Business Insider. "We decided the most natural way for us is to adopt the flexibility of a virtual assistant or chatbot where we are not restricted by the traditional user interface."

What is your bull case for Apple? 

Often pitched as a virtual assistant— like Apple's Siri or Amazon's Alexa — chatbots are seen as a way to help companies cut down on mundane tasks. Bank of America's "Erica" is already helping Main Street manage its accounts, while PayPal is hoping to reduce costs by automating customer service requests. A report by Juniper Research in 2017 estimated chatbots could deliver over $8 billion a year in cost savings by 2022.

Kidner said Morgan Stanley started by developing a list of the most common questions its analysts and sales employees ask when searching for information from internal research content. 

Natural language processing was applied to questions like "What is your bull case for Apple?" and "What is our US GDP forecast?" to allow the bot to recognize the prompts and provide the correct information. The team could then build from there after going live by analyzing other commonly asked questions submitted by employees, Kidner said. 

See more:PayPal's CFO believes AI can save the company $25 million a year by automating one area of customer service

The bank spent the past year improving the bot to answer more complex questions ("What is Morgan Stanley's view on gold?"), which involve pulling unstructured data that sits within analyst reports. Kidner said the key is for the bot to understand the intent of the question, making it easier to track down information. 

D'Arcy Carr, global head of research editorial and publishing at Morgan Stanley, told Business Insider the new feature also opens up research that might have previously been missed. 

"You have this historical archive sitting in a library and there is so much value embedded in it, but traditionally it has been hard to unlock that value because insights and data are fixed in monolithic PDFs," Carr said."We have seen our internal readership spike pretty substantially over the course of the last year."

Solving big-ticket problems

Kidner and Carr didn't give more specific statistics on improvements tied to the chatbot. Kidner did say, anecdotally, that employees are spending less time sending emails, since they can use AskResearch directly in Outlook. 

Longer term, the chatbot could lead to the bank reallocating resources currently used for menial work, Carr said.

"Can we get rid of thousands of small inefficiencies? Can we hire another analyst to cover this? Can we get out on the road to meet more people? I think there is a big opportunity here," Carr said.

"There are tons of inefficiencies in our business still, and the more skills that we add to AskResearch to help analysts manage their day, the more time that can be spent doing the fun parts of their job, like talking to clients and companies and doing research." 

Carr also sees the chatbot benefiting research clients outside the bank, such as large investors. In late 2017, the bank revamped its research portal to improve how users searched for information. The change resulted in a significant uptick in readership, Carr said.

Read more:Investors focused on stock market fundamentals have developed 'quant envy,' and some executives say they're making a critical mistake

But not all investors are optimistic that chatbots will help them save time. Matt Daly, head of credit and investment research at $141 billion asset manager Conning, said AI does not totally solve the problem of being inundated with too much data, and that firms should focus on better curating what they send out in the first place. 

"If I go out and look for the information, I feel like I can navigate pretty well to find it," Daly said. "Say I have 10 research portals available to me, how do I know what to go out and find unless they are pushing that stuff to me? And then how do you scrape through all the stuff to actually add value? Just culling through and managing that information is a challenge." 

Still, Morgan Stanley sees AskResearch as a huge potential help inside and outside the firm.

"The way we think about it is an expert looking over your shoulder. Whatever you are doing, whatever workflow you are currently in, you have the opportunity to get the contextual information you need," Kidner said."The idea was to remove the friction in getting data from our traditional monolithic applications, and expose it through a more natural interface embedded into the analysts' day-to-day workflow."

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• We asked the HR heads at top finance firms like Bank of America, Citi, and Morgan Stanley how to win a spot there — and how to succeed once you do.
• Bank of America looks for good judgment in job candidates.
• Point72 encourages proactivity. If you're feeling unfulfilled, don't wait for challenges to come to you.
• Visit Business Insider's homepage for more stories.

Prestigious firms like Citi and Goldman Sachs are notoriously difficult to break into.

Everyone knows you've got to be smart, competent, and ambitious — but what else will help you stand out among a sea of talented applicants... and what will catapult you to success once you're there?

To find out, we tapped the HR chiefs at top finance companies like Bank of America, BlackRock, and Morgan Stanley. These folks are the final gatekeepers when it comes to recruiting, hiring, and granting promotions.

Read on for their best advice on nailing the job interview, leading with humility, and what to do when you're stuck in a rut.

Dan DeFrancesco, Meghan Morris, and Bradley Saacks contributed reporting.

SEE ALSO: POWER BROKERS OF TECH: HR chiefs reveal how to get hired at Microsoft, Facebook, Netflix, and other top companies

Dane Holmes, global head of human capital management at Goldman Sachs

The skills you need to work at Goldman Sachs

Curiosity and drive. We need people who are committed to growing and learning, and curiosity is critical to that. Effort can't overcome anything, but effort + talent = excellence. These characteristics maximize our impact for our clients, our communities, and our people.

