Broker Dealers, Equity-Focused Managers To Lag On Taper Delay: Citi

Investors are still wading through the implications of the Federal Reserve's decision not to begin tapering its bond purchases. Citigroup's William Katz has a note out today wading through the consequences for brokers and asset managers.

He expects two main outcomes from the taper delay. Firstly, that broker dealers will likely lag in the short term, given rate leverage embedded in their models and recent outperformance—although he warns that a more prolonged delay would "materially impact" the time before these names will reach normalized earnings.  He also writes that managers focused on stocks will likely lag compared to fixed income managers, while wondering overall if the move calls into question the strength of the economic recovery and the credibility of the Fed.

Read on for company-specific musings from the report:

Moving up Franklin Resources (BEN) among Traditionals; Close out T. Rowe Price (TROW)/Legg Mason (LM) pair trade — We are still selective on Traditional managers but are re-ranking our short-term (ST) preferences as we believe FI-centric managers may outperform as NAV risks diminish while volumes become more sustainable. Invesco (IVZ) remains our top selection but we move up BEN ahead of TROW. BEN should outperform given: a) attractive relative valuation; and, b) easing investor concern over FI NAV risk and global bond volumes. We also close out long TROW/underweight LM pair trade as equities flow recovery could slow. Additionally, we see Wisdom Tree Investments (WETF) negatively impacted as DXJ is ~35% of AUM and depreciating USD may result in uneven ST volumes.

Expect B/Ds to lag in the ST but keeping perspective on LT thesis — The delay in tapering and the pullback in rate expectations weakens the ST case for rate sensitive names but does not take away from upside potential with respect to normalized earnings power. While the 10-year Treasury yield pulled back sharply on 9/18 to 2.70%, it is still up from ~2.50% at 6/30. Nonetheless, we see Buy-rated LPL Financial (LPLA) and Neutral-rated Raymond James Financial (RJF) as likely defensive in the ST given FI centricity within key businesses; lower correlation to long end of the curve; and underperformance relative to TD Ameritrade (AMTD) + Charles Schwab (SCHW). Among LPLA and RJF, we prefer LPLA given stronger ETR potential and less risk around consensus expectations. That said, there is no change to our positive LT thesis on B/Ds reflecting bottoming EPS expectations; improving retail re-engagement; and higher NIM.

For alternative names, Katz notes these remain well positioned, as low rates in the short term could reduce pressure on financing costs (although with the prospect of reduced economic growth). He favors Blackstone Group (BX), Apollo Group (APO), KKR, (KKR), and Och-Ziff Capital Management Group (OZM).