U.S. retail brokerage giant Prudential Securities Inc. has initiated coverage of the securities industry with “hold” ratings on the big five securities firms — Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns.

Analyst David Trone rates the industry as “market perform”, given his view that cyclical weakness outweighs secular strength and the medium-term outlook lacks clarity. While differences exist between the individual firms, the effects of the weakened global economy are substantially homogenous.

“The good news is that we believe the longer-term, secular story is attractive. First, we believe the securities business should continue to be the most profitable in financial services across cycles. Second, we believe the independents will successfully defend their already strong market shares. Finally, numerous growth catalysts lie dormant while the global economy struggles to get back on its feet,” he says.

Trone suggests that historic structural changes in Europe and Asia should inevitably trigger a major expansion in each region’s capital markets activities, rivaling that of the U.S. in the 1990s. As a result, he says that revenue growth should be 17% for the six years following recovery, down from the 23% pace of the 1994-2000 period, but above the more normal 11% rate for the 1980-1994 period.

“Nonetheless, we believe buying securities stocks now is unwarranted. We believe industry revenues have not yet reached bottom, and in any event, such a point will not necessarily give way to an immediate, meaningful rebound in growth. In our view, the risk is that revenues remain low for a longer period than most expect is substantial,” he says.

Prudential Securities is a firm that has divested its wholesale business to focus on retail, including offering unbiased equity research. Earlier this year it pledged to begin issuing many more “sell” recommendations. And Trone toils on the firm’s banking analyst team headed by Michael Mayo, who was fired from his previous firm for his negative coverage.

Trone sees lots of volatility in the sector, ultimately going nowhere. “The industry needs a recovery in the global economy, always a challenge to predict, but military responses to recent terrorist attacks add a major wildcard into the mix,” he says. “While the stocks have become less expensive, valuation metrics are mixed and resolution of external issues should take time. Head fakes should be numerous, as the stocks should remain on a roller-coaster for now, but end up little higher or lower.”