Good podcast

Top 100 most popular podcasts

Thoughts on the Market

Thoughts on the Market

Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

Subscribe

iTunes / Overcast / RSS

Website

art19.com/shows/thoughts-on-the-market

Episodes

Will the U.S. Presidential Election Change Fed Policy?

Investors are concerned that the upcoming election might interfere with policy decisions. Here?s why our view is different.

----- Transcript -----

Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley. 

Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. 

Matthew Hornbach: And on this episode of the podcast, we'll discuss whether the election will change Fed policy this year. It's Thursday, January 25th at 10 a.m. in New York. 

Matthew Hornbach: All eyes are on the Fed as 2024 gets underway. Investors are concerned not only about the timing and the magnitude of the expected rate cuts this year, but also on the liquidity in the funding markets, which is intricately linked to the Fed's ongoing quantitative tightening operations, or QT. Seth, let's dig right into it. Does the outcome of the US presidential election in November change your team's baseline view that the Fed will lower rates starting in June? 

Seth Carpenter: Matt, I think the short answer to your question is no. So our baseline forecast is, the Fed starts cutting rates in June. And over the second half of the year, it gets a total of 100 basis points worth of cuts in. But that forecast is predicated on the downward trajectory for inflation and the economy's slowing but not falling off of a cliff, or put simply, it's based on the Fed following their statutory objectives for stable prices and full employment, and not the political cycle. 

Matthew Hornbach: So, Seth, we often hear from investors that they believe that the election will have an impact on Fed policy and we also hear from FOMC participants from time to time about this topic. But why is it that FOMC participants dismiss this wisdom or conventional wisdom amongst investors that the election might interfere with Fed policy? 

Seth Carpenter: I think that question has a really simple answer, which is that the FOMC participants, they're the ones sitting around the table making the decisions, and they don't see themselves as being influenced by the politics. I mean, I can say I was at the Fed for 15 years. I was a staffer preparing memos, doing briefings to the committee in the 2000 election, the 2004 election, the 2008 election, the 2012 election. And I can honestly say from my firsthand experience, there really wasn't anything about the fact of the election that was doing anything to influence the way that monetary policy was being decided. Their eyes were fixed on those statutory objectives of full employment and stable prices. But let me turn it around to you, Matt, because I know that you did a lot of homework. You went back through the historical record and you looked at policy decisions in years when there were elections, in years when there weren't elections. When you do that really careful analysis, what comes out of that pattern? What do you see in the policy decisions that the committee took? 

Matthew Hornbach: Absolutely. We looked at actual policy rate changes going all the way back to 1971. So really getting in that period of time when inflation was also a problem in the 1970s and early 1980s. And we went all the way through the present day. And what we found was that the Fed doesn't shy away from changing policy, whether it be an election year, a general election year, a midterm election year or no election in a given year. They change policy all the time. You know, then we looked at, well, does the policy changes that occur in election years or non election years, does it differ in notable ways? Does the Fed tend to cut rates more in election years or hike rates more in non election years? And we didn't find any notable pattern at all. It just became very apparent in the data that we looked at that there isn't a political bias in terms of the policy rate, whether to change it or not, change it, to move it up, to move it down. The Fed seems, based on the data, to act in the best interest of what's going on in the economy at the time. 

Seth Carpenter: That makes sense to me, and that's very much consistent with my experience there. But let me push a little bit more, because I know that you didn't just do that wave of analysis and then stop. You always burn the midnight oil here, and you went back through the actual transcripts. Because one thing I know I hear from clients and you must hear it as well, is surely the FOMC has to be aware that the election is going on. How could they not be aware of it? It's got to come up during the meetings. It has to come up during the meeting. So when you look at the transcripts themselves, what was said during the meetings, how much do they talk about the election? 

Matthew Hornbach: They're definitely aware that there's an election, as I think most people around the world would be. And when they talk about the elections, you know, typically it comes up almost every election year. You typically get a handful of FOMC participants that bring up the election. 2008 was an interesting exception, where only one person mentioned the election the entire year. 

Seth Carpenter: They may have been thinking about other things.

 

Matthew Hornbach: They may have other things on their mind, like the great financial crisis that was unfolding. But what we found is that not that many people actually bring it up every election year, but there are a handful here in there that talk about it. You typically find that in the first half of the calendar year, there's not that much discussion about the election. But as the election approaches in November, you get more discussion that ends up showing up in the transcript. So you typically find that the month of October, November and December will have the most discussion about the election by FOMC participants. The second thing we found, Seth, was that when they talk about the election, they typically talk about it in sort of two lines of thinking. One is with respect to fiscal policy. Elections can change fiscal policy, either going into the election or coming out of the election, fiscal policy can differ. And so they typically focus on the state of play with respect to fiscal policy. In 2012, which is when you were there at the fed. I'm sure you noticed that there were lots of discussions about the fiscal cliff. So we noticed that in the transcripts as well. Similarly, in 2016, in December, after the election, in 2016, when the markets were starting to price in the prospect of tax cuts and fiscal stimulus, there was a lot of discussion on the Fed at the time about fiscal policy. 

Seth Carpenter: Matt, it sounds like you're staking out the controversial view that the central bank of the country is paying attention to the macroeconomic environment and the main factors that drive the macro economy. 

Matthew Hornbach: That's absolutely right. We also found that they discussed the election in terms of the uncertainty that elections caused businesses and consumers. They typically grow more concerned about business investment as we head into an election and businesses pulling back on that investment for a short period of time, until they have clarity about the election outcome. So that's generally what they're talking about when they discuss the election, fiscal policy and uncertainty. 

Seth Carpenter: All right. So I feel a little bit relieved that my firsthand experience is fully consistent with all the digging that you did through the transcript through multiple decades.

 

Matthew Hornbach: Absolutely. So, Seth, with that, let me just thank you for taking the time to talk with me. 

Seth Carpenter: Matt, I could talk to you all day, but particularly on this topic, it was a pleasure to be here. 

Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

2024-01-25
Link to episode

What Matters Most to Markets in the U.S. Election

While it?s too early to tell who will win the U.S. presidential election ­­­? or how markets will respond to it ? there are a few factors that investors should consider.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of the US election on markets. It's Wednesday, January 24th at 10 a.m. in New York. 

We're two states into the Republican primary election season. Former President Trump has won both contests, underscoring what polls have been suggesting for months now. That he's the heavy favorite to be the party's nominee for the presidency. But other than that, have we learned anything that might matter to markets? Not particularly in our view. This election will clearly be consequential, the markets, but for the moment we're more in watch and learn mode. Here's two reasons to consider. 

First, knowing who the Republican candidate will be doesn't tell us much about who will become president. While we've heard from some clients that they rate President Biden's chances of reelection as low, and therefore, knowing who will be the Republican nominee is the same as knowing who will be president, we don't agree with this logic. Sitting presidents have had low approval ratings this far ahead of an election and still won before. Also, polls may show that economic factors like inflation are a political weakness for Biden today, but those circumstances could change given how quickly inflation is easing. Now, this doesn't mean we expect Biden will win, it's just that we think it's far from clear who the favorite is in this election.

 

Our second point is that, even if we know who wins, we don't necessarily know what reliable market impact this would have. That's because there are many crosscurrents to the policies each party is pursuing. Democrats may be interested in more social spending, which could boost consumption, but they may also be interested in taxes to fund it, which could cut against growth. Republicans may be interested in lower taxes, but the presumptive nominee is also interested in increased tariffs, which could mitigate tax impacts. To top it off, neither party may be able to do much with the presidency unless they also control Congress, something that polls show will be difficult to achieve. 

So, this all begs the question. What will make this election matter to markets? The answer, in our view, is time and market context. As we get closer to the election, what's in the price of equity in bond markets will largely shape the stakes for investors. For example, if markets are priced for weak economic outcomes, investors may embrace a unified government outcome regardless of party, as it opens the door to fiscal stimulus measures. Of course, this is only one scenario that may matter, but you can see the point on how context is important. So as the stakes become clearer, we'll define them here and let you know more about it. 

Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

2024-01-24
Link to episode

Taking the Long View

Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, discusses long-term investors? biggest concern ? the amount and timing of interest rate moves.

Lisa Shalett is a member of Morgan Stanley?s Wealth Management Division and is not a member of Morgan Stanley?s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

----- Transcription -----

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. 

Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. 

Andrew Sheets: And on this special episode of the podcast, we'll be discussing some of the latest market trends and what they may mean for our retail clients. It's Tuesday, January 23rd at 4 p.m. in London. 

Lisa Shalett: And it's 11 a.m. here in New York.

 

Andrew Sheets: Lisa, it's great to have you back on. So wealth management clients are typically investing for the long term in order to meet specific goals such as retirement. And with that in mind, let's start with the current market backdrop. You know, we've entered the year with increased market confidence. We've seen implied volatility near some of the lowest levels that we've seen in several years. And yet we've also seen some mixed economic data to start the year. So as you look out into 2024, what are the major risks that you're focused on?

 

Lisa Shalett: Well, I think one of the first things that, you know, we're trying to impress upon our clients, who tend to be long term, who tend to be multi-asset class investors, very often owning a simple classical 60/40 portfolio, is that we've been in this very interesting potential regime change, where both bonds and stocks are sensitive to the same thing. And that is the level and rate of change of interest rates. And that's meant that the 60/40 portfolio and stocks and bonds are actually positively correlated with one another. And so the very first thing we're talking to clients about is the extent to which we believe they need to focus on diversification. I think a second factor that we're talking, you know, to clients a lot about is liquidity. Now in the macro sense, we know that one of the reasons that markets have been able to resist some of the pressure is coming from the fed. Raising rates 550 basis points in kind of 15, 16 month period has been because there have been huge offsets in the macro backdrop providing liquidity to the marketplace. So we're talking about the fact that some of those supports to liquidity may, in fact, fall away and go from being tailwinds to being headwinds in 2024. So what does that mean? That means that we need to have perhaps more realistic expectations for overall returns. The third and final thing that we're spending a lot of time with clients on is this idea of what is fair valuation, right? In the last eight weeks of the year, clients were, you know, very I think enamored is probably the right word with the move in the last eight weeks of the year, of course, people had, you know, the fear of missing out. And yet we had to point out that valuations were kind of reaching limits, and we therefore haven't been shocked at this January, the first couple of weeks, markets have maybe stalled out a little bit, having to kind of digest the rate that we've come and the level that we're at. So those are some of the themes that, you know, we've begun to talk about, at least with regard to portfolio construction.

 

Andrew Sheets: So, Lisa, that's a great framing of it. You know, you mentioned the importance of rates to the equity story, this unusually high correlation that we've had between bonds and stocks. And you have this debate in the market, will the Fed make its first rate cut in March? Will it make its first rate cut in June, like the Morgan Stanley research call is calling for? Is that the same thing? And how important to you in terms of the overall market outlook is this question of when the Fed actually makes its first interest rate cut?

 

Lisa Shalett: Yeah. For our client base and long term investors, you know, we try to push back pretty aggressively on this idea that any of us can time the market and that there's a big distinction and difference between a march cut and a may or June cut. And so what we've said is, you know, the issue is, again, less about when they actually begin, but why do they begin? And one of the reasons that they may begin later than sooner would be that inflation is lumpy. And I know that some of the economists on our global macro team have that perspective that, you know, the heavy lifting, if you will, or the easy money on the inflation trade has been made. And we were able to get from 9 to 4 on many inflation metrics, but getting from 4 to 2 may require patience as we have to, you know, kind of wait for things like owner occupied rents and housing related costs to come down. We have to wait for the lags in wage growth to come out of some of the calculations, and that may require a pickup in unemployment. We may have to wait for some of the services areas where there has been inflation, things related to automotive insurance and things related to health care for some of those items to settle down as well. And so that might be one of the issues that impacts timing. 

Andrew Sheets: So moving to your second key point around market liquidity. Another factor I want to ask you about, which I think is kind of adjacent to that debate, is what about all this cash? You know, we've heard a lot about record inflows into US money market funds over 2023. You have around $6 trillion sitting in US money market funds. How do you see that story playing out, and how do you think investors should think about that question of should I redeploy my cash, given it's still offering relatively high yields? 

Lisa Shalett: So for our clients, you know, one of the things that we're very focused on, again, because we're taking that much longer time frame is saying, look, how does the current 5.3, 5.25 money market yield compare with expected returns for stocks and bonds over the next couple of years? And in that framing from where we sit, what we're saying is cash is reasonably competitive still. Now if rates come down very, very quickly right, we again get back to that question of why. If rates are coming down very quickly because we have disinflationary growth then, then that might be a signal that it's time to redeploy into riskier assets. Alternatively, if they're cutting because they see deteriorating economic conditions, staying in cash for a little while longer during a slowdown might also be the right thing, even though your yields might be going from five to 4 to 3 and a half. And from where we sit, I think our clients know that our capital market assumptions have erred on the conservative side, no doubt about it. But, you know, we think U.S. equities are apt to return at best in 2024 something in the 4 or 5, 6 range against a backdrop where earnings growth could be 10%. And for, you know, investment grade credit, which I know is your expertise. We're saying, you know, we think that rate risk is moderate from here, that it's asymmetric. 

Andrew Sheets: Lisa, just to bring in your third point on valuations, especially valuations and a potentially higher real rate environment. What should investors do in your opinion to build those diversified portfolios given the valuation reality that they're having to deal with? 

Lisa Shalett: So look, I think our perspective is that in a world where, you know, real interest rates are higher, the dynamics around balance sheet quality really come into the fore dynamics around those business models, where you have to ask yourself, are the companies that I own, are the credits that I own truly able to earn their cost of capital? And you know, those questions tend to put pressure on excess valuations. So when we're building portfolios, at least right now, we have a bias to press up against the current skew in the market, right. We're currently skewed to growth versus value. So we've got a preference for value. We've got some skew towards mega-cap versus large mid or small cap. So we're skewing large mid and small cap and active management versus the cap weighted management. We've had this huge skew towards a US bias in our client portfolios, and we're trying to push back against that and say in a relative value context, other regions like parts of emerging markets, like Japan, like parts of Europe are showing genuine interest. So part of this idea of higher real rates in the US is this idea that other asset classes, other regions than this mega cap U.S. growth bias that has really dominated the themes over the last 18 months, that that might get challenged. 

Andrew Sheets: Lisa, thanks for taking the time to talk. We hope to have you back soon. 

Lisa Shalett: It's always great speaking with you, Andrew. 

Andrew Sheets: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people find the show. 

2024-01-23
Link to episode

Chasing the End of the Economic Cycle

As the current economic cycle plays out, history suggests that stock prices could be in for large price swings in both directions.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 22nd at 11am in New York. So let's get after it. 

For the past several weeks, we've engaged with many clients from very different disciplines about our outlook for 2024. From these conversations, the primary takeaway is that there isn't much conviction about how this year will play out or how to position one's portfolio. After one of the biggest rallies in history in both bonds and stocks to finish the year, there's a sense that markets need to take a rest before the next theme emerges. Our view isn't that different, except that from our perspective, not much has changed from three months ago other than the price of most assets. 

In our view, we remain very much in a late cycle environment, during which markets will oscillate between good and bad outcomes for the economy. The data continue to support this view, with both positive and negative reports on the economy, earnings and other risk factors. However, as noted, the price of assets are materially higher than three months ago, mainly due to the Fed's pivot from higher for longer, to we're done hiking and likely to be easing in 2024. In addition to the timing and pace of interest rate cuts, investors are also starting to ponder if and when the Fed will end its quantitative tightening or QT campaign. Since embarking on this latest round of QT, the Fed's balance sheet has shrunk by approximately $1.5 trillion. However, it's still $500 billion above the June 2020 levels immediately after the $3 trillion surge to offset the Covid lockdowns. To say that the Fed's balance sheet is normalized to desirable levels is debatable. Nevertheless, our economists and rate strategists think the fed will begin to taper the QT efforts starting sometime this summer. More importantly, we think equity prices now reflect this pivot, and the jury is out on whether it will actually increase the pace of growth and prevent a recession this year. 

Three weeks ago, we published our first note of the year, laying out what we think are three equally likely macro scenarios this year that have very different implications for asset markets. The first scenario is a soft landing with below potential GDP growth and falling inflation. Based on published sell side forecasts and discussions with clients, this is the consensus view, although lower than typical consensus probability of occurring. The second outcome is a soft landing with accelerating growth and stickier inflation, and the third outcome is a hard landing. There's been very little pushback to our suggestion of these three scenarios with equally likely probabilities, and why clients are not that convinced about the next move for asset markets, or what leads and lags. As an aside, this isn't that different from last year's late cycle backdrop, when macro events dictated several large swings in equity prices both up and down. We expect more of the same in 2024. While stock picking is always important, macro will likely remain a primary focus for the direction of the average stock price. 

In our view, the data tells us it's late cycle and the Fed will be easing this year. Under such conditions, quality growth outperforms just like last year. While lower quality cyclicals outperformed during the final two months of 2023, we believe this was mainly due to short covering and performance chasing into year end, rather than a more sustainable change in leadership based on a full reset in the cycle, like 1994. So far in 2024, that's exactly what's happened. The laggards of 2023 are back to lagging and the winners are back to winning. When in doubt, it pays to go with the highest probability winner. In this case it's high quality and defensive growth which will do best under two of the three macro scenarios we think are most likely to pan out this year. 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps for people to find the show.

2024-01-22
Link to episode

Special Encore: Andrew Sheets: Why 2024 Is Off to a Rocky Start

Original Release on January, 5th 2024: Should investors be concerned about a sluggish beginning to the year, or do they just need to be patient?

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 5th at 2 p.m. in London. 

2023 saw a strong finish to a strong year, with stocks higher, spreads and yields lower and minimal market volatility. That strength in turn flowed from three converging hopeful factors. 

First, there was great economic data, which generally pointed to a US economy that was growing with inflation moderating. Second, we had helpful so-called technical factors such as depressed investor sentiment and the historical tendency for markets, especially credit markets, to do well in the last two months of the year. And third, we had reasonable valuations which had cheapened up quite a bit in October. 

Even more broadly, 2024 offered and still offers a lot to look forward to. Morgan Stanley's economists see global growth holding up as inflation in the U.S. and Europe come down. Major central banks from the US to Europe to Latin America should start cutting rates in 2024, while so-called quantitative tightening or the shrinking of central bank balance sheets should begin to wind down. And more specifically, for credit, we see 2024 as a year of strong demand for corporate bonds, against more modest levels of bond issuance, a positive balance of supply versus demand. 

So why, given all of these positives, has January gotten off to a rocky, sluggish start? It's perhaps because those good things don't necessarily arrive right away. 

Starting with the economic data, Morgan Stanley's economists forecast that the recent decline in inflation, so helpful to the rally over November and December, will see a bumpier path over the next several months, leaving the Fed to wait until June to make their first rate cut. The overall trend is still for lower, better inflation in 2024, but the near-term picture may be a little murky. 

Moving to those so-called technical factors, investor sentiment now is substantially higher than where it was in October, making it harder for events to positively surprise. And for credit, seasonally strong performance in November and December often gives way to somewhat weaker January and February returns. At least if we look at the performance over the last ten years. 

And finally, valuations where the cheapening in October was so helpful to the recent rally, have entered the year richer, across stocks, bonds and credit. 

None of these, in our view, are insurmountable problems, and the base case expectation from Morgan Stanley's economists means there is still a lot to look forward to in 2024. From better growth, to lower inflation, to easier monetary policy. The strong end of 2023 may just mean that some extra patience is required to get there. 

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

2024-01-20
Link to episode

Three Investment Themes for 2024 and Beyond

Elections, geopolitical risks and rate cuts are driving markets in the short term. But there are three trends that could provide long-term investment opportunities.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about three key investment themes for 2024. It's Wednesday, January 17th at 10 a.m. in New York. 

Markets will have plenty of potential near-term catalysts to contend with in 2024. There's elections, geopolitical risks as tensions rise with regional conflicts in Europe and the Middle East, and key debates about the timing and pace of central bank rate cuts. We'll be working hard to understand those debates, which will influence how markets perform this year.

 

But what if you're thinking a bit longer term? If that's you, we've got you covered. As it's become our annual tradition, we?re rolling out three secular themes that Morgan Stanley research will be focused on developing collaborative, in-depth research for, in an effort to identify ways for investors to create potential alpha in their portfolio for many years to come. 

The first theme is our newest one, longevity. It's the idea that recent breakthroughs in health care could accelerate the trend toward longer and higher quality human lives. To that end, my research colleagues have been focused on the potential impacts of innovations that include GLP-1 drugs and smart chemo. Further, there's reason to believe similar breakthroughs are on the horizon given the promise of AI assisted pharmaceutical development. And when people lead longer lives, you'd expect their economic behavior to change. So there's potential investment implications not just for the companies developing health care solutions, but also for consumer companies, as our team expects that, for example, people may consume 20 to 30% less calories on a daily basis. And even asset managers are impacted, as people start to manage their investments differently, in line with financing a longer life span. In short, there's great value in understanding the ripple effects into the broader investment world. 

The second theme is a carryover from last year, the ongoing attempts to decarbonize the world and transition to clean energy. Recent policies like the Inflation Reduction Act in the US include substantial subsidies for clean energy development. And so we think it's clear that governments and companies will continue to push in this direction. The result may be a tripling of renewable energy capacity by 2030. And while this is happening, climate change is still asserting itself and investment should pick up in physical capital to protect against the impact. So all these efforts put in motion substantial amounts of capital, meaning investors need to be aware of the sectors which will be crimped by new costs and others that will see the benefits of that spend, such as clean energy. 

Our third theme is also a carryover, the development of AI. In 2023, companies we deemed AI enablers, or ones who were actively developing and seeking to deploy that technology, gained about $6 trillion in stock market value. In 2024, we think we'll be able to start seeing how much of that is hype and how much of that is reality, with enduring impacts that can create long term value for investors. We expect clear use cases and impacts to productivity and company's bottom lines to come more into focus and plan active research to that end in the financials, health care, semiconductor, internet and software sectors, just to name a few. So stay tuned. We think these debates could define asset performance for many years to come. And so we're dedicated to learning as much as we can on them this year and passing on the lessons and market insights to you. 

Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

2024-01-17
Link to episode

The Growth Outlook for China?s Tech Sector

Although China has emerged as one of the world?s largest end markets for technology, its tech sector faces some significant macro hurdles. Here?s what investors need to know.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Shawn Kim, Head of Morgan Stanley's Asia Technology Research Team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about the impact of macro factors on China's technology sector. It's Tuesday, January 16th at 10 a.m. in Hong Kong.

 

Over the past year, you've heard my colleagues discuss what we call China's 3D journey. The 3Ds being debt, deflation and demographics. As we enter 2024, it looks like China is now facing greater pressure from these 3Ds, which would cap its economic growth at a slow pace for longer. Given this investor?s currently debating the potential risks of a prolonged deflation environment. In fact, the situation in China, including the rapid contraction of property sales and investment, default risk and initial signs of deflation, has led to comparisons with Japan's extended period of deflation, which was driven by property downturn and the demographic challenge of an aging population. 

At the same time, within the past decade, China has quickly emerged as one of the most important end demand markets for the global information and communication technology industry, accounting for 12% of market share in 2023 versus just 7% back in 2006. This trend is fueled by China's economic growth driving demand for IT infrastructure and China's large population base driving demand for consumer electronics. China has also become the largest end demand market for the semiconductor industry, accounting for about 36 to 40% of global semiconductor revenues in the last decade. As it aims to achieve self-sufficiency and semiconductor localization, China has been aggressively expanding its production capacity. It  currently accounts for about 25% of global capacity.

 

Over the long term, we believe China's economic slowdown will likely lead to lower trade flows in other countries, misallocation of resources across sectors and countries, and reduced cross-border dissemination of knowledge and technology. China's semiconductor manufacturing, in particular, will continue to face significant challenges. As the world transitions to a multipolar model and supply chains get rewired, a further gradual de-risking of robotic manufacturing away from China is underway, and that includes semiconductor manufacturing. In a more extreme scenario, a complete trade decoupling would resemble the 1980s, when the competition between the US and Japan in the semiconductor industry intensified significantly.

 

Our economics team believes that China can beat the debt deflation loop threat decisively next 2 to 3 years. It's important to note, however, that risks are skewed to the downside, with a delayed policy response potentially leading to prolonged deflation. And this could send nominal GDP growth to 2.2% in 2025 to 2027. And based on the historical relationship between nominal GDP growth and the information and communication technology total addressable market, we estimate that China's ICT market and semiconductor market could potentially decline 5 to 7% in 2024, and perhaps as much as 20% by 2030, in a bear case scenario. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcast and share Thoughts on the Market with a friend or colleague today.

2024-01-16
Link to episode

What?s Next for Money Market Funds?

Changing Fed policy in 2024 is likely to bring down yields from these increasingly popular funds. Here?s what investors can consider instead.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the investment landscape and how we put those ideas together. It's Friday, January 12th at 2 p.m. in London. 

One of the biggest stories in recent years has been the rise of the money market fund. Today, an investor in a US dollar money market fund earns a yield of about 5.3%, a full 1% higher than the yield on a 30 year US government bond and almost 4% higher than the yield on the S&P 500. All investment strategy at the moment, to some extent, flows from the starting point that holding cash pays pretty well. 

Unsurprisingly, those high yields in money market funds for little volatility have been popular. Per data from the Investment Company Institute, U.S. money market fund assets now stand at about $6 trillion, over $1 trillion higher than a year ago, which flows into these funds accelerating over the last few months. 

But we think this could change looking into 2024. The catalyst will be greater confidence that the Federal Reserve has not just stopped raising interest rates, but will start to cut them. If short term rates are set to fall, the outlook for holders of a money market fund changes. Suddenly they may want to lock in those high current yields. 

Morgan Stanley expects the declines and what these money market funds may earn to be significant. We see the Fed reducing rates by 100 basis points in 2024, and another 200 basis points in 2025, leaving short term rates to be a full 3% lower than current levels over the next two years. In Europe, rates on money market funds may fall 2% over the same period. 

While lower short term interest rates can make holding money market funds less attractive, they make holding bonds more attractive. Looking back over the last 40 years, the end of Federal Reserve rate increases, as well as the start of interest rate cuts has often driven higher returns for high quality bonds. 

But would a shift out of money market funds into bonds make sense for household allocations? We think so. Looking at data from the Federal Reserve back to the 1950s, we see that household allocation to bonds remain relatively low, while exposures to the stock market remain historically high. And this is the reason why we think any flows out of money market funds are more likely to go into bonds than stocks. Stock market exposure is already high, and stocks represent a much more volatile asset than bonds, relative to holding cash. 

While the US money market funds saw $1 trillion of inflows into 2024 flows to investment grade and high yield saw almost nothing. That is starting to change. With the Fed done raising rates, we expect higher flows into credit, especially in 1 to 5 year investment grade bonds, the part of the credit market that could be the easiest first step for investors coming out of cash and looking for something to move into. 

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

2024-01-12
Link to episode

The Path Ahead for Natural Gas and Shale

Investors are split on the outlook for natural gas as ?peak shale? may be on the horizon. Here?s what to expect in 2024.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Devin McDermott, Head of Morgan Stanley's North American Energy Research Team and the Lead Commodity Strategist for Global Gas and LNG Markets. Today, I'll be talking about some of the big debates around natural gas and shale in 2024. It's Thursday, January 11th at 10 a.m. in New York.

 

The evolution of shale as a viable, low cost energy resource, has been one of the biggest structural changes in global oil and gas markets of the past few decades. In oil, this turned the U.S. into the world's largest producer, while falling costs also led to sharp deflation in prices and global oversupply. For U.S. natural gas, which is more regionally isolated, it allowed the market to double in size from 2010 to 2020, with demand growing rapidly across nearly every major end-market. Over this period, the U.S. transitioned from a net importer of liquefied natural gas, or LNG, to one of the world's largest exporters. But despite this robust growth, prices actually declined 80% over the period as falling cost of U.S. shale and pipeline expansions unlocked low cost supply. 

Now looking ahead after a multi-year pause, the US is set to begin another cycle of LNG expansion. This comes in response to some of the market shocks from the Russia/Ukraine conflict, including loss of Russian gas into Europe, as well as strong demand growth in Asia, where LNG serves as a key energy transition fuel. In total, projects that are currently under construction should nearly double US LNG export capacity by the later part of this decade. While the last wave didn't drive prices higher, this time can be different as it comes at a time when some investors feel like peak shale might be on the horizon. Shale is maturing, well costs and break-evens are generally no longer falling, and pipe expansions have slowed significantly due to regulatory challenges.

 

While many of these issues are more apparent on the oil side, there are challenges for gas as well. Notably, the lowest cost US supply region, the Marcellus in Appalachia, is constrained by lack of infrastructure. As a result, meeting this demand likely elicits a call on supply growth from higher cost regions relative to last cycle. This not only includes the Haynesville, a gas play in Louisiana, but also the Eagle Ford in Texas and Basins in Oklahoma, potentially requiring prices in the $4 to $5 per MMBtu range to incentivize sufficient investment. 

Investors are split on the natural gas outlook. Bears argue that abundant, low cost domestic supply will meet LNG demand without higher prices, just like last time, while bulls backed higher prices this time around. Now, strong supply and a mild start to the winter heating season has actually pushed Henry Hub prices lower to close out 2023, bringing year-to-date declines to 50%. While this drives a softer set up for the first half of 2024, lower prices also come with a silver lining. This should help moderate potential investment in new supply ahead of the pending wave of LNG expansions. As a result, we believe the bearish near-term setup may prove bullish for the second half of 2024 and 2025. A dynamic many stocks in the sector do not fully reflect. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2024-01-11
Link to episode

Will Global Oil Markets Surprise In 2024?

World oil demand is slowing, non-OPEC supply remains strong and OPEC is likely to follow through on planned cuts. Here?s how investors can understand this precarious balance.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Martjin Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the 2024 Global Outlook for oil. It's Wednesday, the 10th of January at 2 p.m. in London. 

Around six months ago, oil market forecasters widely forecasted a tight second half for 2023 with considerable inventory draws. This expectation was partially driven by two factors. One, OPEC cuts, and in particular the additional voluntary cut of about 1 million barrels a day announced by Saudi Arabia back in June that took the country's production to 9 million barrels a day, about 10% lower than the average of the first half of 2023. The second factor was a positive view on demand, which had mostly surprised to the upside in the first half of 2023. The market indeed tightened in the third quarter and inventories drew sharply at the time. As a result, Dated Brant rallied and briefly reached $98 a barrel in late September. 

However, this was not to last in the fourth quarter. Demand disappointed, growth and non-OPEC supply remained relentless and inventories built again. Needless to say, these trends have been reflected in prices. Not only did spot prices decline, Dated Brant fell to about $74 a barrel in mid-December, but a number of other indicators, such as calendar spreads for example, signaled a broad weakening of the oil complex. 

Looking ahead, we expect a relatively precarious balance in 2024. Demand growth is set to slow as the post-Covid recovery tailwinds have largely run out of steam by now. Despite low investment in production capacity in recent years, the growth in non-OPEC supply is set to remain strong in 2024 and probably also in 2025, enough to meet all global demand growth. Naturally, this limits the room in the oil market for OPEC oil. When OPEC cuts production in response, as it has recently been doing, this puts downward pressure on its market share and upward pressure on its spare capacity. 

History warns of such periods. On several occasions when non-OPEC supply growth outpaced global demand, eventually, a period of lower prices was needed to reverse that balance. However, we argue that is not quite what lies ahead for 2024. OPEC cohesion has been robust in recent years and will likely continue this year. We expect the production cuts agreed to in late November 2023 to eventually be extended through all of 2024, and we don't exclude a further deepening of those cuts either. 

This would limit the pace of inventory builds in 2024, but probably not prevent them. In our base case projections, we still see inventories built modestly at a rate of about a few hundred thousand barrels a day this year, and our initial 2025 estimates also imply a modest oversupply next year. 

As a result, we see lower oil prices ahead, but again, not a large difference. We estimate Dated Brant will remain close to $80 a barrel in the first half of 2024, but may gradually decline towards the end of the year, trading in the low to mid $70s in 2025. That may also support our economists' call for inflation to moderate further this year. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2024-01-10
Link to episode

Are These Gen AI?s Next Big Winners?

Companies that offer generative AI solutions saw their valuations rise in 2023. This year, investors should look at the companies adopting these solutions.

----- Transcript -----

Welcome to Thoughts on the Market. I?m Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. And along with my colleagues, bringing you a variety of perspectives, today I'll discuss our views on the broad impacts of AI across global markets. It's Tuesday, the 9th of January at 2 p.m. in London. 

AI has established itself as a critical theme of the last 12 months, but we are clearly in the early innings of its diffusion. More specifically, 2023 was very successful for AI players that we call the enablers, those first line of hardware and software companies that play into the generative AI debate. 

But after the first wave of excitement, how does that trend percolate through the rest of the market, and how much of the hype will translate to sustainable earnings uplift? What is the next move for this entire debate, which so captivated markets in 2023? 

Our team mapped out the next stage of the debate across all regions and industries, and came to three key conclusions. The first, looking back at 2023, the enablers did extraordinarily well, and that shouldn't come as a surprise to any of our regular listeners. Some of those companies saw triple digit returns last year, and we estimate that more than $6 trillion of market cap was added to those names globally. 

But that brings us to our second key conclusion. Namely, looking forward, we think that investors should now turn their attention to the adopters. Meaning companies that are leveraging the enablers software and hardware to better use their own data and monetize that for the AI world. Looking back last year, where the enablers returned more comfortably double digit and triple digit returns, the adopters only gained on average around 6%. 

Of course, we're only in the early innings of the AI revolution, and the market is still treating these adopters as a "show me" story. We think that 2024 is going to be transformative for this adopter group, and we expect to see a wave of product launches using large language models and generative AI, particularly in the second half of 2024. 

Our third key conclusion is around the rate of change. And what do we mean by this? Well, in 2023, the enabler stocks, where AI was moderately important to the investment debate, increased their total market cap by around 28%. But if AI increases in importance to the point where analysts deem it to be core to the thesis for that particular stock, we expect it can add another 40% to market cap of this group based on last year's performance. 

A final point worth noting is that investors should pay close attention to the give and take between enabler and adopter groups. As I mentioned, the adopters were relatively more muted in their performance last year than the enablers. However, we believe in 2024 we will see the virtuous cycle between these two groups come into greater focus for investors. Enablers, consensus upgrades and valuations will depend increasingly on the enterprise IT budgets being deployed by the adopters in 2024-25. The adopters, in turn, are in a race to build both revenue generating and productivity enhancing tools, which completes the virtuous circle by feeding the enablers revenue line. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today. 

2024-01-09
Link to episode

Will Anti-Obesity Drugs Disrupt the MedTech Industry?

Investors worry that anti-obesity drugs could dent demand for medical procedures and devices. Here?s what they could be missing.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Patrick Wood, Morgan Stanley's MedTech analyst. And today, I'll be talking about the potential impact of anti-obesity medications on the MedTech industry. It's Monday, January 8th at 10 a.m. in New York.

 

Anti-obesity drugs have made significant gains in popularity over the past year, and by and large, the market expects them to disrupt numerous MedTech markets as widespread adoption leads to population-level weight reduction and co-morbidity improvement. 

To a certain extent, we agree with the premise that obesity is linked to high health care spend and therefore anti-obesity drugs could represent a risk to device sales. Our research suggests that moderate obesity is associated with about $1,500 a year higher spend on healthcare per capita, with an even greater impact in severe obesity at about $3000 bucks a year. But  we think it would be a mistake to assume reduced rates of obesity are intrinsically negative for medtech makers overall. 

In fact, we think anti-obesity drugs may ultimately prove to be a net positive for MedTech companies as the drugs increased life expectancy and increased demand for procedures or therapies that would not have been a good option for patients who are obese. In some cases, severe obesity can actually be contraindication for ortho or spine surgery, with many patients denied procedures until they shed a certain amount of weight for fear of complications, infection, and other issues. In this context, anti-obesity drugs could actually boost procedure volumes for certain patients. 

Another factor to consider, we believe the importance of life expectancy shifts as a result of potentially lower obesity rates cannot be ignored. In fact, our analysis suggests that obesity reduces life expectancy by about ten years in younger adults and five years in middle age adults. 

Think of it this way, from the standpoint of total healthcare consumption, one incremental year of life expectancy in old age could equate to as much as ten years of obesity in terms of overall healthcare spending. Adults 65 plus spend 2 to 3 times more per year on average, than adults 45 to 64, with a significant $10 to $25,000 step up in dollar terms. 

Furthermore, rates of sudden cardiac death increased dramatically in high body mass index patients, eliminating the possibility of medical intervention to address the underlying obesity issue or the associated co-morbidities. 

Given all this, we think anti-obesity drugs will ultimately prove to be a net benefit for cardiovascular device makers overall, even in certain categories where body mass index is correlated with higher procedure rates. In markets such as structural heart, where we're replacing things like heart valves, we believe the number of patients reaching old age, that is 70 plus, is most important in regards to volumes. Though rates of obesity are contributing factors as well, orthopedics is more of a mixed bag. The strongest evidence we've seen here is on lower BMI's leading to reduced procedure volumes though pertaining to osteoarthritis in the knees and degenerative disc disease in spine. But we think the argument that fewer people with obesity means fewer knee replacements or fewer incidences of spine disease is actually only half the picture. Clearly, age may be a factor here, and our sense is that hip volumes in particular are not dependent on high BMI's as much as on an aging population. 

To sum up, we believe that anti-obesity drugs won't dismantle core MedTech markets. There are more layers to the story here.

Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2024-01-08
Link to episode

Andrew Sheets: Why 2024 Is Off to a Rocky Start

Should investors be concerned about a sluggish beginning to the year, or do they just need to be patient?

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 5th at 2 p.m. in London. 

2023 saw a strong finish to a strong year, with stocks higher, spreads and yields lower and minimal market volatility. That strength in turn flowed from three converging hopeful factors. 

First, there was great economic data, which generally pointed to a US economy that was growing with inflation moderating. Second, we had helpful so-called technical factors such as depressed investor sentiment and the historical tendency for markets, especially credit markets, to do well in the last two months of the year. And third, we had reasonable valuations which had cheapened up quite a bit in October. 

Even more broadly, 2024 offered and still offers a lot to look forward to. Morgan Stanley's economists see global growth holding up as inflation in the U.S. and Europe come down. Major central banks from the US to Europe to Latin America should start cutting rates in 2024, while so-called quantitative tightening or the shrinking of central bank balance sheets should begin to wind down. And more specifically, for credit, we see 2024 as a year of strong demand for corporate bonds, against more modest levels of bond issuance, a positive balance of supply versus demand. 

So why, given all of these positives, has January gotten off to a rocky, sluggish start? It's perhaps because those good things don't necessarily arrive right away. 

Starting with the economic data, Morgan Stanley's economists forecast that the recent decline in inflation, so helpful to the rally over November and December, will see a bumpier path over the next several months, leaving the Fed to wait until June to make their first rate cut. The overall trend is still for lower, better inflation in 2024, but the near-term picture may be a little murky. 

Moving to those so-called technical factors, investor sentiment now is substantially higher than where it was in October, making it harder for events to positively surprise. And for credit, seasonally strong performance in November and December often gives way to somewhat weaker January and February returns. At least if we look at the performance over the last ten years. 

And finally, valuations where the cheapening in October was so helpful to the recent rally, have entered the year richer, across stocks, bonds and credit. 

None of these, in our view, are insurmountable problems, and the base case expectation from Morgan Stanley's economists means there is still a lot to look forward to in 2024. From better growth, to lower inflation, to easier monetary policy. The strong end of 2023 may just mean that some extra patience is required to get there. 

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

2024-01-05
Link to episode

Can Japanese Equities Rally in 2024?

Many investors believe that the value of Japanese stocks will dip as the yen gets stronger. Here?s why we?re forecasting ~10% growth.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Market Equity Strategy team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss one of the big debates in the market around Japanese equities in 2024. It's Thursday, January 4th at 10 a.m. in Singapore.

As we kick off the new year, one of the most debated investor questions is whether Japanese equities can again perform well if the Yen is now over weakening, but instead strengthens over 2024 as expectations of Fed rate cuts play out. The market is understandably concerned that if the Yen appreciates significantly, Japanese equities will underperform, given the impact on competitiveness and the effects translation of foreign earnings. As a result, global investors remain underweight on Japanese equities versus their benchmark weight, despite the notably improved sentiment on the underlying Japanese economy. 

So in contrast to these concerns, we believe that Japanese equities and the Yen can simultaneously rally in 2024, which will mean even stronger returns for unhedged dollar based investors than for the local index. Our currency strategists forecast modest further gains in the Yen, with a pick up to 140 against the US dollar by end 2024 versus 143 today. And despite this, we see corporate earnings growth still achieving 9% in 2024, underpinned by nominal GDP recovery and corporate reforms. 

So what is the reason for the break in the usually negative relationship between the yen and Japanese equities? 

We still see three drivers supporting the market. First, there?s the return of nominal GDP growth. The Japanese economy is finally exiting deflation that has been prevalent since the 1990s, and we believe a virtuous cycle of higher nominal growth in Japan has started thanks to joint efforts from the Bank of Japan and the corporate sector to move to a positive feedback loop between price hikes and wage growth, underpinned by a productive CapEx cycle. Our chief Japan economist, Takeshi Yamaguchi, forecasts nominal GDP growth for 2023 to have achieved 5%, but to remain above 3% growth in 2024, and a healthy 2 to 2.5 % for the foreseeable future. 

The second driver is corporate reforms, which have been the most crucial driver of underlying Japanese equities performance, and we expect the trend improvement of return on equity to continue. The sea change in corporate governance in Japan has led to major changes in buyback and dividend policies, which combined are almost quadruple the levels they were at ten years ago. And we're seeing a broadening trend of underlying business restructuring underpinned by more engagement from investors, both foreign and domestic. 

Finally, Japan has been a net beneficiary of investment inflows and CapEx orders in the transition to a more multipolar world. And with those flows, while equity valuations are cheap to history, in contrast to the US market, we expect them to be supported by further foreign inflows and domestic inflows that will be boosted by the launch of the new Nippon Individual Savings Account Program this month. 

Bottom line Japan equities remain our top pick globally. We see the TOPIX index moving further into a secular bull market with our December 2024 target for the index standing at 2,600, which implies 10% upside in Yen terms and more in US dollar terms from current levels. 

Thanks for listening. And if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2024-01-04
Link to episode

New Year, New Investment Themes?

Tune in as our analysts take a look back at the major themes from 2023 and a look ahead to what investors should be eyeing in 2024.

----- Transcript -----

Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product. And on this special episode of the podcast, we'll take a look back at 2023, which has been an extraordinary year. And we'll also touch on what 2024 could have in store for investors. It's Wednesday, January the 3rd at 2 p.m. in London. 

Paul Walsh: At the start of last year, we identified ten overarching long term themes that we believed would command investor focus throughout 2023 and beyond. And they ranged from macro developments like inflation, China's reopening and India's economic transformation to micro oriented themes such as Chat GPT, obesity, drugs and a number of others. Of course, the year did throw in a few curveballs, so I wanted to sit down with Ed Stanley to review some of the major themes that did hold investor interest last year, and that will likely continue to unfold in 2024. 

Paul Walsh: The whole energy and utilities space has been a topic of constant 

debate, be it at the energy transition or what's been going on around energy security. And then slightly more sort of sector specific with some of the micro dynamics, we've had the value of innovation in pharma at work around GLP-1s proving to be tremendously popular, as one would expect. And clearly the proliferation of artificial intelligence has really been, you know, the other non macro big theme this year, which has been tremendously prevalent, pretty much whichever corner you've looked in. If I take a little bit of a step back, Ed, and I think about the global themes that we've tried to own this year, namely multipolar world, decarbonization and tech diffusion, from a thematics perspective what themes worked and what played out in the way that you thought, and where have we seen things happening that were unexpected? 