Read more: Goldman Sachs' head of HR says an 'underrated' factor should make a big difference in which job you choose — especially if you're going to be logging long hours

His best advice for new managers

Lead with humility. Humility is not synonymous with meekness, but rather rooted in confidence. Humble leaders make their people feel welcomed, appreciated, and empowered.

Demonstrating humility means both recognizing and openly expressing your weaknesses (in corporate speak we say "areas of development") and building a team that offsets your shortcomings. Teams want to be led by a real person — not a corporate cutout.

Jeff Brodsky, chief human resources officer at Morgan Stanley

The question you'll have to answer if you interview with him

Tell me about a time you took a contrarian viewpoint and convinced a large group to approach a problem in a different way.

The best question he was ever asked as a job candidate

Walk me through the most challenging conversation you had with a high-performing team member that you were directly managing. Knowing what you know now, how would you have handled it differently?

Paige Ross, global head of human resources at Blackstone

The mindset you need to work at Blackstone

We pride ourselves on maintaining our entrepreneurial culture and want people who share that mindset.

The best way to get noticed and promoted, besides working hard

We want people who are nice and willing to collaborate. We want our people to enjoy working together. It is important to find ways to network across the various businesses and collaborate with groups across the firm.

Lizzy Schoentube, head of campus recruiting at Bank of America

The one skill you absolutely must have to get hired at Bank of America

Judgment. There are many things that we can and do teach our hires about their job, a particular task, or the company. But sometimes a situation can arise where the new hire needs to know how to operate in the gray and make a decision on something.

Having the judgment to know when to escalate a situation or when to contact people to gather further information, make an assessment, and reach the right decision is key.

The most impressive question someone has asked her in a job interview

Once, at the end of an interview with a summer intern candidate, I asked, "Do you have any other questions?" The intern's response was, "No other questions about the bank, but is there anything else I can tell you to help you decide on my candidacy, and to know that I am fully interested in this opportunity?"

I was very impressed by that question — not only was the candidate ensuring I had all the information I needed, but significantly, it was a way of reiterating interest in an internship with us.

Jeffrey Smith, global head of human resources at BlackRock

The attitude you absolutely must have to get hired at BlackRock

We look for people who come to work every day thinking about what they can do to serve our clients. People who are passionate about learning, growing, and innovating. Strong collaborators driven and motivated by contributing to something greater than ourselves.

The first thing he tells employees who are frustrated at work

If you're feeling unfulfilled, you should have an open conversation with your manager focused on your interests and career aspirations. We have an internal mobility policy so our employees can pursue different opportunities at the firm, which keeps people engaged and shares the talent across different teams.

Read more: Hulu's HR chief shares the simple task you should do when you realize you hate your job

We recently launched two initiatives to support ongoing learning and mobility: the Transform Program helps employees build technical skills to transition to full-stack developer roles and the Growing More Great Investors initiative drives diversity, inclusion, and development across our investment teams.

Ariel Speicher, head of human capital for Point72, and Alyssa Friedman, head of business development for the Cubist business at Point72

The traits you need to get hired at Point72

SPEICHER: You have to be intellectually curious and strive for greatness. But you should also have a growth mindset and see the opportunity in failure. The markets are tough and the odds are challenging, so you have to have the courage and resilience to stick with it.

Read more: A former Starbucks HR exec shares the single job-interview question that predicts success better than a résumé

FRIEDMAN: Grit and persistence. Having great ideas is one thing, but implementation is another. The ability to stick with a project, look deeper than the competition, and not give up easily. This is important in research, but also in other domains. We want to hire people who will take on responsibility and initiative to solve problems.

A pro tip for employees who are feeling unfulfilled

FRIEDMAN: If you put in the effort, you can learn and challenge yourself in any role at any institution. Don't wait for it to come to you. It's important to speak up. I like to ask: What are your favorite projects? When do you feel the most energized? I tell my team all the time that I want to design a job that is too good to leave.

Sara Wechter, global head of human resources at Citi

The only type of people she hires

People who are successful at Citi have the ability to make things happen. We need doers.

The most important piece of advice she gives new managers

I have to remind new managers to ask for help along the way. No one expects you to be able to do it all, and somehow people can forget that when they start to manage people. We all succeed together.

The first question she asks employees who are feeling unmotivated

I ask them what they have done about it. Much of the time when people are stuck they don't take action to help themselves, but when you call them out they do! When someone takes the reins on their own professional development, it makes it easier for others around them to take action and respond to their needs as well.

