Everything you need to know about hiring this year, from the enormous Morgan Stanley report predicting 20k job losses

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Morgan Stanley and Oliver Wyman have produced their large annual report on the state of the investment banking industry.

It doesn't make for massively felicitous reading: what with Basel III and falling margins, it says banks need to reduce their costs and cut 20,000 jobs..

Assuming you don't have the report, or don't want to read the whole 70 pages, here's a distilled version, with subheadings.

1) Enormous middle and back office job cuts are coming

Nowadays, says the report, a global investment bank faces $4bn of quasi-fixed platform costs. This is placing increased emphasis on scale and efficiency, particularly given the need to invest in technology, risk management and compliance.

In the light of this, banks need to take 6-8% out of the 2010 cost base this year, even before bonuses.

Job losses are therefore coming.

JPMorgan has declared its intention of cutting 3,000 jobs in the back office. This may not prove abnormal.

Morgan Stanley and Oliver Wyman think back and middle office job cuts will be divided as follows:

- 5,000-7,000 full time job losses in technology

- 4,000-5,000 full time job losses in operations

- 1,000-3,000 full time job losses in finance

- 2,000-4,000 full time job losses in risk

- 500-1,000 full time job losses in HR

- 1,000-1,500 full time job losses in legal and compliance

- 500-1,000 full time job losses in real estate and corporate

2) FICC generally is not looking good, but within FICC some areas are looking better than others

Under Basel III, fixed income currencies and commodities businesses will suffer, which will make some of their activities unprofitable (see below). More immediately, 2011 won't be a great year anyway, with revenues expected to fall 5-10%.

However, the reduction will not be uniform.

2011 FICC revenues will be up in: Emerging markets (up 5%), Commodities (up 30-45%, although Morgan Stanley's traders are apparently expecting a 50% increase this year).

2011 FICC revenues will be down in: Rates (down 10%) credit and securitisation (down 20%).

FX revenues will be flat.

If revenue changes are a proxy for hiring/firing, expected lots of recruitment in commodities and not much anywhere else.

3) These areas will be safe from FICC redundancies

Even under Basel III, some areas of FICC will make respectable ROE. These include foreign exchange and government bond trading. In the long term, jobs there should be safe.

4) These areas will not be safe from FICC redundancies

Flow credit and rates will be "transformed" by Basel III and could become loss making for mid-tier firms. If you work at a mid tier firm, you may therefore want to make alternative plans. This is particularly the case in credit, where margin erosion is likely to be significant.

5) There will be big investment in electronic trading

If you work in electronic trading, you are in luck. Under Basel III, ROE in parts of fixed income trading is expected to halve. In an effort to preserve margins, banks are expected to invest in the "electronification" of fixed income trading systems.

6) Equities, equity derivatives and prime brokerage are all good

2011 is the year of equities.

Revenues in cash equities are expected to rise 5-10%. Revenues in equity derivatives are expected to rise 10-15%. Revenues in prime brokerage are expected to rise 5-10%.

Expect hiring in equity derivatives especially.

7) Equity research is hot

As execution becomes more commoditised, equity research and content has become an important method of differentiation. This will not change and explains why equity researchers are so popular suddenly.

8) M&A is ok

It's been a good start to the year in M&A, with first quarter volumes at 2007 levels. But Morgan Stanley and Oliver Wyman don't think 2011 will be all that great. They think revenues across M&A and capital markets will be up 0-5% and that at least some of this will come from the unstoppable rise of Asian ECM. Hiring may not be that enthusiastic as a result.

9) Hedge funds, asset managers and private equity funds will be hiring

As banks become more regulated, business will shift to the non-regulated sector. Hedge fund assets are expected to grow at 15% CAGR to $2.5 trillion by the end of 2012.

Prop trading, direct lending, restructuring and parts of complex derivatives are expected to move into hedge funds and asset managers. Jobs will move with them.

10) Emerging markets will keep growing, but won't contribute to profits

Emerging markets will keep producing revenues, but rising costs and falling yields mean they won't contribute much to profitability. Worse, they will eat balance sheet as banks lend to emerging markets clients to win market share.

Cost pressures in emerging markets will increase the incentive to keep costs down and make redundancies in developed markets.

11) There will be new revenue streams from financing

Morgan Stanley and Oliver Wyman predict new revenue streams from:

- collateral transformation (transforming assets into cash to meet the requirements of centralised clearers)

- financing (collateral finance, margin finance)

- Margining (managing clients' cash effectively will become more important)

Position yourself as an expert in these areas, and you may be highly employable. Soon.

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