Ed Stanley: I think the three big themes that you talk about remain as relevant, if not more relevant now than when we started the year. If you think about tech diffusion, A.I. has been the theme of the year. In multipolar world, we've had more conflict this year, and obviously  that kind of sharpens people's minds to what stocks will and won't work in this kind of backdrop. And then if you think about the decarb theme as the final structural theme, higher interest rates are making investors really question whether the net zero transition is on track. So those three themes remain super relevant. We talked about the China reopening that sort of worked and then it was a bit of a disappointment mid and later on in the year. I'd say we got the micro probably better nailed down than the macro, but in a volatile year, I think we did a fairly good job of picking what to watch out for. 

Paul Walsh: What themes have people not been talking about that have been on your radar screen over recent years that you think could make a resurgence as we look forwards? 

Ed Stanley: There is a kind of joke in the tech world that we go in three year cycles, so we have A.I, then we have Web3, which is de facto crypto, and then we go back to AR/VR and we run in these cycles waiting for whatever breakthrough comes next. We've had crypto having another rally and we've had A.I this year, so we've had sort of all of them this year, but those are always rotating on the back burner. There are always things like unexpected news in quantum computing that could have overflow and disruption effects across the economy, which most investors are not thinking about until it becomes relevant. So I think there are a lot of things in the background which very easily could thrust themselves into the core of the debate.

Paul Walsh: Well, let's talk a little bit about that and think about what we should be looking out for 2024. So how are you thinking about how the sort of themes and the landscape across the themes is going to develop into 2024 Ed, and what listeners should be thinking about? 

Ed Stanley: I think if you think on the top down three structural themes, there is very little to change our view that those remain pretty quarter to our thinking. If you think maybe geographically and then from a micro perspective, geographically, not much has changed on our view on the US, we're threading a needle on that. I think what is more of a shift is a much greater focus on Japan and India relative to China and the US. I think the debate will shift a bit, we won't leave generative A.I behind by any means, but we will shift probably more to talking about EDGE A.I. That is where A.I. is being done on your consumer device, in effect rather than in a data center. And this is something where we see many more catalysts. We see the prospect of killer apps emerging in 2024 to really thrust that debate into people's consciousness. So I think you'll be hearing more about EDGE. So now is the time to get clued up on that if it's not on your radar screen. I think if we're keeping up with the healthcare space, obesity will obviously carry on as a debate, but I think, you know, another piece is on smart chemo. And this is a great topic where there are more catalysts coming up. Not an awful lot is being priced into the underlying equities. Where I think there are exciting things to look forward to. And then the final one is what happens to decarbon renewables. This is a huge debate, but this is the question where you have highly polarized views on both sides.

 

Paul Walsh: Ed, thanks for sharing your views and for all of your great insights through 2023. And we really look forward to what I'm sure will be an interesting and exciting 2024. 

Ed Stanley: Thank you. 

Paul Walsh: And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and do share the podcast with a friend or colleague today.

2024-01-03
Link to episode

2024 U.S. Autos Outlook: Should Investors Be Concerned?

The auto industry is pivoting from big spending to capital discipline. Our analyst highlights possible areas where investors may find opportunities this year.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Adam Jonas, Morgan Stanley's Head of the Global Autos and Shared Mobility Team. Today I'll be talking about our U.S. autos outlook for 2024. It's Tuesday, January 2nd at 10 a.m. in New York. 

Heading into 2024, we remain concerned about the future of the U.S. auto industry, in some ways, even more so than during the great financial crisis of 2008 and 2009. But as the auto industry pivots away from big spending on EVs and autonomous vehicles to a relatively more parsimonious era of capital discipline, we see significant upside value unlock for investors. 

It's been a good run for the automakers. Just think how supportive the overall macroeconomic environment has been for the U.S. auto industry since 2010. U.S. GDP growth averaged well over 2%. Historically low interest rates helped consumers afford big ticket auto purchases. The Chinese auto consumers snapped up Western brands funding rich dividend streams for U.S. automakers. Used car prices were mostly stable or rising, supporting the auto lending complex. And COVID driven inventory scarcity lifted average transaction prices to all time highs, buoying auto companies margins. 

Looking back, the relatively strong performance of auto companies contributed to ever growing levels of CapEx and R&D in increasingly unfamiliar areas, ranging from battery cell development to software and A.I inference chips, to fully autonomous robotaxis. For years, investors largely supported Detroit's investments in Auto 2.0, with a glass half-full view of legacy car companies' ability to venture into profitable electric vehicle territory. But we're reaching a critical juncture now, and we believe the decisions that will be made over the next 12 months with respect to capital allocation and spending discipline will determine the overall industry and individual automakers performance. 

We forecast U.S. new car sales to reach 16 million units in 2024, an increase of around 2% from the November 2023 run rate of 15.7 million units. To achieve this growth, we believe car and truck prices need to fall materially. Given stubbornly high interest rates hampering affordability, a 16 million unit seasonally adjusted annual selling rate may require a combination of price cuts and transaction prices down on the order of 5% year-on-year, leaving the value of U.S. auto sales relatively stable year-on-year. 

We expect a continued melting in used car prices, but not a very sharp fall from here, owing to a continued low supply of certified pre-owned inventory in good condition coming off lease as we approach the third anniversary of the COVID lows. As new inventory continues to recover, we expect steady downward pressure on used prices on the order of 5 or 10% from December 23 to December 24. 

In terms of EV demand, we expect growth on the order of 15 to 20% in the U.S., keeping penetration in the 8% range. We continue to expect legacy automakers to pull back on EV offerings due largely to a lack of profitability. Startup EV carmakers will likely see constrained production, including by their own choice, into a slowing demand environment where we expect to see hybrid and plug-in hybrid volume making a comeback, potentially rising 40 to 50%. 

So what themes do we think investors should prepare for? First in an accelerating EV penetration world, we believe internal combustion exposed companies and suppliers may outperform EV exposed suppliers categorically. Secondly, we believe many companies in our coverage have an opportunity to greatly improve capital allocation and efficiency as they dial back expansionary CapEx and prioritize cash generating parts of the portfolio. And finally, we would be increasingly selective on picking winners exposed to long term secular trends like electrification and autonomy, focusing on those firms that can scale such technologies profitably. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2024-01-02
Link to episode

End-of-Year Encore: Macro Economy: The 2024 Outlook Part 2

Original Release on November 14th, 2023: Our roundtable discussion on the future of the global economy and markets continues, as our analysts preview what is ahead for government bonds, currencies, housing and more.

----- Transcript -----

Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what is ahead for the global economy and markets in 2024. It's Tuesday, November 14th at 10 a.m. in New York. 

Yesterday you heard from Seth Carpenter, our Global Chief Economist, and Mike Wilson, our Chief Investment Officer and the Chief U.S. Equity Strategist. Today, we will cover what is ahead for government bonds, corporate credit, currencies and housing. I am joined by Matt Hornbach, our Chief Macro Strategist, James Lord, the Global Head of Currency and Emerging Markets Strategy, Andrew Sheets, Global Head of Credit Research, and Jay Bacow, Co-Head of U.S. Securities Products.

Vishy Tirupattur: Matt, 2023 was quite a year for long end government bond yields globally. We saw dramatic curve inversion and long end yields reaching levels we had not seen in well over a decade. We've also seen both dramatic sell offs and dramatic rallies, even just in the last few weeks. Against this background, how do you see the outlook for government bond yields in 2024? 

Matt Hornbach: So we're calling our 2024 outlook for government bond markets the land of confusion. And it's because bond markets were whipped around so much by central banks in 2023 and in 2022. In the end, what central banks gave in terms of accommodative monetary policy in 2020 and 2021, they more than took away in 2022 and this past year. At least when it came to interest rate related monetary policies. 2024, of course, is going to be a pretty confusing year for investors because, as you've heard, our economists do think that rates are going to be coming down, but so too will balance sheets. 

But for the past couple of years, both G10 and EM central banks have raised rates to levels that we haven't seen in decades. Considering the possibility that equilibrium rates have trended lower over the past few decades, central bank policy rates may be actually much more restricted today than at any point since the 1970s. But, you know, we can't say the same for central bank balance sheets, even though they've been shrinking for well over a year now. They're still larger than before the pandemic. 

Now, our economists forecast continued declines in the balance sheets of the Fed, the ECB, the Bank of England and the Bank of Japan. But nevertheless, in aggregate, the balance sheet sizes of these G4 central banks will remain above their pre-pandemic levels at the end of 2024 and 2025.

Vishy Tirupattur: Matt, across the developed markets. Where do you see the best opportunity for investors in the government bond markets? 

Matt Hornbach: So Vishy we think most of the opportunities in 2024 will be in Europe given the diverging paths between eurozone countries. Germany, Austria and Portugal will benefit from supportive supply numbers, while another group, including Italy, Belgium and Ireland will likely witness a higher supply dynamic. Our call for a re widening of EGB spreads should actually last longer than we originally anticipated. 

Elsewhere in Europe, we're expecting the Bank of England to deliver 100 basis points of cumulative cuts by the end of 2024, and that compares to significantly less that's priced in by the market. Hence, our forecasts for gilts imply a much lower level of yields and a steeper yield curve than what you see implied in current forward rates. So the UK probably presents the best duration and curve opportunity set in 2024. 

Vishy Tirupattur: Thank you, Matt. James, a strong dollar driven by upside surprises to U.S. growth and higher for longer narrative that has a world during the year characterized the strong dollar view for much of the year. How do you assess 2024 to be? And what differences do you expect between developed markets and emerging market currency markets? 

James Lord: So we expect the recent strengthening of US dollar to continue for a while longer. This stronger for a longer view on the US dollar is driven by some familiar drivers to what we witnessed in 2023, but with a little bit of nuance. So first, growth. US growth, while slowing, is expected to outperform consensus expectations and remain near potential growth rates in the first half of 2024. This is going to contrast quite sharply with recessionary or near recessionary conditions in Europe and pretty uncompelling rates of growth in China. 

The second reason we see continued dollar strength is rate differentials. So when we look at our US and European rate strategy teams forecasts, they have rates moving in favor of the dollar. Final reason is defense, really. The dollar likely is going to keep outperforming other currencies around the world due to its pretty defensive characteristics in a world of continued low growth, and downside risks from very tight central bank monetary policy and geopolitical risks. The dollar not only offers liquidity and safe haven status, but also high yields, which is of course making it pretty appealing. 

We don't expect this early strength in US Dollar to last all year, though, as fiscal support for the US economy falls back and the impact of high rates takes over, US growth slows down and the Fed starts to cut around the middle of the year. And once it starts cutting, our U.S. econ team expects it to cut all the way back to 2.25 to 2.5% by the end of 2025. So a deep easing cycle. As that outlook gets increasingly priced into the US rates, market rate differentials start moving against the dollar to push the currency down. 

Vishy Tirupattur: Andrew, we are ending 2023 in a reasonably good setup for credit markets, especially at the higher quality end of the trade market. How do you expect this quality based divergence across global trade markets to play out in 2024? 

Andrew Sheets: That's right. We see a generally supportive environment for credit in 2024, aided by supportive fundamentals, supportive technicals and average valuations. Corporate credit, especially investment grade, is part of a constellation of high quality fixed income that we see putting up good returns next year, both outright and risk adjusted. 

When we talk about credit being part of this constellation of quality and looking attractive relative to other assets, it's important to appreciate the cross-asset valuations, especially relative to equities, really have moved. For most of the last 20 years the earnings yield on the S&P 500, that is the total earnings you get from the index relative to what you pay for it, has been much higher than the yield on U.S. triple B rated corporate bonds. But that's now flipped with the yield on corporate bonds now higher to one of the greatest extents we've seen outside of a crisis in 20 years. Theoretically, this higher yield on corporate bonds relative to the equity market should suggest a better relative valuation of the former. 

So what are we seeing now from companies? Well companies are buying back less stock and also issuing less debt than expected, exactly what you'd expect if companies saw the cost of their debt as high relative to where the equities are valued. 

A potential undershoot in corporate bonds supply could be met with higher bond demand. We've seen enormous year to date flows into money market funds that have absolutely dwarfed the flows into credit. But if the Fed really is done raising rates and is going to start to cut rates next year, as Morgan Stanley's economists expect, this could help push some of this money currently sitting in money market funds into bond funds, as investors look to lock in higher yields for longer. 

Against this backdrop, we think the credit valuations, for lack of a better word, are fine. With major markets in both the U.S. and Europe generally trading around their long term median and high yield looking a little bit expensive to investment grade within this. Valuations in Asia are the richest in our view, and that's especially true given the heightened economic uncertainty we see in the region. We think that credit curves offer an important way for investors to maximize the return of these kind of average spreads. And we like the 3 to 5 year part of the U.S. credit curve and the 5 to 10 year part of the investment grade curve in Europe the most. 

Vishy Tirupattur: Thanks, Andrew. Jay, 2023 was indeed a tough year for the agency in the US market, but for the US housing market it held up quite remarkably, despite the higher mortgage rates. As you look ahead to 2024, what is the outlook for US housing and the agency MBS markets and what are the key drivers of your expectations? 

Jay Bacow: Let's start off with the broader housing market before we get into the views for agency mortgages. Given our outlook for rates to rally next year, my co-head of securitized products research Jim Egan, who also runs US housing, thinks that we should expect affordability to improve and for sale inventory to increase. Both of these developments are constructive for housing activity, but the latter provides a potential counterbalance for home prices. 

Now, affordability will still be challenged, but the direction of travel matters. He expects housing activity to be stronger in the second half of '24 and for new home sales to increase more than existing home sales over the course of the full year. Home prices should see modest declines as the growth in inventory offsets the increased demand. But it's important to stress here that we believe homeowners retain strong hands in the cycle. We don't believe they will be forced sellers into materially weaker bids, and as such, we don't expect any sizable correction in prices. But we do see home prices down 3% by the end of 2024. 

Now, that pickup in housing activity means that issuance is going to pick up as well in the agency mortgage market modestly with an extra $50 billion versus where we think 2023 ends. We also think the Fed is going to be reducing their mortgage portfolio for the whole year, even as Q2 starts to taper in the fall, as the Fed allows their mortgage portfolio to run off unabated. And so the private market is going to have to digest about $510 billion mortgages next year, which is still a concerning amount but we think mortgages are priced for this. 

Vishy Tirupattur: Thanks, Jay. And thank you, Matt, James and Andrew as well. And thank you to our listeners for joining us for this 2 part roundtable discussion of our expectations for the global economy and the markets in 2024. As a reminder, if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-12-29
Link to episode

End-of-Year Encore: Macro Economy: The 2024 Outlook

Original Release on November 13th, 2023: As global growth takes a hit and inflation begins to cool, how does the road ahead look for central banks and investors? Chief Fixed Income Strategist Vishy Tirupattur hosts a roundtable with Chief Economist Seth Carpenter and Chief U.S. Equity Strategist Mike Wilson to discuss.

----- Transcript -----

Vishy Tirupattur:  Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today on the podcast we'll be hosting a very special roundtable discussion on what is ahead for the global economy and markets by 2024. I am joined by my colleagues, Seth Carpenter, Global Chief Economist and Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. It's Monday, November 13th at 9 a.m. in New York. 

Vishy Tirupattur: Thanks to both of you for taking the time to talk. We have a lot to cover, so I am going to go right into it. Seth, I want to start with the global economy. As you look ahead to 2024, how do you see the global economy evolving in terms of growth, inflation and monetary policy? 

Seth Carpenter: Thanks, Vishy. As we look forward over the next couple of years, there are a few key themes that we're seeing in terms of growth, inflation and monetary policy. First, looks like global growth has stepped down this year relative to last year and we're expecting another modest step down in the global economy for 2024 and into 2025. Overall, what we're seeing in the developed market economies is restrictive monetary policy in general restraining growth, whereas we have much more mixed results in the emerging market world.

Inflation, though, is a clear theme around the world. Overall, we see the surge in inflation. That has been a theme in global markets for the past couple of years as having peaked and starting to come down. It's coming down primarily through consumer goods, but we do see that trend continuing over the next several years. 

That backdrop of inflation having peaked and coming down along with weaker growth means that we're setting ourselves up for overall a bit of an easing cycle for monetary policy. We are looking for the Fed and the ECB each to start an easing cycle in June of this year. For the Fed, it's because we see growth slowing down and inflation continuing to track down along the path that we see and that the Fed will come around to seeing. 

I would say the stark exception to this among developed market economies is the Bank of Japan. We have seen them already get to the de facto end of yield curve control. We think by the time we get to the January policy meeting, they will completely eliminate yield curve control formally and go from negative interest rate policy to zero interest rate policy. And then over the course of the next year or so, we think we're going to see very gradual, very tentative increases in the policy rate for Japan. So for every story, there's a little bit of a cross current going on. 

Vishy Tirupattur: Can you talk about some of the vulnerabilities for the global economy? What worries you most about your central case, about the global economy? 

Seth Carpenter: We put into the outlook a downside scenario where the current challenges in China, the risks, as we've said, of a debt deflation cycle, they really take over. What this would mean is that the policy response in beijing is insufficient to overcome the underlying dynamics there as debt is coming down, as inflation is weak and those things build on themselves. Kind of a smaller version of the lost decade of Japan. We think from there we could see some of that weakness just exported around the globe. And for us, that's one of the key downside risks to the global economy. 

I'd say in the opposite direction, the upside risk is maybe some of the strength that we see in the United States is just more persistent than we realize. Maybe it's the case that monetary policy really hasn't done enough. And we just heard Chair Powell talk about the possibility that if inflation doesn't come down or the economy doesn't slow enough, they could do more. And so we built in an alternate scenario to the upside where the US economy is just fundamentally stronger. Let me pass it back to you Vishy. 

Vishy Tirupattur: Thank you Seth. Mike, next I'd like to go to you. 2023 was a challenging year for earnings growth, but we saw significant multiple expansion. How do you expect 2024 to turn out for the global equity markets? What are the key challenges and opportunities you see for equity markets in 2024? 

Mike Wilson: 2023 was obviously, you know, kind of a challenging year, I think, for a lot of equity managers because of this incredible dispersion that we saw between, kind of, how economies performed around the world and how that bled into company performance. And it was very different region by region. So, you know, first off, I would say US growth, the economic level was better than expected, better than the consensus expected for sure, and even better than our economists view, which was for a soft landing. China was, on the other hand, much worse than expected. The reopening really never materialized in any meaningful way, and that bled into both EM and European growth. 

I would say India and Japan surprised in the upside from a growth standpoint, and Japan was by far the star market this year. The index was up a lot, but also the average stock performed extremely well, which is very different than the US. India also had pretty good performance equity wise, but in the US we had this incredible divergence between the average stock and the S&P 500 benchmark index, with the average stock underperforming by as much as 12 or 1300 basis points. That's pretty unusual. So how do we explain that and what does that mean for next year? Well, look, we think that the fiscal support is starting to fade. It's in our forecast now. In other words, economic growth is likely to soften up, not a recession yet for 2024, but growth will be deteriorating. And we think that will bleed into further earnings deterioration. 

So for 2024, we continue to favor Japan, where the earnings of breadth has been the best looks to us, and that's in a new secular bull market. In the US, it's really a tale of two worlds. It's companies that have cost leadership or operational efficiency, a thing we've been espousing for the last two years. Those types of companies should continue to outperform into the first half of next year. And then eventually we suspect, will be flipping pretty aggressively to companies that have poor operational efficiency because we're going to want to catch the upside leverage as the economy kind of accelerates again in the back half of 2024 or maybe into 2025. But it's too early for that in our view.

Vishy Tirupattur: How do you expect the market breadth to evolve over 2024? Can you elaborate on your vision for market correction first and then recovery in the later part of 2024? 

Mike Wilson: Yes. In terms of the market breadth, we do ultimately think market breadth will bottom and start to turn up. But, you know, we have to resolve, kind of, the index price first. And this is why we've continued to maintain our $3900 price target for the S&P 500 for, you know, roughly year end of this year. That, of course, would argue you're not going to get a big rally in the year-end. And the reason we feel that way, it's an important observation, is that market breadth has deteriorated again very significantly over the last three months. And breadth typically leads the overall index. So until breadth bottoms out, it's very difficult for us to get bullish at the index level as well. So the way we see it playing out is over the next 3 to 6 months, we think the overall index will catch down to what the market breadth has been telling us and should lead us out of what has been, I think a pretty, you know, persistent bear market for the last two years, particularly for the average stock. 

And so we suspect we're going to be making some significant changes in both our sector recommendations. New themes will emerge. Some of that will be around existing themes. Perhaps AI will start to actually have a meaningful impact on overall productivity, something we see really evolving in 2025, more than 2024. But the market will start to get ahead of that. And so I think it's going to be another year to be very flexible. I'd say the best news is that although 2023 has been somewhat challenging for the average stock, it's been a great year for dispersion, meaning stock picking. And we think that's really the key theme going into 2024, stick with that high dispersion and stock picking mentality. And then, of course, there'll be an opportunity to kind of flip the factors and kind of what's working into the second half of next year. 

Vishy Tirupattur: Thanks, Mike. We are going to take a pause here and we'll be back tomorrow with our special year ahead roundtable, where we'll share our forecasts for government bonds, corporate credit, currencies and housing. As a reminder, if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-12-28
Link to episode

End-of-Year Encore: 2024 Asia Equities Outlook: India vs. China

Original Release on December 7th, 2023: Will India equities continue to outperform China equities in 2024? The two key factors investors should track.

----- Transcript -----

Welcome to Thoughts on the market. I'm Jonathan Garner, Morgan Stanley's Chief Asia and Emerging Market Equity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'm going to be discussing our continued preference for Indian equities versus China equities. It's Thursday, December 7th at 9 a.m. in Singapore. 

MSCI India is tracking towards a third straight year of outperformance of MSCI China, and India is currently our number one pick. Indeed, we're running our largest overweight at 100 basis points versus benchmark. In contrast, we reduced China back to equal weight in the summer of this year. So going into 2024, we're currently anticipating a fourth straight year of India outperformance versus China. 

Central to our bullish view on India versus China, is the trend in earnings. Starting in early 2021, MSCI India earnings per share in US dollar terms has grown by 61% versus a decline of 18% for MSCI China. As a result, Indian earnings have powered ahead on a relative basis, and this is the best period for India earnings relative to China in the modern history of the two equity markets. 

