Despite the events of the last couple of years, banking will remain a lucrative place to work. However, the question is where in banking are the bucks to be made. There is little doubt that the quickest path up the ranks and to the big bonuses is to land yourself in a hot area e.g. equities in the 80s, convertibles in the late 90s, credit derivatives in the early 2000s, or prior to the crisis, structured Credit.
Many are now calling the current fixed income environment a bull market. Rates and FX in particular are proving hot engines for most of the bulge bracket banks and it is in the simple flow products that the bucks are being made. Even in credit, flow is back and doing well.
One of the beautiful things about the fixed income markets is the spread-based nature of their economics. The natural lifecycle of most markets is towards commoditisation. Securities and derivative markets are no different but the cyclical nature of risk pricing is a huge mitigant to sustained commoditisation in these markets. Fixed income spreads blew out in response to the risk environment and have remained much wider than pre-crisis levels. Traders are minting money for just sitting in the middle and crossing the spread.
Longer term it may not be so good for some flow markets particularly if OTC trading moves onto exchanges as is currently being mooted for credit. There is nothing worse for margins than transparent markets, and exchanges are way more transparent than OTC.
While flow has boomed, structured markets have died, but these are where banks had made their best margins prior to the crisis. However, it's hard to believe that once markets show a sustained period of normalisation that these markets won't return - maybe not in the most complex forms such as CDO squared, but in various forms that we have seen already and no doubt some new ones too.
On the cash equity side, the commission and exchanged based nature of the economics does not adjust so fluidly to changes in the risk environment. Therefore, unlike on the fixed income side where margin expansion appears to more than offset volume declines, revenues in cash equities have fallen in step with both declining asset values and market volumes.
Despite this, there does appear to be a current spate of significant investment in the cash equity space with whole teams being poached. True, departments have previously been decimated but there is a definite rebuild going on. Could it be that banks are calling the bottom of the equities cycle? I doubt it. More, that they see market share opportunities to gain. Margins are thin and will remain so but the playing field is up for grabs.
One area, which is generally seen as 'hot' is Commodities, it has been so for the last 3 or 4 years. Despite the economy-linked lull, hiring in this area continues unabated. This one does look sustainable over the medium term as you can see growth in many of these markets linked to underlying demand trends in developing economies and while we are in a global recession, longer-term positive demand trends look very sustainable.
So what to make of all this? Here are my picks for right now (not so difficult):
Hot: Flow Rates, Flow FX, Flow credit, Commodities, ETFs
Not: Cash Equities, Structured anything, Securitisation
And here are picks for the medium term (a lot more difficult to pick):
Hot: Commodities, Structured products, ETFs, Emerging Markets
Not: Cash Equities, Securitisation
No doubt many will disagree, and to be honest, if I really had the ability to spot the forward, I'd have retired already!