• SpaceX, the rocket company founded by Elon Musk, plans to surround Earth a gigantic network of internet-providing satellites called Starlink.
• In May, Musk said if Starlink could get a few percent of the global telecommunications market, SpaceX could net $30 billion to $50 billion in annual revenue.
• Financial analysts at Morgan Stanley Research said in a report sent to Business Insider on Tuesday that they now considered SpaceX's base valuation to be $52 billion.
• However, the report notes a wide margin of error: If SpaceX is wildly successful with Starlink, their "bull case" suggests the company could be worth $120 billion — but in a "bear case," it could be worth $5 billion if it falters.
• Visit Business Insider's homepage for more stories.

How much could SpaceX, the fast-moving private-rocket company founded by Elon Musk, actually be worth?

After SpaceX's successful launch of 60 experimental Starlink internet satellites in May, CNBC reported the company's estimated value was about $33.3 billion. This barely eclipsed the valuation of Tesla, the electric-car company Musk heads. This was a roughly $10 billion jump in valuation compared with estimates from 2017.

But a new report by Morgan Stanley Research sees a lot more potential for disruption of the internet industry with SpaceX's planned constellation of nearly 12,000 Starlink satellites.

Titled "SpaceX, Starlink and Tesla: Moving into Orbit?" and sent to Business Insider on Tuesday, the document gives SpaceX a base valuation of $52 billion — an increase of more than 50% compared with the latest reported number.

"This assumes that expanding access to the internet drives broadband penetration from 50% to 75% of the global population, with SpaceX able to capture ~10% of the incremental broadband subscribers," the analysts wrote.

However, that's just the middle-of-the-road estimate: The firm's range in value for SpaceX is roughly a hundredfold.

Read more: Europe's space agency says it dodged a SpaceX satellite because the company wouldn't move it out of the way. Buggy software may be to blame.

If you're a pessimist, and Starlink either struggles to turn its first few hundred satellites into a working internet service or fails to get many customers, the analysts said their "bear case" for SpaceX is just $5 billion. Their "bull case," on the other hand, is a staggering $120 billion.

If that rosy scenario pans out for SpaceX, the company may be pulling in as much as General Electric, Verizon, Fannie Mae, and even JPMorgan Chase.

The analysts shared their summary and methodology ahead of the second annual Morgan Stanley Space Summit in New York on December 10.

Why Starlink could be so disruptive — and make SpaceX and Musk a lot of money

Traditional satellite internet relies on spacecraft that are larger, older, more expensive, and about 22,236 miles away from Earth. This limits coverage and bandwidth while making for laggy connections. Starlink, meanwhile, would hug Earth at hundreds to 1,000 miles away with a larger number of newer satellites. What's more, they'll link together into a floating internet backbone, providing a faster alternative to fiber-optic cables that span the world.

According to current government documents, Starlink may consist of nearly 12,000 satellites by the end of 2027. If that happens, SpaceX may own and operate more than six times the number of all operational spacecraft in orbit.

The goal is to cover Earth with high-speed, low-latency, and affordable internet access. Even partial deployment of Starlink would benefit the financial sector and bring pervasive broadband internet to rural and remote areas.

Completing the project may cost $10 billion or more, Gwynne Shotwell, the president and chief operating officer of SpaceX, said in May 2018. That gambit — launching thousands of custom-built desk-sized satellites sent into space, 60 at a time, with perhaps 200 different Falcon 9 rocket missions — could be massive. Musk said during a call with reporters on May 15 that it could net the company perhaps $30 billion to $50 billion per year.

But SpaceX plans to get a robust Starlink service up and running much sooner than 2027, perhaps by 2020 or 2021.

"For the system to be economically viable, it's really on the order of 1,000 satellites," Musk said in May, "which is obviously a lot of satellites, but it's way less than 10,000 or 12,000."

He added: "I think within a year and a half, maybe two years — if things go well — SpaceX will probably have more satellites in orbit than all other satellites combined."

Read more: Elon Musk just revealed new details about Starlink, a plan to surround Earth with 12,000 high-speed internet satellites. Here's how it might work.

More recently, SpaceX asked the US government to spread out its Starlink satellites to cover more of Earth's surface sooner, Eric Berger at Ars Technica first reported.

SpaceX does have competition from other companies that are launching or planning to launch global satellite-internet constellations, such as OneWeb and Amazon's forthcoming Project Kuiper.

But Mark Handley, a computer-networking researcher at University College London who's studied Starlink, previously told Business Insider that SpaceX's "is the most exciting new network we've seen in a long time," adding that the project could affect the lives of everybody.

One thing Morgan Stanley Research's report does not seem to account for, though, is SpaceX's planned Starship launch system. If realized, according to Musk, it may reduce the cost of access to space by 100 to 1,000 times by being fully reusable. Mass estimates also suggest the towering 400-foot-tall system could launch hundreds of Starlink satellites into orbit at a time. 

SEE ALSO: Elon Musk and Jeff Bezos have profound visions for humanity's future in space. Here's how the billionaires' goals compare.

DON'T MISS: Satellite collisions may trigger a disaster that could end human access to space. Here's how.

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