There are two fundamental factors underpinning this trend in India's favor, both of which we expect to continue to be present in 2024. The first is India's relative economic growth, particularly in nominal GDP terms. Our economists have written frequently in recent months on China's persistent 3D challenges, that is its battle with debt, deflation and demographics. And they're forecasting another subdued year of around 5% nominal GDP growth in 2024. In contrast, their thesis on India's decade suggests nominal GDP growth will be well into double digits as both aggregate demand and crucially supply move ahead on multiple fronts. 

The second factor is currency stability. Our FX team anticipate that for India, prudent macro management, particularly on the fiscal deficit, geopolitical dynamics and inward multinational investment, can lead to continued Rupee stability in real effective terms versus volatility in previous cycles. For the Chinese Yuan, in contrast, the real effective exchange rates has begun to slide lower as foreign direct investment flows have turned negative for the first time and domestic capital flight begins to pick up. 

Push backs we get on continuing to prefer India to China in 2024, are firstly around potential volatility of the Indian markets in an election year. But secondly, a bigger concern is relative valuations. Now, as always, we feel it's important to contextualize valuations versus return on equity and return on equity trajectory. Currently, India is trading a little over 3.7x price to book for around 15% ROE. This means it has one of the highest ROE's in emerging markets, but is the most expensive market. And in price to book terms, second only to the US globally. China is trading on a much lower price to book of 1.3x, but its ROE is 10% and indeed on an ROE adjusted basis, it's not particularly cheap versus other emerging markets such as Korea or South Africa. 

Importantly for India, we expect ROE to remain high as earnings compound going forward, and corporate leverage can build from current levels as nominal and real interest rates remain low to history. So the outlook is positive. But for China, the outlook is very different. And in a recent detailed piece, drawing on sector inputs from our bottom up colleagues, we concluded that whilst the base case would be for ROE stabilization, if reflation is successful, there's also a bear case for ROE to fall further to around 7% over the medium term, or less than half that of India today. 

Finally, within the two markets we?re overweight India, financials, consumer discretionary and industrials. And these are sectors which typically do best in a strong underlying growth environment. They're the same sectors on which we're cautious in China. There our focus is on A-shares rather than large cap index names, and we like niche technology, hardware and clean energy plays which benefit from China's policy objectives. 

Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-12-27
Link to episode

End-of-Year Encore: An Early Guide to the 2024 U.S. Elections

Original Release on December 6th, 2023: Although much will change before the elections, investors should watch for potential impacts on issues such as AI regulation, energy permitting, trade and tax policy.

----- Transcript -----

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. 

Ariana Salvatore: And I'm Ariana Salvatore, from the U.S. Public Policy Research Team. 

Michael Zezas: On this special episode of Thoughts on the Market, we'll discuss our early views around the 2024 U.S. presidential election. It's Wednesday, December 6th at 10 a.m. in New York. 

Michael Zezas: With U.S. elections less than a year away now, it's likely much will change in terms of the drivers of the outcome and its market impact. Still, we believe early preparation will help investors navigate the campaign. And so starting now, we'll bring your updated views and forecasts until the U.S. elects its next president in November of 2024. Arianna, we've noted that this upcoming election will affect particular sectors rather than the broader macro market. What's driving this view? 

Ariana Salvatore: There are really two reasons that we've been pointing to. First, lawmakers have achieved a lot of their policy priorities that impact the deficit over the past few election cycles. If you think about the 2017 Tax Cuts and Jobs Act or the infrastructure bill back in 2021, for example. Now they're turning to policy that holds more sectoral impacts than macro. The second reason is that inflation is still a very high priority issue for voters. As we've noted, an elevated level of concern around inflation really disincentivizes politicians from pushing for legislation that could expand the deficit because it's seen as contrary to that mandate of fiscal austerity that comes in a high inflation environment. There is one exception to this. As we've noted before, lawmakers will have to deal with the expiring Tax Cuts and Jobs Act. We think the different configurations post 2024 each produce a unique outcome, but we expect in any scenario, that will only add modestly to the deficit. 

Michael Zezas: And digging into specific sectors. What policies are you watching and which sectors should investors keep an eye out for in the event these policies pass? 

Ariana Salvatore: Following the election, we think Congress will turn to legislative items like AI regulation, energy permitting, trade and tax policy. Obviously, each unique election outcome will facilitate its own level and type of policy transformation. But we think you could possibly see the biggest divergence from the status quo in a Republican sweep. In particular, in that case, we'd expect lawmakers to launch an effort to roll back, at least partially, the Inflation Reduction Act or the IRA, though we ultimately don't think a full scale repeal will be likely. We also expect to see something on AI regulation based on what's currently in party consensus, easing energy permitting requirements and probably extending the bulk of the expiring Tax Cuts and Jobs Act. That means sectors to watch out for would be clean tech, AI exposed stocks and sectors most sensitive to tax changes like tech and health care. Mike, as we mentioned, with this focus on legislation that impacts certain sectors, we don't expect this to be a macro election. So is there anything that would shift the balance toward greater macro concerns? 

Michael Zezas: Well, if it looks like a recession is getting more likely as the election gets close, it's going to be natural for investors to start thinking about whether or not the election outcome might catalyze a fiscal response to economic weakness. And in that situation, you'd expect that outcomes where one party doesn't control both Congress and the White House would lead to smaller and somewhat delayed responses. Whereas an outcome where one party controls both the White House and Congress, you would probably get a bigger fiscal response that comes faster. Those are two outcomes that would mean very different things to the interest rates market, for example, which would have to reflect differences in new bond supply to finance any fiscal response, and of course, the resulting difference in the growth trajectory. 

Ariana Salvatore: All right so, keeping with the macro theme for a moment. How do our expectations for geopolitics and foreign policy play into our assessment of the election outcomes? 

Michael Zezas: Yeah, this is a difficult one to answer, mostly because it's unclear how different election outcomes would net impact different geopolitical situations. So, for example, investors often ask us about what outcomes would matter for a place like Mexico, where they're concerned that some election outcomes might create economic challenges for Mexico around the US-Mexico border. However, those outcomes could also improve the prospects for near shoring, which improves foreign direct investment into Mexico. It's really unclear whether those cross-currents would be a net positive or a net negative. So we don't really think there's much specific to guide investors on, at least at the moment. Finally, Arianna, to sum up, how is the team tracking the presidential race and which indicators are particularly key, the focus on? 

Ariana Salvatore: Well, recent history suggests that it will be a close race. For context, the 2022 midterms marked the fourth time in four years that less than 1% of votes effectively determined which side would control the House, the Senate or the White House. That means that elections are nearly impossible to predict. But we think there are certain indicators that can tell us which outcomes are becoming more or less likely with time. For example, we think inflation could influence voters. As a top voter issue and a topic that the GOP is better perceived as equipped to handle, persistent concerns around inflation could signal potential upside for Republicans. Inflation also tracks very closely with the president's approval rating. So on the other hand, if you see decelerating inflation in conjunction with overall improving economic data, that might indicate some tailwinds for Democrats across the board. We're going to be tracking other indicators as well, like the generic ballot, President Biden's approval rating and prediction markets, which could signal that different outcomes are becoming more or less likely with time. 

Michael Zezas: Ariana, thanks for taking the time to talk. 

Ariana Salvatore: Great speaking with you, Mike. 

Michael Zezas: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

2023-12-26
Link to episode

Andrew Sheets: Credit Markets Take a Sunny View

How has corporate credit fared through slow growth and high inflation? Here?s our view on what comes next for this market.

----- Transcript -----

[00:00:02] Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, December 22nd at 4 p.m. in London.

 

[00:00:18] Sometimes it's hard to explain why a market is moving. This is not one of them. U.S. economic data has been unquestionably good over the last two months, delivering an unusual combination of better than expected growth with lower than expected inflation. In the U.K. and Euro area, inflation has been declining even faster. 

[00:00:35] Central banks, seeing this encouraging decline in inflationary pressure, have signaled an end to their recent rate hiking campaigns and hinted that next year will bring cuts. These shifts have been significant. The market's expectation of one year interest rates in the eurozone in one year's time have fallen almost 1% in the last month alone. In the U.S., they've fallen about 1.25% over the last two. 

[00:00:56] As you've heard us discuss on this program throughout the year, inflation is incredibly important to the current macroeconomic story. Much of the concerns this year, especially at the beginning, were based on a widespread view that in an economy near full employment, high inflation could only be brought down with much weaker growth, leaving investors with the unappetizing choice of either a recession or permanently higher inflation. 

[00:01:17] But the last two months have presented a notable glass half full, more optimistic challenge to that story. In the U.S., there are signs the economy is increasing capacity, which in economic terms allows for more output without higher prices. U.S. energy production has hit record levels, with the U.S. currently producing 40% more oil than Saudi Arabia. More workers are joining the labor force. New business formations are high and supply chain stresses are improving. All of that has helped reduce inflationary pressure and reinforce the idea that policy shifts in the Federal Reserve towards easier monetary policy can be credible over the next several years. 

[00:01:52] In Europe, growth has been weaker, but this has meant inflation is coming down even faster, bolstering the view that the European Central Bank has taken interest rates much higher than it needs to, and could also reverse these significantly over the next 12 months. 

[00:02:04] For a market that spent much of the last two years worried about being stuck between this rock and a hard place with growth and inflation, the data over the last two months is welcome news and we remain positive on corporate credit. While levels have rallied more than we expected, we think this is balanced, for now, with these better than expected economic developments. 

[00:02:22] Within the credit rally, however, we see dispersion. Long term U.S. investment grade bonds, a highly volatile sector, have done so well that spreads are now near the tightest levels in 20 years. We think this looks overdone. In contrast, performance in the lowest rated and also volatile cohort of triple C issuers has lagged significantly. While we've previously had a higher quality bias within credit, we think U.S. and European triple C's can now start to catch up, given some of the better macroeconomic developments we've been seeing in the recent months. 

[00:02:51] Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you.

2023-12-22
Link to episode

Will Falling Rates Mean Lower Home Prices?

As mortgage rates come down from 8% closer to 6.5%, the 2024 housing market will see changes in inventory, home prices and sales.

----- Transcript -----

Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of Securitized Products Research at Morgan Stanley. 

Jim Egan: And I'm Jim Egan, the other Co-Head of Securitized Products Research.

 

Jay Bacow: And on this episode of the podcast we'll be discussing what the recent rally in mortgage rates means to the mortgage and housing Markets. It's Thursday, December 21st at 11 a.m. in New York. 

Jim Egan: Now, Jay, the last time that we were on this podcast, we talked about what an 8% mortgage rate can mean to the homeowner. Now, mortgage rates have come down. They're getting quoted with a 6% handle. What happened? And where do we see mortgage rates going from here? 

Jay Bacow: The combination of data and Fed speak made the markets expect a lot more cuts from the Fed in 2024. Markets are pricing in close to 150 basis points of cuts, and that's caused a pretty large rally in rates. Primary mortgage rates to the homeowner are generally based off of secondary mortgage rate execution in the market, along with treasury rates. And you've seen a little over a hundred basis point rally in Treasury rates and a little over 150 basis point rally and secondary market execution. 

Jim Egan: Okay, So mortgage rates are down 150 basis points.

 

Jay Bacow: Not quite. Lenders don't really drop the primary rate as fast as a secondary rate goes down because they're not going to be able to deal with the added volume of inquiries until they add staffing. So we don't think primary rates are going to come down quite as much as secondary market rates have come down right now. But if rates stay here for some time, then we'd expect mortgage rates to settle in, in the context of about 6.5% or so. 

Jim Egan: Basically, what you're saying is when originators can hire enough officers to deal with the refinance and purchase inquiries, then they'll drop rates, effectively, don't cut profits if you can't make it up in volume. 

Jay Bacow: Exactly right. Now, what we would point out is there's only about 5% of the market that has a mortgage rate above 6.5%. So we wouldn't really expect a huge wave of refi activity. But what we would expect is that as market is pricing in more cuts, is that investors are going to feel more comfortable buying mortgages. For instance, right now the yields on mortgages that investors earn is similar to the yield that they can earn with Fed funds. However, the market is expecting that 150 basis point move lower in Fed funds next year, but they're not really expecting the back end of the yield curve to move that much. And so we think that investors like domestic banks, will be looking to move their cash out of the Fed's interest on reserves and into securities, and the probability of that happening is higher now than it was before all these cuts got priced in. But that's sort of investor behavior. What does this rally mean for the housing market writ large, in particular I guess I'm thinking like housing activity. You know, you put out a forecast a month ago. Do we think it's going to pick up now given the rally? 

Jim Egan: So when we published our year ahead forecast, we were expecting affordability to improve and to improve in line with the decreases in mortgage rates that you were discussing a little bit earlier in this podcast. But if interest rates were to stay here, that improvement would obviously be occurring far more quickly than we had originally anticipated.

 

Jay Bacow: Now, I guess I would think that more affordable housing would equal a higher volume of home sales. But we moved up to that almost 8% mortgage rate so fast and then we've rallied so quickly, and a lot of this happened during this slower seasonal period. So what are you thinking about the implication for home sales in general? 

Jim Egan: As you're pointing out, it's not really that straightforward here. The affordability improvement that we were expecting to see over the entire course of 2024 is something that we've only seen seven or eight other times in the course of the past 40 years. In most of those instances, sales volumes actually fell during that first year of affordability improvement, and that is before they climbed significantly in the 12 to 24 months after, that affordability improved. When you combine that historical experience with the fact that, look, despite this improvement in affordability, it's still very stretched and inventories, for sale inventories, are still very low. Jay, As you just mentioned, 95% of mortgaged homeowners have a rate below 6.5%. We just don't think that that spells material increases in home sales from here.

 

Jay Bacow: Okay. But there's a lot of room between no change and material increase, so what are you forecasting? 

Jim Egan: Despite the comments that I just made, an additional factor that we do need to consider is honestly, how much further can sales volumes really fall from here? There is some non-economic level of transaction volumes that has to occur. Think about people that need to move for jobs, in situations like that, and we think we're roughly there. Through the first three quarters of 2023, total sales volumes are at their lowest levels since 2011. But this is a much larger housing market than 2011. When we look at sales as a percentage of the total owned stock of housing, we're at the lows from the great financial crisis. That isn't to say that sales can't fall from these levels, but we think it's much more likely that they climb, especially considering this rate move and the affordability improvement that comes along with it. Our original forecast was for existing home sales to climb 2.5% in 2024 and for new home sales to climb 7.5%. If this affordability improvement were to really solidify here, we would expect sales volumes to be stronger than those forecasts. 

Jay Bacow: All right. More activity means more supply and I learned in Economics 101 that more supply generally means lower prices. But housing is more affordable, and I guess that means more demand. I learned in Jim Egan housing 101 that you have a four pillar framework. So how do you balance these four pillars and what does this mean for home prices next year? 

Jim Egan: For our listeners, our four pillar framework for the U.S. housing market is one, the demand for shelter. So we're looking at household formations as the marginal demand for both ownership and rentership shelter. Two, supply in the U.S. housing market. That's three fold; it's the listing of existing homes for sale, it's the building of new homes and it's distressed, so think of defaults and foreclosures in the housing market. The third pillar is the affordability of the U.S. housing market, which we've been discussing. And the fourth is the availability of mortgage credit. And Jay you're right, these factors influence home prices in different ways. While we do expect sales to increase, we're also expecting for sale inventory to increase next year, even if only at the margins. What our models are telling us is that increasing off of multi-decade lows from an inventory perspective is enough to push home prices down a little bit in 2024, despite the increase in demand that we're forecasting. We're calling for home prices to fall by about 3% year-over-year by the end of next year. 

Jay Bacow: That doesn't seem like a lot given that home prices are up about 45% since the start of the pandemic. 

Jim Egan: Right. And I would stress that we think this is a moderation, not a correction in home prices. We also don't think that there's a lot of downside below that 3% number, as homeowners do remain strong hands in this cycle. And by that, we mean we don't think that they're going to be forced to sell into materially weaker bids. That has and will continue to provide a lot of support to home prices in the cycle. We just don't think that that support means that home prices can't decline marginally on a year-over-year basis in 2024. 

Jay Bacow: All right, Jim, it's always great talking to you about the mortgage and housing market. 

Jim Egan: Great talking to you, too, Jay. 

Jay Bacow: And thank you all for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcast app and share the podcast with a friend or colleague today.

2023-12-21
Link to episode

Michael Zezas: Why Geopolitics May Matter More in 2024

While the U.S. debt ceiling challenge and the conflict in the Middle East left markets largely undisturbed this year, 2024 could tell a different story.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be looking ahead to geopolitical catalysts for markets in 2024. It's Wednesday, December 20th at 11 a.m. in New York. 

2023 was a year that, in our view, stood out as one where geopolitics surprisingly impacted markets far less than in recent years. But investors shouldn't get complacent because 2024 is full of potential geopolitical catalysts for markets. Let's start by looking back. 

The year that was had plenty of potential catalysts that could have arisen from the political economy. The U.S. flirted again with default by taking a painfully long time to raise the debt ceiling. Its credit rating suffered a downgrade along the way, but the volatility was barely noticeable in the equity and bond markets. Later in the year, a major military conflict broke out in the Middle East, creating a threat of major escalation and confrontation among nations both inside and outside the region, as well as disruptions to the global supply of oil. Still, markets shrugged with the price of oil mostly keeping steady and major global equity indices continuing on their prior trend. 

How were markets immune to these events? There's explanations specific to each event. For the debt ceiling, despite the brinkmanship, the probability that Congress wouldn't actually lift the debt ceiling was always quite small. For the Middle East, disruptions of the supply of global oil was not in anyone's interest. But there was also a bigger explanation for investors who look past this. The more important debate all year was whether central banks could turn the tide on inflation, and if so, could they avoid recession along the way. 

2024 should be a different story. The debate about inflation in developed markets looks increasingly settled, but the growth debate lingers. While our economists see the U.S. avoiding a recession or having a soft landing, recession remains a key risk. Meaning even small impacts from geopolitical events could meaningfully shift investors perceptions about whether positive or negative economic growth is the base case next year, with asset valuations shifting at the same time. And there will be plenty of events to watch. U.S. elections are clearly one area of focus with implications for Fed policy, global trade and ongoing assistance to Ukraine, whose conflict with Russia continues to carry risks to the European outlook. But it's not just the U.S. There are as many as 40 elections in key countries next year, including in India and Mexico, two secular growth stories our strategist favor. So stay tuned to geopolitics in 2024, we certainly will and we'll continue to share our insight into what it all means for markets. 

Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show. 

2023-12-20
Link to episode

Will the Fed?s Pivot Favor Bonds Over Equities?

Hear our perspective on market action following the Fed's change in direction, and what it means for our 2024 outlook. 

----- Transcript -----

Vishy Tirupattur: Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. In this special episode I'm joined by my colleague and Global Head of Cross-Asset Strategy, Serena Tang. Along with our colleagues bringing you a variety of perspectives, we'll be talking about how our views have evolved since we published our 2024 outlook over a month ago. It's Tuesday, December 19th, at 10 a.m. in New York. 

Vishy Tirupattur: Hello, Serena. Thank you for joining me in the show. 

Serena Tang: Very happy to join you. 

Vishy Tirupattur: Since we published our 2024 outlook, we've had some big moves across markets. So how do you think our views have changed from your perch as the Head of Cross-Asset Strategy? 

Serena Tang: Markets have moved a lot and have moved very, very quickly. When we first published our outlook just a month ago, you and I both had investors push back on our macro strategy team's forecast of U.S. ten year Treasury yields at below 4%. And you know what? We are at those levels now. In a similar vein, MSCI EM, which is the broad index of emerging market equities that we track, that is at our equity strategies price target. And we are now also through our base case target for U.S. high grade corporate bonds. So I would say this has shifted our short term views. Our U.S. rate strategy team, they've recently gone tactically neutral on government bonds as the markets have repriced quickly, maybe a bit too quickly. Now, that being said, on a strategic horizon, my team and I have been arguing for a strong preference for high quality fixed income over higher beta assets going into 2024. In large part because risky assets like equities, like high yield corporate bonds, they have been pricing in a perfect landing and not paying investors enough premium for the risk that the world may be less than perfect. And the assets which have valuation cushion right now, especially after rally we've seen these past few weeks, is still high grade fixed income. You know U.S. yields are close to post global financial crisis highs, while equity risk premiums have been falling most of this past year. So, yes, markets have moved, but our strategic view of being overweight in high quality fixed income over higher beta markets have not changed. So for you Vishy, you know, when we published our year ahead outlook, we had some pushback, not just on the rates view but also on a forecast for the Fed to cut four times next year. The market is clearly moved beyond that now. What do you think has driven that rally? 

Vishy Tirupattur: Serena, the pushback we had was really about the motivation and timing of the Fed cuts. As you know, our economists are calling for cuts starting in June as the economy and inflation begin to decelerate. Some people initially pushed back on this idea, that the Fed starts cutting rates before we get to the 2% core PCE target rate. After the downward surprise in CPI last week and more so after the FOMC meeting, which came across more dovish than the markets as well as us expected, the market narrative, including the pushback we've been getting, have dramatically changed. Clearly, the markets interpreted the messaging from the FOMC statement, the dot plot and the press conference to be unequivocally dovish. The changes in the market narratives notwithstanding, we continue to expect 100 basis point cuts over 2024. I would note that in a world where inflation is falling, standard economic models would prescribe rate cuts and in 2024 inflation is projected to fall further. And because the Fed targets the level of real leads to maintain the same level of restraint, the Fed needs to cut nominal rates in line with falling inflation. This is the reasoning we see behind Fed's projection for cutting cycle to begin next year. Cutting the policy rate is not to stimulate the economy, but really to move monetary policy towards a more normalized level. While the real rate will be likely lower at the end of next year than it is today, it will still remain elevated above neutral, nevertheless. 

Serena Tang: So do you think the markets are right to go with the Fed pivot narrative at this point in time? What are the market's pricing in right now for what the Fed will do in 2024? And compared to our U.S. economist forecasts, do you see the market pricing as too bullish or bearish? 

