Financial Services Industry in Recessions
Over the past few months, by far the most common questions we have received have to do with the economy as a whole, and more specifically, how it will impact the market for jobs in corporate finance.
We are not in the business of offering economic prognosis or specific investment advice, but since we are committed to helping our clients understand the basics of corporate finance and valuation and prepare for careers in those fields, then naturally we’d like to offer a few thoughts on the current environment and what career opportunities are now out there.
Fundamentals of a Recession and Job Market Pullback
It is important in an environment like this to keep certain fundamentals in mind. In times of significant volatility, it is tempting to view the stock market as little more than a casino, where prices are largely unrelated to actual corporate performance and everything boils down to investor confidence.
There is certainly some truth to such a behaviorist explanation. Fears over the collapse of the financial sector and the pull-back in consumer spending have no doubt contributed to the rapid decline in stock prices, whether those fears prove to be excessive or not. However, the evidence is overwhelming that over the long-term, the market does indeed track the fundamentals of corporate performance and valuation, which means that understanding those fundamentals is at least as important now as it is during more “normal” times.
There are businesses that thrive in a recession, and the key is to position your career path and skill set to take advantage of this.
A common sense reflection on the nature of the stock market reinforces this point. What a stock investor buys is a share in the value-generating (or value-destroying) investments of the underlying firm.
Those who have attended our boot camps or completed our self study programs know that one way to value these investments is by estimating future cash flows and discounting them to the present by the firm’s cost of capital. Future cash flows are determined by the firm’s ability to generate revenue and control expenses, and the firm’s cost of capital is a required return that represents the opportunity cost of foregoing other investments in favor of the one being chosen.
Taken together, these relatively simple factors determine the value of the firm. While they can be difficult to estimate – sometimes impossibly difficult – and vary widely across companies and industries, the concepts themselves are ubiquitous and apply to all firms.
A further consideration of these factors helps to explain the severe drop in stock prices that we have seen over the past 14 months or so. Fears of recession and a pull-back in consumer spending directly affect the revenue growth estimates of a wide range of industries, especially consumer retail. Loan failures from the collapse in the residential real estate market have wiped out billions in expected revenues for financial institutions.
Large banks are not hiring nearly at the levels they hired last year, and while the less-impaired boutique and middle-market investment banks are picking up some slack, it’s nowhere near enough to offset the declines.
Finally, the impaired ability of financial institutions to extend further credit has raised the cost of capital for nearly all firms as they evaluate future investment projects. Being able to master these concepts is obviously important for someone looking to invest in stocks or bonds, but it is just as important for someone seeking a job in investment banking or corporate finance. Valuation is a critical tool for all types of business planning.
Reduced Hiring at Investment Banks
So, what does all of this mean for those of us pursuing a career in finance? It is certainly the case that because of these fundamental issues, many firms have scaled back their hiring of corporate finance professionals.
Large banks are not hiring nearly at the levels they hired last year, and while the less-impaired boutique and middle-market investment banks are picking up some slack, it’s nowhere near enough to offset the declines.
“Recession-Proof” Career Paths
There is, however, some good news for the dedicated jobseeker.
There are businesses that – dare I say it – thrive in a recession, and the key is to position your career path and skill set to take advantage of this.
Our experience teaching companies and providing interview preparation of MBAs over the last 12 months has convinced us that the traditional investment banking career search now must be expanded.Below we identify a few of the industries and companies that may benefit from this tumult:
1. Restructuring and Distressed Advisory
2. Investment Banks with Strong Restructuring Practices
3. Consulting Firms
There’s no question that jobseekers now must do literally everything right; a polished resume, strong academic background, aggressive networking, core financial modeling skills, and unflinching persistence are the basic ingredients of the post-subprime jobseeker.
Good luck!
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