Vishy Tirupattur: The market pricing now reflects about 140 basis points of rate cuts in 2024, and market is assigning a nearly two thirds probability of a cut materializing in March. In our view, for a march cut to be realized, we need to continue to see downward surprises in incoming inflation and growth data. To quote Chair Powell on inflation, "I'm not calling into question the progress. It's great. We just need to see more" end quote. So we don't think the Fed would be confident that enough progress has been achieved by March. So that means cuts arrive in June, if there are no further downside surprises to our inflation path. So we think market has gotten a bit ahead of itself and thus will remain tactically neutral on duration? So Serena, if the pivot is real, why are you not more bullish on equities or fixed income? Also, why are you not bullish on higher beta fixed income? 

Serena Tang: Right. As I mentioned earlier, there's a strong valuation case for fixed income over equities. The latter is pretty much priced to perfection, while the former is not. But also in an environment where the Fed pivot is real and I think you and I both believe the Fed will start easing policy next year, the rally we've seen is not entirely surprising. My team's done some work looking into past episodes of rate hikes and cuts and pauses and what it means for cross-asset performance. Now, 3 to 6 months after the last Fed hike, normally everything rallies, which makes sense. Equities rates, credit, all these markets are just very relieved there is no more policy tightening. But in 3 to 6 months going into that first Fed cut, that's when you see bonds outperform equities, investment grade bonds outperform lower quality and quality within equities outperforming as investors recognize that easing usually comes along with decelerating growth. And I think that moment of epiphany is still to come. 

Vishy Tirupattur: Thank you, Serena. Thank you for joining me. 

Vishy Tirupattur: Thank you for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-12-19
Link to episode

Mike Wilson: Does the U.S. Equity Rally Still Have Steam?

Hear how the Fed?s announcement of upcoming rate cuts could affect equity markets?particularly small-cap stocks.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing me a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 18th at 11 a.m. in New York. So let's get after it. 

Going into last week, the key question for investors was whether Fed Chair Jay Powell would push back on the significant loosening of financial conditions over the prior six weeks. Not only did he not push back, his message was consistent with the notion that the Fed is likely done hiking and will begin cutting interest rates next year. Markets took the change in guidance as an all clear sign to ramp up risk further. 

Given that policy rates are well into restrictive territory, the Fed likely doesn't want to wait to shift to more accommodative policy until it's too late to achieve a soft landing. That's a bullish outcome for stocks because it means the odds of a soft landing outcome have gone up even if this dovish shift also increases the risk of inflation reaccelerating. Given the price reaction to the news last week, it appears that markets are of the view that the Fed isn't making a policy mistake by shifting more dovish too soon. 

For investors looking to capitalize on this shift, it's important to note that markets started to price this dovish tilt back in November, with one of the sharpest declines in interest rates and loosening of financial conditions. As discussed in prior podcast, this accounted for most of the 15% rally in equity valuations over the past six weeks. While Powell's dovish shift has given investors a catalyst to pursue higher valuations, the markets may have moved in advance of last week's dovish transition. We think equity prices will now be more dependent on the effect that this dovish shift has on growth rather than valuations alone. If growth doesn't improve, the rally will run out of steam. If it does improve, there could be further to go in the upside and we would also see a change in market leadership and a broadening of stock performance. 

On that note, since the lows in October, small cap stocks have done better and breadth has improved. However, when looking at past cycles we find that smallcaps underperform both before and after Fed rate cuts. This speaks to the notion that the Fed typically cuts rates as nominal growth is slowing and small caps tend to be quite economically sensitive. Thus, the introduction of rate cuts may not drive sustainable outperformance for small caps or lower quality stocks by itself. However, if the earlier than anticipated dovish shift in the context of a still healthy economic backdrop can drive a cyclical rebound in nominal growth next year, small caps look compelling over a longer investment horizon. In our view, the probability of this outcome has gone up given last week's Fed meeting, but it's far from a slam dunk after such a strong rally. 

From here it'll be important to watch relative earnings revisions, high frequency macro data and small business confidence for signs that a more durable period of cap outperformance is coming. For now, relative earnings revisions remain negative for small caps and relative margin estimates have just recently taken another turn lower. Meanwhile, purchasing manager indices remain below the expansion contraction line of fifty and small business confidence remains low in a historical context and is yet to turn convincingly higher. That said, these indicators may now start to turn in a more favorable manner given last week's events. 

The bottom line, small caps and lower quality stocks have rallied sharply with the S&P 500 since October. We believe most of this outperformance is due to short covering and the seasonal tendency for the year's laggards to do better into the end of the year in January. For this trend to continue beyond that, we will need to see nominal GDP reaccelerate and for inflation to stabilize at current levels rather than fall further toward the Fed's target of 2%. While this may seem counterintuitive, we remind listeners that the average stock does better when inflation is rising, not falling and that may be what the market is now anticipating. 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

2023-12-18
Link to episode

Economic Roundtable: What?s in Store for ?24?

Join our first quarterly roundtable where Morgan Stanley?s chief economists discuss the outlook for the U.S., Europe, China, and Japan.

----- Transcript -----

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. On this special episode of the podcast, we're going to hold a roundtable discussion focusing on Morgan Stanley's global economic outlook for 2024. It's Friday, December 15th at 4 p.m. in London. 

Ellen Zentner: 11 a.m. in New York. 

Jens Eisenschmidt: 5 p.m. in Frankfurt. 

Chetan Ahya: And midnight in Hong Kong. 

Seth Carpenter: So today I am joined by the leaders of the economics teams in key regions for a roundtable discussion that we're going to start to share each quarter. I'm with Ellen Zentner, our Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe economist. I want to talk with you three about the outlook for the global economy in 2024. Clearly, we're going to need to hit on growth, inflation, and we'll talk about how the various central banks are likely to respond. Let's start with the U.S., Ellen, how do you see the U.S. economy faring next year? What's just like the broad contours of that forecast? 

Ellen Zentner: Sure. Well, you know, the soft landing call that we've had since early 2022, we're rolling forward into a third year. I think what's important is why do we expect to finally get the slowing in the economy? We think that the fiscal impulse, which has been positive and made the Fed's job harder, is finally overcome by monetary policy lags that overcome and become more of a strain on the economy. We've got a slowing consumer. That's basically because labor demand is slowing and labor income is slowing. But again I think the whole view, the outlook is that the economy is slowing but not falling off a cliff. That's going to lead deflation in core goods to continue and disinflation in services so that inflation is coming down. So the Fed, after having remained on hold for quite some time, we think will start to cut in June of next year and ultimately deliver four rate cuts through the course of the year. And then another 200 basis points as we move through 2025. 

Jens Eisenschmidt: Yeah, if I can jump in here with a view from Europe. So it's striking how similar and at the same time different the views are here, in the sense that the starting point for Europe is much weaker growth. Yet we also get a big disinflation on the way we see actually euro area inflation ending at the ECBs target, or reaching the ECB target at the fourth quarter of 2024. Now for growth, we do have, as I said, a weak patch we are in. It's actually a technical recession with two negative quarters, Q3 and Q4 and 23. And then we are actually accelerating from there, but not an awful lot. So because we see potential growth very low, but consumption actually is picking up. So that's essentially the opposite in some sense, the flip side, but still very weak growth overall. 

Seth Carpenter: Okay, Jens. So against that backdrop of your outlook for Europe, what does that mean for the ECB? And in particular, it sort of looks like if the Fed's cutting in June, does the ECB have to wait until the Fed cuts or can it go before the Fed? How are you thinking about policy in Europe? 

Jens Eisenschmidt: No, I think that's a great question also, because we get that a lot from clients and we get a lot this sort of based on past regularities observation that the ECB will never cut before the Fed. And technically speaking, we have actually now forecast the ECB cutting before the Fed just one week. So they cut in June as well. And I think the issue here is really hardwired in the way we see the disinflation process and the information arriving at the doorstep of the ECB. They are really monitoring wages and are really worried about the wage developments. So they really want to have clarity about Q1 in particular wages, Q1 24. This clarity will only arrive late May, early June. And so June really for them is the first opportunity to cut in the face of weak inflation data. 

Seth Carpenter: Thanks, Jens. That makes a lot of sense. So if I'm reading you right, though, part of the weakness in Europe, especially in Germany, comes from the weakness in China, which is a  target for exports from Germany. So let's turn to you, Chetan. What is the baseline outlook for China? It's been a little bit disappointing. How do you see China evolving in 2024? 

Chetan Ahya: Well, in our base case, we expect China's GDP growth to improve marginally from an underlying base of 4% in 2023 to 4.2% in 2024, as the effects from coordinated monetary and fiscal easing kicks in. However, a part of the reason why we see only a modest improvement is because the economy is constrained by the three D challenges of high levels of debt, weakening demographics and deflationary pressures. And within that, what will influence the near-term outlook the most is how policymakers will address the deflation challenge. 

Jens Eisenschmidt: Chetan,  I get a lot of clients, though, questioning the outlook for China and thinking that this is quite optimistic. So what is the downside case for China that you have in your forecast? 

Chetan Ahya: Well in the downside case, we think the risk is China falls into that deflation loop. To recall, in our base case, we expect policymakers to stimulate domestic demand with coordinated monetary and fiscal easing. But if that does not materialize, deflationary pressures will persist, nominal GDP growth and corporate revenue growth will decelerate, Corporate profits will decline, forcing them to cut wage growth. This, against the backdrop of declining property prices, will mean consumers will turn risk averse, leading to the formation of a negative feedback loop. In this scenario, we could see real GDP growth at 2.7% and nominal GDP growth at just about 1%. 

Seth Carpenter: Wow. That would be a pretty bleak outcome in the downside scenario, Chetan. Maybe if we shift a little bit because we have a pretty compelling story for Japan that there's been a positive structural shift there. Why don't you walk us through the outlook for Japan for next year? 

Chetan Ahya: Well, we think Japan is entering a new era of higher nominal GDP growth. We expect Japan's nominal GDP growth to be at 3.8% in 2024, compared with the relatively flat trend for decades. The most important driver to this is policymakers concerted effort to deflate the economy with coordinated monetary and fiscal easing. We think Japan has decisively exited deflation, and its underlying inflation should be supported by sustained wage growth. Indeed, we are getting early signals that the wage increase in 2024 could be higher than the 2.1% that we saw in the 2023 spring wage negotiations. 

Seth Carpenter: Super helpful, Chetan. And it reminds me that a baseline forecast is critical, but thinking about the ways in which we can be wrong is just as important for markets as they think through where things are going to go. So, Ellen, let me turn to you. If we are going to be wrong about our Fed call, what's likely to drive that forecast error and which direction would it most likely be? 

Ellen Zentner: It's a great question because oftentimes you can get the narrative on the economy right, you can even get the numbers right sometimes, but you can get the Fed reaction function wrong. And so I think what we'll be looking for here is how well Chair Powell sends the message that you can cut rates in line with falling inflation and keep the policy stance just as restrictive. And if that's something that he really gives a full throated view around, then it could lead them to cutting in March, one quarter earlier than we've expected, because inflation has been coming down faster than expected. 

Jens Eisenschmidt: If I may chime in here for the ECB, I think we have essentially pretty high conviction that this will be June. And that has to do with what I explained before, that there is essentially a cascading of information and for the ECB, the biggest upside risk to inflation is wages. And they really want to have clarity on that. So it would take a much larger fall in inflation that we observe until, say, March for them to really move before June and we think June is it. But of course the latest is inflation that we are getting that was sort of a little bit more than was expected might have or is a risk actually to our 25 basis point cut calls. So it could well be a 50. In particular if we see more of these big prints. 

Seth Carpenter: Ellen, Chetan, Jens, thanks so much for joining and for everyone listening. Thank you for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today. 

2023-12-16
Link to episode

Sustainability: Mixed Signals on Decarbonization After COP28

The U.N. Climate Change Conference, COP28, delivered positive news around technology, clean energy and methane emissions. But investors should be wary about slower progress in other areas.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss some takeaways from the recent UN Climate Change Conference. It's Thursday, December 14th at 10 a.m. in New York. 

Achieving net zero emissions is a top priority as the world moves into a new phase of climate urgency. Decarbonization, or energy transition, is one of the three big themes Morgan Stanley research has followed closely throughout this year. As we approach the end of 2023. I wanted to give you an update on the space, especially as the U.N. Climate Change Conference or COP 28 just concluded in Dubai. 

First, there have been multiple announcements from the conference around the issue of decarbonizing the energy sector, which accounts for about three-quarters of total greenhouse gas emissions. The first was a surprisingly broad effort to curb methane gas emissions. Fifty oil and gas producers, accounting for 40% of global oil production, signed an agreement to cut methane emissions to 0.2% by 2030 and to reduce carbon emissions to net zero by 2050. Methane accounts for 45 to 50% of oil and gas emissions, and the energy sector is responsible for about 40% of human activity methane globally. Important to note, this agreement will be monitored for compliance by three entities, the U.N. International Methane Emissions Observatory, the Environmental Defense Fund, and the International Energy Agency. 

Second, 118 countries reached an agreement to commit to tripling renewable energy and doubling energy efficiency by 2030, an action that boosts the global effort to reduce the usage of fossil fuels. A smaller group of countries also agreed to triple nuclear power capacity by 2050. 

And third, several governments have reached an agreement on the Loss and Damage Startup Fund, designed to provide developing nations with the necessary resources to respond to climate disasters. The fund is especially important because it could alleviate the debt burden of countries that are under-resourced and overexposed to climate events and to improve their climate resiliency. 

So what do all of these developments mean for the energy transition theme? Overall, our outlook is mixed, and at a global level, we do see challenges on the way to achieving a range of emissions reductions goals. On the positive side, we see many data points indicating advances in energy transition technology and a more rapid scaling up of clean energy deployment. We are also encouraged to see a major focus on reducing methane emissions and a small but potentially growing focus on providing financial support for regions most exposed to climate change risks. On the negative side, however, we see multiple signs that fossil fuel demand is not likely to decline as rapidly as needed to reach a variety of emissions reduction goals. We see persistent challenges across the board, for instance, in raising capital to finance energy transition efforts, especially in emerging markets. This is in part driven by greater weather extremes stressing power grids, as well as a broad geopolitical focus favoring energy security. An example of this dynamic is India. Not only does India depend on coal for over 70% of its national power generation, but it intends to bolster further its coal power generation capacity despite the global efforts to move towards renewable energy, and this is really driven by a focus on energy security. 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show. 

2023-12-14
Link to episode

Michael Zezas: The U.S. Election, Clean Energy and Healthcare

Investors are concerned about the potential impact of the upcoming U.S. presidential election in a number of sectors. Here?s what to watch.

----- Transcript -----

Welcome to the Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research from Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impact of the U.S. elections on markets. It's Wednesday, December 13th at 10 a.m. in New York. 

Following our publication last week of our early look for investors at the U.S. election, we've had plenty of discussion with clients trying to sort out what the event might mean for markets. Here's the three most frequently asked questions we've received and of course, our answers. 

First, could the election be a catalyst to undo planned investment into the clean energy industry? This question often gets asked as, under what conditions could the Inflation Reduction Act be repealed? That Act allocated substantial sums to investment in clean energy alternatives, a boon for the industry. In our view, we don't see that act being repealed, even if Republicans who oppose the act take control of both Congress and the White House. We think there's too many negative local economic consequences to undoing that investment, to get a sufficient number of Republicans to vote for the repeal. However, clean energy investors should note that a Republican administration might be able to slow the spend of that money using the regulatory process. 

Second, should healthcare investors be concerned that there's an election outcome that could substantially change the U.S. healthcare system? This was a concern in prior elections where Republicans promised to repeal the Affordable Care Act, an outcome current President Trump has recommitted to in his current campaign. Republicans couldn't make good on that promise, despite unified government control in 2017 and 2018. And here we think history would repeat itself with even a Republican majority having difficulty finding sufficient votes if it means restricting health care delivery to some of their voters. That said, investors in sectors that would be negatively impacted by a repeal of the Affordable Care Act could see market effects if Republicans start surging in the polls, as markets would then have to account for the possibility, albeit modest, of repeal. 

Finally, when might political campaigns begin impacting markets? We don't have a clear answer here. In 2016 and 2020, health care stocks started reflecting campaign statements early in the year. Whereas macro market effects, such as the sensitivity of the Mexican peso to then candidate Trump's comments around renegotiating trade agreements, didn't kick in until much closer to November. The bottom line is that we don't really know, which is why we're here to help you prepare now. 

Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

2023-12-14
Link to episode

2024 China Outlook: Can Growth Rebound?

China continues to face the triple challenge of debt, deflation and demographics. But are investors missing an opportunity in China equities? 

----- Transcript -----

Laura Wang:] Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. 

Robin Xing: And I'm Robin Xing, Morgan Stanley's Chief China Economist. 

Laura Wang: On this special episode of the podcast, we'll discuss our 2024 outlook for China's economy and equity market and what investors should focus on next year. It's Tuesday, December 12th, 9 a.m. in Hong Kong. 

Laura Wang: Robin, China's post reopening recovery has been lackluster in 2023, disappointing expectations. We've seen significant challenges in housing and local government financing vehicles, which are pressuring the Chinese economy to the verge of a debt deflation loop. Can you explain some of these current dynamics? 

Robin Xing: China is in this difficult battle against the it's 3D problems, namely debt, deflation and demographics. China has stepped up reflationary measures since the July Politburo meeting, including immediate budgetary expansion, kick start of local government debt resolution and easing on the housing sector. Growth also bottomed out from its second quarter trough. That said, the reflationary journey remains gradual and bumpy. In particular, the downturn in the housing sector and its spillover to local government are still lingering. And it might take some time until it converges to a new steady state. Against this backdrop, we expect China to continue to roll out stronger and more coordinated fiscal, monetary and housing easing policies. 

Laura Wang: What measures does China need to undertake to avoid a debt deflation loop? 

Robin Xing: Well, there is no easy way out. We think China needs a systematic macro solution, including both cyclical stimulus and structural reforms, to decisively fend off a debt deflation loop. In particular, we proposed a 5R action plan. Reflation, Rebalance, Restructuring, Reform and Rekindle. So that includes reflecting the economy with policy stimulus to support aggregate demand. Rebalancing the economy towards consumption with structural initiatives such as fiscal transfer to the households. Restructuring balance sheets of troubled sectors, including property and financing league of Local Government. Reforming the SOE's of the public sector and rekindle the private sectors animal spirit. So far, Beijing has only completed 25% of the 5R strategy, led by some stimulus in reflation sector and also restructuring its local debt. We expect the progress to reach 50% by end 2024, and China could lead to this debt deflation loop in about two years after 2025. 

Laura Wang: Debt and deflation are 2 of the 3D's in what you call China's 3D journey. Demographics is the third challenge on this list. Why are demographics an economic headwind and how is China handling this challenge now? 

Robin Xing: Well, Laura, there is a little dispute on China's aging population. This will diminish capital returns and drag growth. So in our long term growth forecast, labor quantity will lower overall GDP growth by 40 basis points every year between 2025 to 2030. Though the declining labor quantity is unlikely to be reversed, Beijing would make more efforts in better utilizing higher labor quality, which has been increasing steadily. On that front, Beijing could step up reviving private sector confidence, which will bring more jobs and translate to labor with higher education into stronger output. Detailed measures could include, they start to issue the financial license to FinTech and resumption of offshore IPO by firms with sensitive data. That could send a clearer message to the end of regulatory reset since 2021. 

Laura Wang: With all these macro backdrops, what are your expectations for GDP growth in 2024 and 2025, and what are some of the biggest economic challenges facing China over this forecast horizon? 

Robin Xing: Well, we expect a modest growth recovery next year. Real GDP growth could edge up mildly from 4% two year kegger in 2023 to a slightly better 4.2% in 24. And the GDP deflator, which is a broader defined inflation indicator, it could rebound from a -.8% in this year, to .6% in 2024. But this is still way below a 2 to 3%, the level of inflation. So China will continue to grow and reflate at a subpar rate next year. The biggest challenge here is stabilizing the aggregate demand amid continued housing and the local government deleveraging. That requires more debt initially, particularly by the central government, to cushion this downturn. We expect a 1.5% point widening in China's government deficit next year. Led by a rising official budget and some increase in local special purpose bond. Monetary policy will likely remain accommodative as well. We expect a 25 basis point cut and the cumulatively another 20 basis points interest rate cuts in 2024. Now, Laura, turning it over to you. Over the past the year, the debate on investing in China has shifted profoundly towards long term structural challenges, we just discussed. And you have argued that this would continue into 2024. So what is your outlook for Chinese equities within the global EM framework over the next year? 

Laura Wang: We see a largely range bound market at best in our base case for China equity market at the index level. For example, our price target for MSCI China by end of 2024 is 60, suggesting very limited upside from its current level. Such upside puts China very much on par with what we expect from the broader emerging market index, MSCI EM. Therefore, we retain our equal weight rating on China within our EM API allocation framework. There will still be quite strong headwinds on corporate earnings as we go through the earnings results season for the rest of the year and then into the first quarter of 2024. This could lead to continuous downward revisions of consensus estimates. For example, we Morgan Stanley expect 9% earnings growth for MSCI China in 2024 compared to consensus at 16%, which we think is overly positive. Such downward revisions could also cap the valuation rerating opportunities. 

Robin Xing: Given this backdrop, Laura, how should investors be positioned in 2024 in terms of Chinese equities? 

Laura Wang: The Asia market, if we use CSI 300 as a proxy, has been outperforming the offshore MSCI China index for five years in a row. We expect this trend to continue at least in the next 3 to 6 months, given that the top down easing policies are starting to pivot to further support economic growth. And Robin, you are still expecting some easing on the monetary side with PSI rate cuts and the triple R cuts. Those usually tend to have a bigger impact on the Asia market than on the offshore space. Plus, I think we're also expecting some further currency weakness in the first half of next year and A-shares tend to be more resilient in such a scenario. 

Robin Xing: Finally, Laura, what is the market missing right now when it comes to Chinese equities? 

Laura Wang: As investors are still debating over the beta opportunities being largely absent for the past couple of years. We think some investors may easily come to the conclusion that there are not good investment opportunities in China anymore. We disagree with that. There are still plenty of alpha generating opportunities and particularly high quality names in the growth categories who can offer a strong earnings and ROE track record, good management teams and limited reliance on foreign technology input or on domestic government policy support. We believe those names can offer strong downside protection and help minimize your portfolio's volatility, while also offer the upside from their respective growing sectors when the market turns around. We have put together selected names that we believe meeting these criteria, and we call them the China best business model.

 

Laura Wang: Robin, thanks a lot for taking the time to talk. 

Robin Xing: Great speaking with you, Laura. 

Laura Wang: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

2023-12-12
Link to episode

Mike Wilson: Could Bond Market Consolidation Weigh on U.S. Equities?

Here?s how upcoming inflation data and this week?s Federal Open Market Committee meeting could affect the U.S. bond and equity markets. 

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 11th at 11am in New York. So let's get after it. 

Last week we discussed the increasing importance of interest rates in terms of dictating equity prices over the past six months. First, the sharp move higher in rates between July and October weighed heavily on stocks with the Russell 2000 selling up by 20% and the S&P 500 by 10%. Over the following six weeks, the opposite occurred as ten year yields fell by 90 basis points due to a perceived dovish pivot by the Fed and less longer dated bond issuance guidance from the Treasury. This move, lowering yields, helped the S&P 500 regain all of its losses from the prior three months, while several other indices, including the Russell 2000, clawed back 50% or more of their prior losses. This week, we remain focused on the bond market, which may be due for some consolidation after seeing such strong gains and that could weigh on equities in the near term. 

Friday's job data was important in this regard, with the stronger than expected release taking ten year U.S. Treasury yields higher by a modest 8 basis points. Though 135 basis points of Fed cuts that were priced into the bond market a week ago were now reduced to 110 basis points as of Friday's close. This reaction makes sense to us and there may be more to go in the near-term if inflation data released this week comes in a little hotter than consensus expects. Finally, the Fed is also meeting this week and will have taken notice of the data as well. With the unemployment rate falling by almost 2/10 in November, and inflation data potentially remaining bumpy over the next 3 to 6 months, the Fed may push back on the bond markets' more aggressive interest rate cuts. 

Given the severe underperformance of small caps this year, clients are more interested to know if the introduction of Fed rate cuts could reverse it. To address this question, we took a more in-depth look at small cap value and growth relative performance around prior Fed rate cuts. Interestingly, small cap value and growth underperformed large cap value and growth in the months before and after the Fed's first rate cut. Large cap growth is historically the best performing category following the first rate cut, and it also tends to see strong performance before the cut. We think these data reflect the notion that growth is typically slowing. When the Fed initially pivots to more accommodative policy. Given small caps greater sensitivity to economic activity, they tend to underperform in this context. Therefore, the more important determinant of small cap relative outperformance from here will be the rate of change on economic and earnings growth. Given our less optimistic growth outlook, we stick with a large cap defensive growth bias for one's portfolio. 

In addition to the recent fall in interest rates, the liquidity picture has also been a key driver of elevated equity valuations, in our view. More specifically, the draining of the reverse repo facility has continued to help fund the Treasuries elevated amount of issuance over the past six months. That issuance provided the financing for the fiscal deficit, which has been a key factor in stronger than expected GDP growth this year, especially in the third quarter. With over $800 billion remaining in a reverse repo facility, that balance should be drained towards zero next year and continue to play a supportive role both through Treasury funding and asset prices. 

Finally, our work suggests the Producer Price Index is a very good leading indicator for sales growth. Recent softness in the Producer Price Index does not yet point to a positive inflection in revenue growth. As a result we'll be closely watching this week's Producer Price Index release for signs that pricing trends are either stabilizing or decelerating further. Interestingly, small business surveys indicate that corporates intend to raise prices in 2024, a strategy that looks unlikely in our view. Our work leveraging company transcripts indicate that mentions of pricing power and related terms have been concentrated in hotels, restaurants, leisure, commercial services and supplies, household durables, specialty retailers and software over the last 90 days. And this is another area to watch closely for confirmation of inflation trends. 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple podcast app. It helps more people to find the show.

2023-12-11
Link to episode

David Adams: A Contrarian Call on the U.S. Dollar

Will the U.S. dollar weaken further as the economy slows? What will its value be compared to the Euro by spring 2024? Our analyst tackles those key currency questions and more.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Dave Adams, Head of G10 FX Strategy at Morgan Stanley. And today I'll be talking about our views on the US dollar. It's Friday, December 8th at 3 p.m. in London. 

The US dollar has fallen about 4% since it peaked in October and has retraced about half of its gains since July. We think this correction should be faded and we're affirming our call for Euro/Dollar to fall back to parity by the spring of next year, meaning the US dollar will rise a further 8% versus the Euro. 

This is a controversial and out of consensus call, but we think the market is still underpricing weakness in Europe and strength in the U.S., and a continued widening in growth and rate differentials should weigh on the pair. 

A lot of investors claim that the US dollar should weaken further as the US economy slows from its growth rate this summer. We agree US growth is likely to slow, but by far less than investors think. Our US economics team thinks the US growth will be about 1% stronger than consensus estimates, with the biggest gap for data leading into the second quarter of next year. This is a dollar-positive outcome. 

We also hear from investors a lot that weakness in Europe is fully priced, but we respectfully disagree. Sure, there's a lot of cuts priced in for the European Central Bank, but not as much as there should be once the ECB more formally acknowledges that cuts are coming.

The real risk here is that markets begin to price in ECB rate cuts below the long-run estimate of the neutral rate of 2%, and in a world where the ECB is cutting, this is a real possibility. 

A fast and deep cutting cycle in Europe would sharply contrast with the Fed, whose rhetoric continues to emphasize higher for longer, a view amplified by strong domestic growth. Divergence in economic data between Europe and the US should keep the euro falling versus the greenback. 

Now, I'm the first to admit that an 8% move in a few months time is a pretty big move and moves that large don't happen that often. If we look at options pricing, the market is pricing in an even lower risk of such a move compared to historical frequencies. And it's worth remembering that large moves do happen. Eurodollar fell 10% in a four month window two different times last year. So while this call may be bold and buck consensus, we think the fundamental story still holds. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

2023-12-08
Link to episode

2024 Asia Equities Outlook: India vs. China

Will India equities continue to outperform China equities in 2024? The two key factors investors should track.

----- Transcript -----

Welcome to Thoughts on the market. I'm Jonathan Garner, Morgan Stanley's Chief Asia and Emerging Market Equity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'm going to be discussing our continued preference for Indian equities versus China equities. It's Thursday, December 7th at 9 a.m. in Singapore. 

MSCI India is tracking towards a third straight year of outperformance of MSCI China, and India is currently our number one pick. Indeed, we're running our largest overweight at 100 basis points versus benchmark. In contrast, we reduced China back to equal weight in the summer of this year. So going into 2024, we're currently anticipating a fourth straight year of India outperformance versus China. 

Central to our bullish view on India versus China, is the trend in earnings. Starting in early 2021, MSCI India earnings per share in US dollar terms has grown by 61% versus a decline of 18% for MSCI China. As a result, Indian earnings have powered ahead on a relative basis, and this is the best period for India earnings relative to China in the modern history of the two equity markets. 

There are two fundamental factors underpinning this trend in India's favor, both of which we expect to continue to be present in 2024. The first is India's relative economic growth, particularly in nominal GDP terms. Our economists have written frequently in recent months on China's persistent 3D challenges, that is its battle with debt, deflation and demographics. And they're forecasting another subdued year of around 5% nominal GDP growth in 2024. In contrast, their thesis on India's decade suggests nominal GDP growth will be well into double digits as both aggregate demand and crucially supply move ahead on multiple fronts. 

The second factor is currency stability. Our FX team anticipate that for India, prudent macro management, particularly on the fiscal deficit, geopolitical dynamics and inward multinational investment, can lead to continued Rupee stability in real effective terms versus volatility in previous cycles. For the Chinese Yuan, in contrast, the real effective exchange rates has begun to slide lower as foreign direct investment flows have turned negative for the first time and domestic capital flight begins to pick up. 

Push backs we get on continuing to prefer India to China in 2024, are firstly around potential volatility of the Indian markets in an election year. But secondly, a bigger concern is relative valuations. Now, as always, we feel it's important to contextualize valuations versus return on equity and return on equity trajectory. Currently, India is trading a little over 3.7x price to book for around 15% ROE. This means it has one of the highest ROE's in emerging markets, but is the most expensive market. And in price to book terms, second only to the US globally. China is trading on a much lower price to book of 1.3x, but its ROE is 10% and indeed on an ROE adjusted basis, it's not particularly cheap versus other emerging markets such as Korea or South Africa. 

Importantly for India, we expect ROE to remain high as earnings compound going forward, and corporate leverage can build from current levels as nominal and real interest rates remain low to history. So the outlook is positive. But for China, the outlook is very different. And in a recent detailed piece, drawing on sector inputs from our bottom up colleagues, we concluded that whilst the base case would be for ROE stabilization, if reflation is successful, there's also a bear case for ROE to fall further to around 7% over the medium term, or less than half that of India today. 

Finally, within the two markets we?re overweight India, financials, consumer discretionary and industrials. And these are sectors which typically do best in a strong underlying growth environment. They're the same sectors on which we're cautious in China. There our focus is on A-shares rather than large cap index names, and we like niche technology, hardware and clean energy plays which benefit from China's policy objectives. 

Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-12-07
Link to episode

An Early Guide to the 2024 U.S. Elections

Although much will change before the elections, investors should watch for potential impacts on issues such as AI regulation, energy permitting, trade and tax policy.

----- Transcript -----

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. 

Ariana Salvatore: And I'm Ariana Salvatore, from the U.S. Public Policy Research Team. 

Michael Zezas: On this special episode of Thoughts on the Market, we'll discuss our early views around the 2024 U.S. presidential election. It's Wednesday, December 6th at 10 a.m. in New York. 

Michael Zezas: With U.S. elections less than a year away now, it's likely much will change in terms of the drivers of the outcome and its market impact. Still, we believe early preparation will help investors navigate the campaign. And so starting now, we'll bring your updated views and forecasts until the U.S. elects its next president in November of 2024. Arianna, we've noted that this upcoming election will affect particular sectors rather than the broader macro market. What's driving this view? 

Ariana Salvatore: There are really two reasons that we've been pointing to. First, lawmakers have achieved a lot of their policy priorities that impact the deficit over the past few election cycles. If you think about the 2017 Tax Cuts and Jobs Act or the infrastructure bill back in 2021, for example. Now they're turning to policy that holds more sectoral impacts than macro. The second reason is that inflation is still a very high priority issue for voters. As we've noted, an elevated level of concern around inflation really disincentivizes politicians from pushing for legislation that could expand the deficit because it's seen as contrary to that mandate of fiscal austerity that comes in a high inflation environment. There is one exception to this. As we've noted before, lawmakers will have to deal with the expiring Tax Cuts and Jobs Act. We think the different configurations post 2024 each produce a unique outcome, but we expect in any scenario, that will only add modestly to the deficit. 

Michael Zezas: And digging into specific sectors. What policies are you watching and which sectors should investors keep an eye out for in the event these policies pass? 

Ariana Salvatore: Following the election, we think Congress will turn to legislative items like AI regulation, energy permitting, trade and tax policy. Obviously, each unique election outcome will facilitate its own level and type of policy transformation. But we think you could possibly see the biggest divergence from the status quo in a Republican sweep. In particular, in that case, we'd expect lawmakers to launch an effort to roll back, at least partially, the Inflation Reduction Act or the IRA, though we ultimately don't think a full scale repeal will be likely. We also expect to see something on AI regulation based on what's currently in party consensus, easing energy permitting requirements and probably extending the bulk of the expiring Tax Cuts and Jobs Act. That means sectors to watch out for would be clean tech, AI exposed stocks and sectors most sensitive to tax changes like tech and health care. Mike, as we mentioned, with this focus on legislation that impacts certain sectors, we don't expect this to be a macro election. So is there anything that would shift the balance toward greater macro concerns? 

Michael Zezas: Well, if it looks like a recession is getting more likely as the election gets close, it's going to be natural for investors to start thinking about whether or not the election outcome might catalyze a fiscal response to economic weakness. And in that situation, you'd expect that outcomes where one party doesn't control both Congress and the White House would lead to smaller and somewhat delayed responses. Whereas an outcome where one party controls both the White House and Congress, you would probably get a bigger fiscal response that comes faster. Those are two outcomes that would mean very different things to the interest rates market, for example, which would have to reflect differences in new bond supply to finance any fiscal response, and of course, the resulting difference in the growth trajectory. 

Ariana Salvatore: All right so, keeping with the macro theme for a moment. How do our expectations for geopolitics and foreign policy play into our assessment of the election outcomes? 

Michael Zezas: Yeah, this is a difficult one to answer, mostly because it's unclear how different election outcomes would net impact different geopolitical situations. So, for example, investors often ask us about what outcomes would matter for a place like Mexico, where they're concerned that some election outcomes might create economic challenges for Mexico around the US-Mexico border. However, those outcomes could also improve the prospects for near shoring, which improves foreign direct investment into Mexico. It's really unclear whether those cross-currents would be a net positive or a net negative. So we don't really think there's much specific to guide investors on, at least at the moment. Finally, Arianna, to sum up, how is the team tracking the presidential race and which indicators are particularly key, the focus on? 

Ariana Salvatore: Well, recent history suggests that it will be a close race. For context, the 2022 midterms marked the fourth time in four years that less than 1% of votes effectively determined which side would control the House, the Senate or the White House. That means that elections are nearly impossible to predict. But we think there are certain indicators that can tell us which outcomes are becoming more or less likely with time. For example, we think inflation could influence voters. As a top voter issue and a topic that the GOP is better perceived as equipped to handle, persistent concerns around inflation could signal potential upside for Republicans. Inflation also tracks very closely with the president's approval rating. So on the other hand, if you see decelerating inflation in conjunction with overall improving economic data, that might indicate some tailwinds for Democrats across the board. We're going to be tracking other indicators as well, like the generic ballot, President Biden's approval rating and prediction markets, which could signal that different outcomes are becoming more or less likely with time. 

Michael Zezas: Ariana, thanks for taking the time to talk. 

Ariana Salvatore: Great speaking with you, Mike. 

Michael Zezas: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

2023-12-06
Link to episode

2024 Asia Economics Outlook: Still Divergent?

Asia?s economic recovery could continue to be out of step with the rest of the world. Hear which countries are positioned for growth and which might face challenges. 

----- Transcript -----

Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Along with my colleagues bringing you a variety of perspectives, today, I'll discuss 2024 Economics Outlook for Asia. It's Tuesday, December 5 at 9 a.m. in Hong Kong.

 

It used to be the case that business cycles across Asian economies were in sync. But after the Covid shock, global trade and global growth have moved out of sync. Growth in Asia has diverged at times from global growth momentum. 

Moreover, in this cycle, the inflation picture is very different across Asian economies. So in contrast to previous cycles, we have to be more focused on nominal GDP growth. Real GDP growth, which is nominal GDP growth, adjusted for inflation, has been divergent across Asian economies during this cycle. And we think Asia's recovery will remain asynchronous vis a vis the rest of the world. Looking at the three largest economies in the region, we are more constructive on the outlook for nominal GDP growth for India and Japan, while we think China's nominal GDP growth will be constrained. 

Why is this? First, we think China is facing a challenge in managing aggregate demand and inflationary pressures from deleveraging of local government and property companies balance sheets. Policymakers have embarked on coordinated monetary and fiscal easing, which would help to bring about a modest recovery in 2024. But the deleveraging challenges are intense, and so the path ahead will still be bumpy. Moreover, we believe that inflation will remain low, which means corporate pricing power will be weak, and that could present a challenge for corporate profitability. 

Second, we are seeing a momentous shift in Japan's nominal GDP growth trajectory. Japan has exited deflation decisively, supported mainly by its accommodative policy and with some help from global factors. Against this backdrop, nominal GDP growth reached a 30 year high in the second quarter of 2023. Improving inflation dynamics mean that we see that Bank of Japan exiting negative rates and removing yield curve control in early 2024. But we believe the BOJ will not tighten macro policies aggressively, which should ensure a robust nominal GDP growth of 3.8% in 2024. 

Finally, we believe that India remains the best opportunity within the region. Nominal GDP growth is expanding rapidly and we think a pickup in private capital investment cycle will sustain productivity growth. Policymakers have been implementing supply side reform and that has already boosted public CapEx. A virtuous cycle is already underway in India and nominal GDP growth will be expanding at double digit growth rates. 

To sum up, Asia's recovery remains asynchronous relative to the rest of the world, and idiosyncratic drivers still matter more during the cycle. We are constructive on the outlook for India and Japan, however, structural challenges will constrain China's growth path. 

Thanks for listening. If you enjoy the show, please leave us a review and Apple podcast and share Thoughts on the Market with a friend or a colleague today.

2023-12-05
Link to episode

Mike Wilson: Are Markets Following the Right Playbook?

U.S. equities markets appear to be betting on an outdated playbook that worked when inflation was benign. But analysis of earnings and macro data suggests an updated playbook may be necessary. What investors should watch now.

----- Transcript -----

Welcome to thoughts of the market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 4th at 11 a.m. in New York. So let's get after it. 

After a very challenging three month stretch for stocks ending in October, the S&P 500 recouped all its losses in November, while the small cap and S&P 500 equal weight indices only regained about half. This left the performance gap between the average stock and the market cap weighted index near its widest level of the year as equity market performance remains historically narrow. In other words, the market accurately reflects today's challenging operating environment for most companies. In many ways, it's a reflection of how most consumers are suffering amid high absolute prices in most spending categories.

 

On Friday, the equity markets took on a different complexion, with small caps and lower quality stocks outperforming significantly. This occurred as rates continued to fall sharply, despite Jay Powell's comments that it was premature for markets to price in rate cuts early next year. With 130 basis points of cuts now priced into the Fed's fund futures market through the year end of 2024, investors have set a high bar for cuts to be delivered. Our analysis on equity returns post prior peaks in the Fed funds rate shows a strong disparity in performance between cycles where inflation was historically elevated versus those where inflation was relatively benign. 

The equity market appears to be betting on the playbook from the last four cycles when inflation was benign, suggesting we are early to mid-cycle for this particular economic expansion. However, our analysis of the earnings and macro data continue to suggest we are late cycle, which argues for continued outperformance of our defensive growth and late cycle cyclicals barbell strategy. 

The primary argument supporting our position relates to the labor market, which appears to be short on supply at a price companies can afford. This is why labor demand continues to soften and why consumer spending is slowing. Having said that, we can stay in the late cycle regime for long periods of time with 2023 representing one of those classic late cycle periods. This is why large-cap quality is outperform and why Friday's rally in small caps and lower quality stocks is unlikely to be sustained. 

Recently, we have received an increasing amount of client questions on the relative performance of industry groups and factors around the Fed's first interest rate cut of the cycle. Value stocks tend to outperform growth into the cut and underperform post the cut. Quality tends to outperform meaningfully into the cut and then sees more volatile performance after. Interestingly, defenses tend to outperform cyclicals and small caps fairly persistently, both before and after the initial cut. This helps to support the notion at the beginning of the Fed cutting cycle is not typically the catalyst for a meaningful broadening out of leadership. 

Another topic of interest from investors more recently has been industry group performance around presidential elections. On an equal weighted basis, performance shows a modest bias towards value, quality and defensive large caps. Post-election, we do tend to see a broadening out in leadership with small caps and cyclicals generally showing better performance. Value maintains its outperformance. Financials tend to show strong relative performance both before and after elections. And interestingly, health care's relative performance tends to hold up until three months prior to the election. Within the health care sector, equipment and services tends to outperform pharma and biotech post the election. 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple podcast app. It helps more people to find the show.

2023-12-04
Link to episode

Andrew Sheets: November?s Early Holiday Gift to Investors

The market rally of the last few weeks is based on strong economic data, suggesting that the U.S. and Europe remain on track for a ?soft landing.? 

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, December 1st at 2 p.m. in London.

 

November 2023 is now in the history books. It was outstanding. US bonds rose 4.5%, the best month since 1985. Global stocks rose 9%, the best month in three years. Spreads on an investment grade and high yield bonds tightened significantly. With the exception of commodities and Chinese stocks, which both struggled, November was an early holiday gift to investors of many stripes. 

While the size of the rally in November was unusual, the direction didn't just spring from thin air. Generally speaking, economic data in November strongly endorsed the idea of a soft landing. Soft landing, where inflation falls without a sharp drop in economic activity are historically rare. But they are Morgan Stanley's economic forecast for the year ahead. And in November, investors unwrapped data suggesting the story remains on track. 

In the US, core consumer price inflation declined more than expected. Core PCE inflation, a slightly different measure that the Federal Reserve prefers, has fallen down to an annualized pace of just 2.5% over the last six months. Gas prices are down 16% since the summer, rental inflation has stalled and the U.S. auto production is normalizing, improving the trend in three big drivers of the higher inflation we've seen over the last two years. 

Go back 12 months and most forecasts, including our own, assume that lower inflation would be the result of higher interest rates driving a slowdown in growth. But the economy has been good. Over the last 12 months, the U.S. economy has grown 3%, .5% better than the average since 1990. 

The story in Europe is a little different from the one in America, but it still rhymes. In Europe, recent inflation data has also come in lower than expected. While economic data has been somewhat weaker. Still, we see signs that the worst of Europe's economic growth will be confined to 2023 and continue to forecast the weakest growth right now, with somewhat better European growth in 2024. 

Why does this matter? While the returns of November were unusual and unlikely to repeat, it's a good reminder not to overcomplicate things. Good data, by which we mean lower inflation and reasonable growth, is a good outcome that markets will reward, and remains the Morgan Stanley economic base case. Deviating on either variable is a risk, especially for an asset class like credit. Following the data and keeping an open mind, remains important.

 

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you.

2023-12-01
Link to episode

Pamela Kaufman: Anti-Obesity Meds Could Bite Into Food Sales

The growing popularity of medicines that curb appetite is having an impact on consumption of less-healthy foods. Here?s what that could mean for packaged snacks, soda, alcohol and fast food.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Pamela Kaufman, Morgan Stanley's Tobacco and Packaged Food Analyst. Today I'll be talking about how obesity medicines are impacting food spending. It's Thursday, November 30th at 10 a.m. in New York. 

With Thanksgiving behind us, we've now entered the holiday season when many of us are focused on shopping, travel and, of course, food. 

The last 12 to 18 months have seen overwhelming growth in popularity for a glucagon-like peptide 1 or GLP-1 anti-obesity medications. These medications were first approved for the treatment of type two diabetes more than 15 years ago and for the treatment of obesity more than 8 years ago. But the inflection point came only recently when the formulation and delivery of GLP-1 drugs improved from once daily injections to once weekly injections, and even an oral formulation. There were also some key FDA approvals that opened the doors for widespread use. 

How effective are these new and improved GLP-1 drugs? Essentially, they target areas of the brain that regulate appetite and food consumption so that patients feel full longer, have a reduced appetite and consume less food. Studies show that patients taking the injectable GLP-1 medicines can lose approximately 10 to 20% of their body weight. 

One of the key debates in the market right now is how the growing use of GLP-1 drugs will affect various industries within the larger food ecosystem. The fact that patients on anti-obesity drugs experience a significant reduction in appetite impacts their food habits and consumption. 

The "Food Meets Pharma" debate is one we've been tracking closely, and our most recent work indicates that shoppers with obesity spend about 1% more on groceries compared to shoppers without obesity. But we see a larger difference across less healthy categories. Over the last year, obese shoppers spent more on candy, frozen meals and beverages, but less on produce, fish and beans and grains. In addition, shoppers with obesity spend more at large fast food chains. 

Our own survey data and various medical studies point to a drastic 60 to 70% reduction in consumption of less healthy categories in patients taking GLP-1 drugs, driven by the significant changes observed in their food consumption and preferences. 

As drug use grows, we can see an increasing impact across various food and beverage related industries in the U.S. For example, among our beverages coverage, U.S. shoppers with obesity spend more on carbonated soft drinks and salty snacks. Shoppers with obesity also spend more on fast food and on a relative basis, less at fast casual restaurants and casual diners. But obesity medicines are starting to change these habits. Furthermore, 62% of GLP-1 patients report consuming less alcohol since starting on the medications, with 56% of those consuming less reporting at least a 75% reduction in alcohol consumption. 

So what's our outlook for drug adoption? Morgan Stanley research estimates that the global obesity prescription market will reach $77 billion in the next decade, with $51 billion in the U.S. By 2035, my colleagues expect 7% of the U.S. population will be on anti-obesity medication. Given these projections, the "Food Meets Pharma" debate will remain relevant and something investors should watch closely. 

Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-11-30
Link to episode

Ravi Shanker: A New Golden Age of Travel Ahead?

With a strong holiday season expected, and a rise in U.S. passport issuance, there?s good reason to believe the travel industry will see durable growth in the year ahead.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's Freight Transportation and Airlines Analyst. Along with my colleagues bringing you a variety of perspectives, today I'll discuss our view on airline travel in 2024. It's Wednesday, November 29th at 10 a.m. in New York. 

Travel plans are in most people's minds over the holiday season, and many of us just experienced firsthand the hectic Thanksgiving holiday weekend. On the Sunday after Thanksgiving, the US Transportation Security Administration, or TSA, screened more than 2.9 million passengers, which was the most ever for a single day. Overall, the TSA's reported number of travelers last week was up 4.2% versus 2019 and has been tracking up nearly 6% versus 2019 for the month of November. This is impressive given that November is typically a slower leisure travel month. 

Furthermore, despite record travel over the last several weeks, airlines achieved record low cancellations over the Thanksgiving weekend as well. This all bodes well for the upcoming holidays. We continue to expect a strong holiday season ahead, as demand for air travel is showing no signs of slowing. And despite concerns around choppy macro conditions, we continue to see no signs of a cliff in demand. Meanwhile, our survey work indicates that holiday travel intentions remain robust among all consumers and not just high income households. 

At the same time, corporate travel budgets in 2024 are trending in line with expectations, and business travel is likely to mirror domestic leisure travel just on a delayed basis. Smaller enterprises continue to lead the way for corporate travel demand. Among companies with less than $1 billion in revenue, 41% are already back to pre 2020 travel volumes. Right now, the primary barriers to corporate travel appear to be cost concerns as well as the economic and market outlook. This suggests that constraints on corporate travel may be cyclical rather than structural. 

One final observation which relates to both international business and leisure travel is that US passport issuance is also up. According to US government data, as of early November, 2023 had already seen the issuance of over 24 million passports. That's 9% higher compared to 2022. This is a new record which demonstrates that people want to travel now more than ever, particularly internationally. Over the past 25 years, the number of US passports issued per year has noticeably increased after major economic events such as the dot-com bubble in the early 2000s, the global financial crisis in 2008-2009, with the latest being post-Covid in 2022. We continue to believe that this is not a one and done travel spike, but a durable growth trend. All told, it looks like we may be entering a new golden age of travel in the 2020s. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and shared Thoughts on the Market with a friend or colleague today.

2023-11-29
Link to episode

How Education Companies Can Benefit from AI

Investors in the education sector have focused on threats from generative AI, but may be missing the potential for greater efficiency and new opportunities in workforce reskilling.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Brenda Duverce from the Morgan Stanley Sustainability Research Team. Along with my colleagues bringing you a variety of perspectives. Today I'll discuss the potential impact of generative AI on the global education market. It's Tuesday, November 28th at 10 a.m. in New York. 

When ChatGPT was first introduced, it disrupted the education system with the threat of plagiarism and misinformation, and some school systems have banned it. Some companies in the educational technology space were initially affected by this, but have since recovered as the risks have become clearer. Still, investors appear to be overly focused on the risks GenAI poses to education companies, missing the potential upside GenAI can unlock. 

From a sustainability perspective, we view GenAI as an opportunity to drive improvements to society in general, with education being one core use case. We would highlight two areas where GenAI will be key. One, in improving the overall education experience and two, in helping to reskill or upskill an evolving workforce. 

Starting with the quality of the education experience, GenAI has the potential to transform learning and teaching, from automating tasks with chatbots to creating adaptive learning solutions. Applications such as auto grading, large language model based tutors and retention management can drive efficiencies and increase productivity. 

We see efficiencies driving $200 billion of value creation and education over the next three years. In the fragmented education market, we expect lower costs to flow through to prices as companies pass along cost savings to maximize volumes. 

 

The second key area that we highlight from a sustainability angle is the reskilling and upskilling of the workforce. We think the market may be under appreciating the role education companies can have in this respect. Many fear that GenAI would lead to substantial job losses in various areas of the economy, and the market sometimes assumes that job loss leads to permanent displacement of workers long term. But we argue this isn't necessarily true. Workers typically re-enter the labor force with an updated skill set. 

Take, for instance, the introduction of ATMs and the concerns that ATMs would replace bank tellers and lead to significant job loss. This didn't prove to be the case. Over time, there were fewer tellers per bank branch, but the overall number of tellers continued to rise. Furthermore, the bank teller role evolved as customers sought a better experience and bank tellers responded by reskilling. Another example of this type of disruption was the introduction of the spreadsheet in the accounting industry. Many argued that spreadsheets would replace accounting jobs. However, data from the Bureau of Labor Statistics indicates the opposite, the number of accountants and financial managers rose significantly. 

When it comes to reskilling or upskilling workers impacted by GenAI, we think this could cost somewhere around $16 billion within the next three years. 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

2023-11-28
Link to episode

Vishy Tirupattur: Debating the Outlook

Morgan Stanley published its 2024 macroeconomic and investment outlooks last week after spirited debates among our economists and strategists. Three topics animated much of this year?s discussion: lingering concerns about recession; China; and the challenging real estate market in the U.S.

----- Transcript -----

Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about some of the key debates we engaged in during our year ahead outlook process. It's Monday, November 27th at 10 a.m. in New York. 

We published our Year Ahead Global Economics and Strategy Outlook last Sunday and more detailed asset class and country specific outlooks have been streaming out since. At Morgan Stanley Research the outlooks are the culmination of a process involving much deliberation and spirited debate among economists and strategists across all regions and asset classes we cover. While we strive for cohesion and consistency in our outlook across economies and markets, we are convinced that in a highly interconnected world, facing numerous uncertainties, challenging each other's views makes the final product much stronger. In that spirit, here are some of the key debates we engaged in along the way. 

Slowdown but not recession? In their baseline scenario, our economists expect a significant slowdown in developed market economies while inflation is tamed and outright recession is avoided. Unsurprisingly, the prospect of a substantial slowdown that does not devolve into a recession was debated at length. Our economists maintain that while recessions remain a risk everywhere, they expect any recession, such as the one in the United Kingdom, to be shallow. Since inflation is falling with full employment, real incomes should hold up, leaving consumption resilient despite more volatile investment spending. 

Our economists call for policy easing to start across several DM economies in the middle of 2024 was also much discussed. For the U.S., our economists call for 100 basis points of rate cuts starting around the second half of the year and the cuts begin even before inflation target has been achieved and without a spike in the unemployment rate. The motivation here is not that the Fed will cut to stimulate the economy, but the cuts are a move towards a more normalized monetary policy. As the economy begins to slow and net new jobs created fall below replacement levels, we think that the Fed sees the need to normalize policy instead of maintaining policy at very restrictive levels. 

The China question. Relative to the expectations in our mid-year outlook, China growth surprised to the downside. We clearly overestimated the ability and willingness of China policymakers to restore vigor to the economy. Thus, as we debated China, we spent time on the policy measures needed to offset the drag from the looming 3D trap of debt, deflation and demographics. We look for subpar improvement in both growth and inflation in 2024, with real GDP growth reaching a below consensus 4.2%. More central government led stimulus will only cushion the economy against continued deleveraging in the housing sector and local government financial vehicles.

Real estate challenges. U.S. residential and commercial real estate markets diverged dramatically over the course of 2023, and their trajectory in the year ahead was an important debate. The dramatic affordability challenges posed by higher mortgage rates caused a significant pullback in existing home sales, renewing decreases in inventory that provided near-term support for home prices. On the other hand, the combination of challenges for key lenders such as regional banks and secular challenges to select property types such as offers coupled with an imminent and persistent wall of maturities that need to be refinanced, drove commercial real estate prices and sales meaningfully lower. Looking ahead, as rates come down, we expect affordability to improve and for sale inventory of homes to increase. U.S. home prices should see modest declines, about 3% as the growth in inventory offsets the increased demand, with fundamental stressors still largely unresolved, we expect the outlook for commercial real estate to remain challenging. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-11-27
Link to episode

Special Encore: Matt Cost: How AI Could Disrupt Gaming

Original Release on November, 7th 2023: AI could help video game companies boost engagement and consumer spending, but could also introduce competition by making it easier for new companies to enter the industry.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Matt Cost from the Morgan Stanley US Internet Team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss how A.I could change the video game industry. It's Tuesday, November 7th at 10 a.m. in New York. 

New A.I tools are starting to transform multiple industries, and it's hardly a surprise that the game industry could see a major impact as well. As manual tasks become more automated and the user experience becomes increasingly personalized, A.I. tools are starting to change the way that games are made and operated. Building video games involves many different disciplines, including software development, art and writing, among others. Many of these processes could become more automated over time, reducing the cost and complexity of making games and likely reducing barriers to entry. And since we expect the industry to spend over $100 billion this year building and operating games, there's a significant profit opportunity for the industry to become more efficient. 

Automated content creation could also offer more tailored experiences and purchase options to consumers in real time, potentially boosting engagement and consumer spending. Consider, for example, a game that not only makes offers when a consumer is most likely to spend money, but also generates in-game items designed to appeal to that specific person's preferences in real time. 

Beyond A.I generated content, we also need to consider the impact of user generated content. Some popular titles already depend on the users to shape the game around them, and this is another core area that could be transformed by A.I.. Faster and easier to use content creation tools could make it easier for games to tap into the creativity of their users. And as we've seen with major social platforms, relying on users to create content can be a big opportunity. 

With all that said, these transformational opportunities create downside risk as well. Today's large game publishers rely on their scale and domain expertise to differentiate their products from competitors. But while new A.I. tools could make game development more efficient, they could also lower barriers to entry for new competitors to jump into the fray and put pressure on the incumbents. 

Another risk is that A.I. tools could fail to drive the hope for efficiencies and cost savings in the first place. Not all technology breakthroughs in the past have helped the industry become more profitable. In some cases, industry leaders have decided to reinvest cost savings back into their products to make sure that they deliver bigger and better games to stay ahead of the competition. With that in mind, the biggest challenge for today's industry leaders could be making sure that they find ways to differentiate their products as A.I. tools make it easier for new firms to compete. 

Where does all of that leave us? Although a number of A.I. tools are already being used in the game industry today, adoption is just beginning to tick up and there's a lot of room for the tools to improve. With that in mind, we think we're just on the cusp of this A.I. driven revolution, and we may have to get through a few more castles to find the princess. 

Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

2023-11-24
Link to episode

Special Encore: US Economy: What Generative AI Means for the Labor Market

Original Release on November, 2nd 2023: Generative AI could transform the nature of work and boost productivity, but companies and governments will need to invest in reskilling.

----- Transcript -----

Stephen Byrd: Welcome to Thoughts in the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. 

Seth Carpenter: And I'm Seth Carpenter, the Global Chief Economist. 

Stephen Byrd: And on the special episode of the podcast, we'll discuss how generative A.I. could reshape the US economy and the labor market. It's Thursday, November 2nd at 10 a.m. in New York. 

Stephen Byrd: If we think back to the early 90's, few could have predicted just how revolutionary the Internet would become. Creating entirely new professions and industries with a wide ranging impact on labor and global economies. And yet with generative A.I. here we are again on the cusp of a revolution. So, Seth, as our global chief economist, you've been assessing the overarching macro implications of the Gen A.I. phenomenon. And while it's still early days, I know you've been thinking about the range of impacts Gen A.I could have on the global economy. I wondered if you could walk us through the broad parameters of your thinking around macro impacts and maybe starting with the productivity and the labor market side of things? 

Seth Carpenter: Absolutely, Stephen. And I agree with you, the possibilities here are immense. The hardest part of all of this is trying to gauge just how big the effects might be, when they might happen and how soon anyone is going to be able to pick up on the true changes and things. But let's talk a little bit about those two components, productivity and the labor market. They are very closely connected to each other. So one of the key things about generative A.I is it could make lots of types of processes, lots of types of jobs, things that are very knowledge base intensive. You could do the same amount of work with fewer people or, and I think this is an important thing to keep in mind, you could do lots more work with the same number of people. And I think that distinction is really critical, lots of people and I'm sure you've heard this before, lots of people have a fear that generative A.I is going to come in and destroy lots of jobs and so we'll just have lots of people who are out of work. And I guess I'm at the margin a lot more optimistic than that. I really do think what we're going to end up seeing is more output with the same amount of workers, and indeed, as you alluded to before, more types of jobs than we've seen before. That doesn't exactly answer your question so let's jump into those broad parameters. If productivity goes up, what that means is we should see faster growth in the economy than we're used to seeing and I think that means things like GDP should be growing faster and that should have implications for equities. In addition, because more can get done with the same inputs, we should see some of the inflationary pressures that we're seeing now dissipate even more quickly. And what does that mean? Well, that means that at least in the short run, the central bank, the Fed in the U.S., can allow the economy to run a little bit hotter than you would have thought otherwise, because the inflationary pressures aren't there after all. Those are the two for me, the key things one, faster growth in the economy with the same amount of inputs and some lower inflationary pressures, which makes the central bank's job a little bit easier. 

Stephen Byrd: And Seth, as you think about specific sectors and regions of the global economy that might be most impacted by the adoption of Gen A.I., does anything stand out to you? 

Seth Carpenter: I mean, I really do think if we're focusing just on generative A.I, it really comes down, I think a lot to what can generative A.I do better. It's a lot of these large language models, a lot of that sort of knowledge based side of things. So the services sector of the economy seems more ripe for turnover than, say, the plain old fashion manufacturing sector. Now, I don't want to push that too far because there are clearly going to be lots of ways that people in all sectors will learn how to apply these technology. But I think the first place we see adoption is in some of the knowledge based sectors. So some of the prime candidates people like to point to are things like the legal profession where review of documents can be done much more quickly and efficiently with Gen A.I. In our industry, Stephen in the financial services industry, I have spoken with clients who are working to find ways to consume lots more information on lots of different types of firms so that as they're assessing equity market investments, they have better information, faster information and can invest in a broader set of firms than they had before. I really look to the knowledge based sectors of the economy as the first target. You know, so that Stephen is mostly how I'm thinking about it, but one of the things I love about these conversations with you is that I get to start asking questions and so here it is right back at you. I said that I thought generative A.I is not going to leave large swaths of the population unemployed, but I've heard you say that generative A.I is really going to set the stage for an unprecedented demand in reskilling workers. What kind of private sector support from corporations and what sort of public sector support from governments do you expect to see? 

Stephen Byrd: Yeah Seth, I mean, that point about reskilling, I think, is one of the most important elements of the work that we've been doing together. This could be the biggest reskilling initiative that we'll ever see, given how broad generative A.I really is and how many different professions generative A.I could impact. Now, when we think about the job impacts, we do see potential benefits from private public partnerships. They would be really focused on reskilling and upskilling workers and respond to the changes to the very nature of work that's going to be driven by Gen A.I. And an example of some real promising efforts in that regard was the White House industry joint efforts in this regard to think about ways to reskill the workforce. That said, there really are multiple unknowns with respect to the pace and the depth of the employment impacts from A.I. So it's very challenging to really scope out the magnitude and cadence a nd that makes joint planning for reskilling and upskilling highly challenging. 

Seth Carpenter: I hear what you're saying, Stephen, and it is always hard looking into the future to try to suss out what's going on but when we think about the future of work, you talked about the possibility that Gen A.I could change the nature of work. Speculate here a little bit for me. What do you think? What could be those changes in terms of the actual nature of work? 

Stephen Byrd: Yeah, you know, that's what's really fascinating about Gen A.I and also potentially in terms of the nature of work and the need to be flexible. You know, I think job gains and losses will heavily depend on whether skills can be really transferred, whether new skills can be picked up. For those with skills that are easy to transfer to other tasks in occupations, you know, disruptions could be short lived. To this point the tech sector recently experienced heavy layoffs, but employees were quickly absorbed by the rest of the economy because of overall tight labor market, something you've written a lot about Seth. And in fact, the number of tech layoffs was around 170,000 in the first quarter of 2023. That's a 17 fold increase over the previous year. While most of these folks did find a new job within three months of being laid off, so we do see this potential for movements, reskilling, etc., to be significant. But it certainly depends a lot on the skill set and how transferable that skill set really is. 

Seth Carpenter: How do you start to hire people at the beginning of this sort of revolution? And so when you think about those changes in the labor market, do you think there are going to be changes in the way people hire folks? Once Gen A.I becomes more widespread. Do you think workers end up getting hired based on the skill set that they can demonstrate on some sort of credentials? Are we going to see somehow in either diplomas or other sorts of certificates, things that are labeled A.I? 

Stephen Byrd: You know, I think there is going to be a big shift away from credentials and more heavily towards skills, specific skill sets. Especially skills that involve creativity and also skills involving just complex human interactions, human negotiations as well. And it's going to be critical to prioritize skills over credentials going forward as, especially as we think about reskilling and retraining a number of workers, that's going to be such a broad effort. I think the future work will require hiring managers to prioritize these skills, especially these soft skills that I think are going to be more difficult for A.I models to replace. We highlight a number of skills that really will be more challenging to automate versus those that are less challenging. And I think that essentially is a guidepost to think about where reskilling should really be focused. 

Seth Carpenter: Well, Stephen, I have to say I'd be able to talk with you about these sorts of things all day long, but I think we've run out of time. So let me just say, thank you for taking some time to talk to me today. 

Stephen Byrd: It was great speaking with you, Seth.

Seth Carpenter: And thanks to the listeners for listening. If you enjoyed Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

2023-11-22
Link to episode

U.S. Consumer: Mixed Holiday Spending Expectations

Third-quarter consumer spending was strong, but a growing gap between middle- and higher-income consumers may affect the holiday shopping season.

----- Transcript -----

Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S Equity Strategy Team. 

Sarah Wolfe: And I'm Sarah Wolfe and the U.S Economics Team. 

Michelle Weaver: On this special episode of the podcast, we wanted to give you an update on the U.S. consumer and a preview of our holiday spending expectations this year. It's Tuesday, November 21st at 10 a.m. in New York. 

Michelle Weaver: Sarah, recent data releases and your modeling suggests that U.S. consumer spending will begin to slow more meaningfully in 2024 and 2025. And you've argued that the slowdown in consumption is driven by a cooling labor market which weighs on real disposable income and elevated rates, putting further pressure on debt service costs. Given all this, would you say that the U.S. consumer is still healthy as we approach the holiday season and the end of the year? 

Sarah Wolfe: You're exactly right. Consumer spending in the third quarter was very strong, and we know that there's going to be some more of that underlying momentum pulled into the fourth quarter, which includes holiday shopping season. Just last week, we got the October retail sales report, which did show a notable deceleration in consumer spending from the third quarter into the fourth quarter, but still positive retail sales. There are a few reasons, however, that, you know, we take pause at saying that the holiday shopping season is going to be very strong. The first is that there is this growing discrepancy between the health of a struggling lower middle income household versus the solid higher income household. The second is the expiration of the student loan forbearance. We know that about half of borrowers have started making payments as of October. And the third is the wallet shift away from goods and toward services that will impact the type of holiday spending. I would like to hone in on this discrepancy between the health of the lower middle income household and higher income households. We've highlighted that lower middle income households have been pulling back more in discretionary and they've been trading down as they're disproportionately being hit by tighter lending standards, higher inflation, higher debt service costs. And that's likely going to reflect the type of holiday spending that we see this year. In particular, higher income households have just more buying power, they're more willing to spend on experiences. And so we could just see that holiday shopping that's more skewed towards higher income spenders and that's more experience oriented will be the winners of this holiday shopping season. 

Michelle Weaver: What specific trends have you seen in U.S. consumer spending in the third quarter? And what do you expect for the final quarter of this year? 

Sarah Wolfe: Consumer spending in the third quarter was really strong because the labor market largely was very resilient, and as a result, we saw that there was just more momentum for goods and services spending, so both reaccelerated into the third quarter. However, what we could see is that there still is this clear preference shift on experiences over goods in particular accommodations, travel, etc. And so I think that's going to feed through into the type of holiday shopping that we see this year. 

Michelle Weaver: And I know that during Covid, consumers were able to save a lot more money than usual. How are these excess savings balances looking now and what do you expect going forward? 

Sarah Wolfe: We estimate that about 40% of the excess savings stockpile has been spent down, so there's still a pretty hefty 60% of excess savings sitting among households. However, we do not expect much more drawdown in excess savings across 2024. The reason is that our work shows that the excess savings stockpile is increasingly being held by the highest income households. They, first of all, have a lower propensity to consume out of savings, but more importantly, they had been willing to spend down their excess savings over the past two years. But that was to fuel their pent up demand for the services, economy recovery. And now that we've seen a full recovery on that side of the economy, there's really just less desire, less willingness to spend out of excess savings. Further, we're seeing that there's been an increasing movement from liquid to less liquid assets. So more and more of that savings is not just sitting in cash under the bed and so it's less likely to make its way into consumer spending. Michelle, based on your recent survey work in collaboration with U.S. Equity Analyst, what are you seeing in terms of holiday spending intentions for U.S. consumers this year compared to last year? 

Michelle Weaver: So the majority of holiday shoppers are planning to keep their holiday budgets roughly the same this year. And this means that retailers will be competing for a similarly sized budget pool versus last year and have to offer competitive prices to get shoppers to choose their products. As consumers seek out deals and discounts, they're also likely to stagger their purchases throughout the holiday season. 

Sarah Wolfe: Can we dig a little bit more into what people plan to spend their money on for the holiday season? I talked about how we're seeing this clear preference away from goods and towards services in the economic data. Is that where you're hearing in the survey data about holiday spending intentions? 

Michelle Weaver: Definitely, the services over goods shift that's been playing out since the end of the pandemic is likely to remain relevant this holiday shopping season. Our analysts are expecting weaker results in goods oriented industries like clothing and apparel, toys and electronics, while airlines remain the one bright spot, with consumers continuing to prioritize holiday travel. The biggest spending declines are expected to come in luxury goods, sports equipment, home and kitchen products and electronics. 

Sarah Wolfe: And let's talk about e-commerce. I just feel like the promotions for online sales have just gotten earlier and earlier every year. How big is e-commerce going to be for this holiday shopping season? 

Michelle Weaver: Overall, the share of expected holiday spending is evenly split between in-store and online platforms. Lower income consumers expect to shop slightly more in store, though, while upper income consumers have a higher share allocated to online shopping. For e-commerce more broadly, the industry has decelerated since the summer, setting up for a slower holiday. Sarah, you've been following the disinflationary cycle that's been underway, mainly driven by core goods deflation and disinflation in housing Consumer Price Index. October's CPI came in below expectations. Is this a relief for the consumer wallet and where do you expect inflation to trend from here? 

Sarah Wolfe: This is definitely a relief for consumers. We're seeing that as inflation continues to step down with a tight labor market, real wages are rising and this is really a silver lining for households for next year. In particular, if you look at real wages, they were -3% year-over-year across 2022. I mean, deeply negative, really stripping away consumer buying power. And then if you look at today, because of all the progress we've got in inflation without a hit to the labor market, real wages are now up.  And we're expecting that real wages will continue to rise into 2024 as inflationary pressures abate and the labor market remains resilient. 

Michelle Weaver: Sarah, thanks for taking the time to talk. 

Sarah Wolfe: It was great speaking with you, Michelle. 

Michelle Weaver: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today. 

2023-11-21
Link to episode

Ed Stanley: The Cutting Edge of AI

The next phase in artificial intelligence could be ?edge AI,? which lowers costs and improves security by embedding AI capabilities directly in smartphones and other devices.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. And along with my colleagues, bringing you a variety of perspectives, today I'll discuss Edge A.I. It's Monday, the 20th of November at 2 p.m. in London.

 

The last year has seen a surge in adoption of artificial intelligence, particularly for foundational model builders and consumer-facing chatbots. But we think the next big wave of A.I will be embedded in consumer devices, this is smartphones, notebooks, wearables, drones and autos, amongst others. Enter Edge A.I. This means running A.I algorithms locally rather than in centralized cloud computing facilities in order to power the killer apps of the A.I age. 

Generative A.I., cloud computing, GPUs and hyperscalers, that is, the large cloud service providers that run computing and storage for enterprises. They all remain central to the secular machine learning trend. However, as A.I continues to permeate through all aspects of consumer life and enterprise productivity, it will push workloads to hardware devices at the edge of networks. 

The US data firm Gartner estimates that by 2025, half of enterprise data will be created at the Edge, across billions of battery powered devices. The key benefits of A.I computation performed at the Edge are lower cost, lower latency personalization and importantly, higher security or privacy relative to centralized cloud computing. 

And the prize in moving these workloads to the Edge is large, we're talking some 30 billion devices by the end of the decade, but the hurdles are also significant. We think 2024 will be a catalyst year for this theme. And the companies that could benefit range from household name hardware vendors to key components suppliers around the world. 

But just as there are benefits to Edge A.I, there are constraints as well. Not all Edge devices are created equal, for example. The clearest limitations across hardware media are battery life and power consumption, processing capabilities and memory, as well as form factor, i.e. how they look. For example, mass market smartphones and notebooks today don't have the battery life or processing capability to run inferencing of the largest large language models. This will have to change over time, which will require investment predominantly in advanced proprietary silicon or custom ASICs as they're known, of which we've seen a number of announcements from big tech companies in recent weeks. The hardware arms race is really heating up in our view. 

It's important to note, though, that generative A.I. and Edge A.I are not mutually exclusive. In fact, Generative A.I. has reinforced the already growing need for edge A.I. Our consumer and investor trend analysis suggests that the theme is already moving into its upswing phase. Moreover, a slate of new product releases as soon as Q1 2024, such as Edge A.I enabled smartphones with embedded custom silicon, should drive further investor interest in this theme over the coming 12 months. And we think smartphones stand the best chance of breaking the bottleneck soonest and they also have the largest total addressable market potential in the short and medium term. This is an uncrowded theme which we think is in pole position for 2024. 

Thanks for listening. If you enjoy the show, please leave a review on Apple Podcasts and shared Thoughts on the Market with a friend or a colleague today.

2023-11-20
Link to episode

Ellen Zentner: 2024 U.S. Economic Outlook

Our Chief U.S. Economist previews the key economic themes of 2024, including potential rate cuts, housing affordability, job growth and more. 

----- Transcript -----

Welcome to Thoughts on the market. I'm Ellen Zentner. Morgan Stanley's Chief U.S. Economist. Along with my colleagues, bringing you a variety of perspectives, today, I'll discuss our 2024 outlook for the U.S. economy. It's Friday, November 17th at 10 a.m. in New York. 

You may remember that back in March 2022, we called for a soft landing for the U.S. economy. And we still maintain this view, even though strains in the economy are becoming more noticeable and recession fears remain alive. And that's because the Fed's monetary policy is weighing increasingly on growth and especially next year. High rates for longer are causing a persistent drag, bringing growth sustainably below potential over our forecast horizon. We forecast that U.S. GDP growth slows from an estimated 2.5% this year on a Q4 over Q4 basis to 1.6% in 2024 and 1.4% in 2025. 

We also expect U.S. consumer spending to begin to slow more meaningfully in 2024 and 2025, driven by a cooling labor market which weighs on real disposable income and elevated rates, putting further pressure on debt service costs. 

But there are some positive indicators for the year ahead as well. We think that business investment and equipment will finally turn positive by the second half of next year following two years of decline, while the surge in nonresidential construction should move to a lower but more sustainable pace. Bank lending conditions have tightened sharply for the past year, but in public credit markets, many businesses refinanced while rates were still low. 

Turning to the housing market, we expect home sales to be weak in the first half of next year, but activity should pick up in the second half and further into 2025. And that's primarily because affordability will improve. We also think homebuilding activity will be stronger in the second half of next year. Home prices should see modest declines as growth in inventory offsets the increase in demand. By 2025 with lower rates existing home sales should rise more convincingly. 

We see job growth slowing throughout the forecast horizon, although we expect the unemployment rate to remain low because companies will still be focused on retaining headcount. And the labor force participation rate should continue to recover, with real wage growth increasing in 2024 and 2025. 

Now, inflation, which was at record highs last year, has been decelerating, mainly driven by core goods deflation and disinflation in housing. We expect negative monthly data releases for core goods inflation through the forecast horizon. 

So we continue to think that the Fed is done to here, that back in July of this year, the funds rate peaked at 5.375% for this cycle, and we think they're on hold now until June 2024, when we expect the Fed to take its first cautious step with a 25 basis point cut, followed by a 25 basis point cut one quarter later in September. In the fourth quarter of 2024, the Fed will likely begin cutting 25 basis points every meeting, eventually bringing the real rate to .4% by the fourth quarter of 2025, when core inflation, GDP growth and unemployment are near neutral. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

2023-11-18
Link to episode

Serena Tang: The Return of the 60/40 Portfolio

After poor performance in 2022, a traditional 60/40 equity/bond portfolio could see an annual return around 8% over the next decade.

----- Transcript -----

Welcome to your Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset Strategist. Along with my colleagues, bringing you a variety of perspectives, today, I'll discuss our long run expectations for what markets will return in 2024. It's Thursday, November 16th at 10 a.m. in New York. 

2023 has seen a relentless rise in government bond yields. This has hit total multi-asset returns this year, while also lifting nominal expected returns over the long run for fixed income and stocks above historical averages. U.S. equities are expected to return about 9.6% per year for the next decade, little change from the level last year. While ten year U.S. Treasuries are projected to be at 5.8%, up quite significantly from 4.7% in 2022. But the steeper climb in nominal long run expected returns for government bonds is also eroded risk premiums, that is the investment returns assets are expected to yield over and above risk free assets. For example, the equity risk premium for U.S. stocks sits at around 3.8%, down from 4.9% just a year ago. 

Given soaring yields over the last three months, it's understandable why some investors may be skeptical of fixed income. Except today's higher yields are a strong reason to buy bonds because they can better cushion fixed income returns. 

In fact, looking across assets, fixed income stands as being particularly cheap to equities relative to history. European and Japanese equities screen cheap to most other assets on an FX-hedged basis, and Euro-denominated assets look cheap to dollar denominated assets. Furthermore, our estimated optimal allocation to agency mortgage backed securities has increased at the expense of investment grade credit over the past year, reflecting how cheap mortgages are relative to other markets. 

Against this backdrop, a traditional 60/40 portfolio which allocates 60% to stocks and 40% to bonds and carries a moderate level of risk, looks viable once again despite its poor performance in 2022, when both stocks and bonds suffered greatly amid record inflation and aggressive interest rate hikes. From where we sit now, the high long run expected returns across most assets mean that a traditional 60/40 equity bond dollar portfolio would see about 8% per year over the next decade. The last time it was this high was in 2013 and surely a 60/40 equity bond euro portfolio could see 7.7% per year over the next 10 years, the most elevated since 2011.

While long-run expected returns have climbed higher, unfortunately for 60/40 strategies correlation has surged. We still think there's some diversification benefits/volatility reduction in a 60/40 portfolio from bonds? low risk rather than low correlation, but the rise in bond volatility has also challenged this fear.

 

The big question here is whether the high correlation between stocks and bonds will normalize. There's an argument that it won't, and perhaps surprisingly, it's all to do with A.I. Now, for the last three decades or so, the positive relationship between growth and inflation has been an important factor on negative correlation between stocks and bonds. Higher inflation erodes bond returns, and that's offset by higher stock returns from rising growth and vice versa. 

But in the case of A.I technology diffusions, we can see a boost to growth and reduction in inflation in the short run, which in turn challenges assumptions that stock and bond returns will have low to negative correlations in the future. In other words, bonds, as was the case this year, would no longer be the good diversifier they have been over the last three decades. 

Timing and sequencing will matter, and how A.I. may impact growth inflation correlations is only one of many factors that can move multi-asset correlation over time. 

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-11-16
Link to episode

Special: What Should I Do With My Money?

If you're a listener to Thoughts on the Market you may be interested in another of our podcasts: What Should I Do With My Money? 

----------------------------------------------------------------------------------------------------------------------------

This material has been prepared for informational purposes only. It does not provide individually

tailored investment advice. It has been prepared without regard to the individual financial

circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC

(?Morgan Stanley?) recommends that investors independently evaluate particular investments

and strategies, and encourages investors to seek the advice of a Financial Advisor. The

appropriateness of a particular investment or strategy will depend on an investor?s individual

circumstances and objectives.

----------------------------------------------------------------------------------------------------------------------------

The team here at Thoughts on the Market is so excited for our friends at Morgan Stanley Wealth Management and their What Should I Do With My Money? podcast, which was recently chosen by listeners as their favorite money and investment podcast in the 2023 Signal Awards.

Whether you're a seasoned investor or just venturing into the investment world for the first time, there's never been a better time to tune in as the team at What Should I Do With My Money? gears up for a new season. In each episode, we listen in on a conversation between a guest with money questions and a financial advisor from the team at Morgan Stanley. In this excerpt, Willow and Sarah talk about buying a property versus renting.

For more information visit morganstanley.com/mymoney.  

2023-11-15
Link to episode

Macro Economy: The 2024 Outlook Part 2

Our roundtable discussion on the future of the global economy and markets continues, as our analysts preview what is ahead for government bonds, currencies, housing and more. 

----- Transcript -----

Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what is ahead for the global economy and markets in 2024. It's Tuesday, November 14th at 10 a.m. in New York. 

Yesterday you heard from Seth Carpenter, our Global Chief Economist, and Mike Wilson, our Chief Investment Officer and the Chief U.S. Equity Strategist. Today, we will cover what is ahead for government bonds, corporate credit, currencies and housing. I am joined by Matt Hornbach, our Chief Macro Strategist, James Lord, the Global Head of Currency and Emerging Markets Strategy, Andrew Sheets, Global Head of Credit Research, and Jay Bacow, Co-Head of U.S. Securities Products.

Vishy Tirupattur: Matt, 2023 was quite a year for long end government bond yields globally. We saw dramatic curve inversion and long end yields reaching levels we had not seen in well over a decade. We've also seen both dramatic sell offs and dramatic rallies, even just in the last few weeks. Against this background, how do you see the outlook for government bond yields in 2024? 

Matt Hornbach: So we're calling our 2024 outlook for government bond markets the land of confusion. And it's because bond markets were whipped around so much by central banks in 2023 and in 2022. In the end, what central banks gave in terms of accommodative monetary policy in 2020 and 2021, they more than took away in 2022 and this past year. At least when it came to interest rate related monetary policies. 2024, of course, is going to be a pretty confusing year for investors because, as you've heard, our economists do think that rates are going to be coming down, but so too will balance sheets. 

But for the past couple of years, both G10 and EM central banks have raised rates to levels that we haven't seen in decades. Considering the possibility that equilibrium rates have trended lower over the past few decades, central bank policy rates may be actually much more restricted today than at any point since the 1970s. But, you know, we can't say the same for central bank balance sheets, even though they've been shrinking for well over a year now. They're still larger than before the pandemic. 

Now, our economists forecast continued declines in the balance sheets of the Fed, the ECB, the Bank of England and the Bank of Japan. But nevertheless, in aggregate, the balance sheet sizes of these G4 central banks will remain above their pre-pandemic levels at the end of 2024 and 2025.

Vishy Tirupattur: Matt, across the developed markets. Where do you see the best opportunity for investors in the government bond markets? 

Matt Hornbach: So Vishy we think most of the opportunities in 2024 will be in Europe given the diverging paths between eurozone countries. Germany, Austria and Portugal will benefit from supportive supply numbers, while another group, including Italy, Belgium and Ireland will likely witness a higher supply dynamic. Our call for a re widening of EGB spreads should actually last longer than we originally anticipated. 

Elsewhere in Europe, we're expecting the Bank of England to deliver 100 basis points of cumulative cuts by the end of 2024, and that compares to significantly less that's priced in by the market. Hence, our forecasts for gilts imply a much lower level of yields and a steeper yield curve than what you see implied in current forward rates. So the UK probably presents the best duration and curve opportunity set in 2024. 

Vishy Tirupattur: Thank you, Matt. James, a strong dollar driven by upside surprises to U.S. growth and higher for longer narrative that has a world during the year characterized the strong dollar view for much of the year. How do you assess 2024 to be? And what differences do you expect between developed markets and emerging market currency markets? 

James Lord: So we expect the recent strengthening of US dollar to continue for a while longer. This stronger for a longer view on the US dollar is driven by some familiar drivers to what we witnessed in 2023, but with a little bit of nuance. So first, growth. US growth, while slowing, is expected to outperform consensus expectations and remain near potential growth rates in the first half of 2024. This is going to contrast quite sharply with recessionary or near recessionary conditions in Europe and pretty uncompelling rates of growth in China. 

The second reason we see continued dollar strength is rate differentials. So when we look at our US and European rate strategy teams forecasts, they have rates moving in favor of the dollar. Final reason is defense, really. The dollar likely is going to keep outperforming other currencies around the world due to its pretty defensive characteristics in a world of continued low growth, and downside risks from very tight central bank monetary policy and geopolitical risks. The dollar not only offers liquidity and safe haven status, but also high yields, which is of course making it pretty appealing. 

We don't expect this early strength in US Dollar to last all year, though, as fiscal support for the US economy falls back and the impact of high rates takes over, US growth slows down and the Fed starts to cut around the middle of the year. And once it starts cutting, our U.S. econ team expects it to cut all the way back to 2.25 to 2.5% by the end of 2025. So a deep easing cycle. As that outlook gets increasingly priced into the US rates, market rate differentials start moving against the dollar to push the currency down. 

Vishy Tirupattur: Andrew, we are ending 2023 in a reasonably good setup for credit markets, especially at the higher quality end of the trade market. How do you expect this quality based divergence across global trade markets to play out in 2024? 

Andrew Sheets: That's right. We see a generally supportive environment for credit in 2024, aided by supportive fundamentals, supportive technicals and average valuations. Corporate credit, especially investment grade, is part of a constellation of high quality fixed income that we see putting up good returns next year, both outright and risk adjusted. 

When we talk about credit being part of this constellation of quality and looking attractive relative to other assets, it's important to appreciate the cross-asset valuations, especially relative to equities, really have moved. For most of the last 20 years the earnings yield on the S&P 500, that is the total earnings you get from the index relative to what you pay for it, has been much higher than the yield on U.S. triple B rated corporate bonds. But that's now flipped with the yield on corporate bonds now higher to one of the greatest extents we've seen outside of a crisis in 20 years. Theoretically, this higher yield on corporate bonds relative to the equity market should suggest a better relative valuation of the former. 

So what are we seeing now from companies? Well companies are buying back less stock and also issuing less debt than expected, exactly what you'd expect if companies saw the cost of their debt as high relative to where the equities are valued. 

A potential undershoot in corporate bonds supply could be met with higher bond demand. We've seen enormous year to date flows into money market funds that have absolutely dwarfed the flows into credit. But if the Fed really is done raising rates and is going to start to cut rates next year, as Morgan Stanley's economists expect, this could help push some of this money currently sitting in money market funds into bond funds, as investors look to lock in higher yields for longer. 

Against this backdrop, we think the credit valuations, for lack of a better word, are fine. With major markets in both the U.S. and Europe generally trading around their long term median and high yield looking a little bit expensive to investment grade within this. Valuations in Asia are the richest in our view, and that's especially true given the heightened economic uncertainty we see in the region. We think that credit curves offer an important way for investors to maximize the return of these kind of average spreads. And we like the 3 to 5 year part of the U.S. credit curve and the 5 to 10 year part of the investment grade curve in Europe the most. 

Vishy Tirupattur: Thanks, Andrew. Jay, 2023 was indeed a tough year for the agency in the US market, but for the US housing market it held up quite remarkably, despite the higher mortgage rates. As you look ahead to 2024, what is the outlook for US housing and the agency MBS markets and what are the key drivers of your expectations? 

Jay Bacow: Let's start off with the broader housing market before we get into the views for agency mortgages. Given our outlook for rates to rally next year, my co-head of securitized products research Jim Egan, who also runs US housing, thinks that we should expect affordability to improve and for sale inventory to increase. Both of these developments are constructive for housing activity, but the latter provides a potential counterbalance for home prices. 

Now, affordability will still be challenged, but the direction of travel matters. He expects housing activity to be stronger in the second half of '24 and for new home sales to increase more than existing home sales over the course of the full year. Home prices should see modest declines as the growth in inventory offsets the increased demand. But it's important to stress here that we believe homeowners retain strong hands in the cycle. We don't believe they will be forced sellers into materially weaker bids, and as such, we don't expect any sizable correction in prices. But we do see home prices down 3% by the end of 2024. 

Now, that pickup in housing activity means that issuance is going to pick up as well in the agency mortgage market modestly with an extra $50 billion versus where we think 2023 ends. We also think the Fed is going to be reducing their mortgage portfolio for the whole year, even as Q2 starts to taper in the fall, as the Fed allows their mortgage portfolio to run off unabated. And so the private market is going to have to digest about $510 billion mortgages next year, which is still a concerning amount but we think mortgages are priced for this. 

Vishy Tirupattur: Thanks, Jay. And thank you, Matt, James and Andrew as well. And thank you to our listeners for joining us for this 2 part roundtable discussion of our expectations for the global economy and the markets in 2024. As a reminder, if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-11-15
Link to episode

Macro Economy: The 2024 Outlook

As global growth takes a hit and inflation begins to cool, how does the road ahead look for central banks and investors? Chief Fixed Income Strategist Vishy Tirupattur hosts a roundtable with Chief Economist Seth Carpenter and Chief U.S. Equity Strategist Mike Wilson to discuss.

----- Transcript -----

Vishy Tirupattur:  Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today on the podcast we'll be hosting a very special roundtable discussion on what is ahead for the global economy and markets by 2024. I am joined by my colleagues, Seth Carpenter, Global Chief Economist and Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. It's Monday, November 13th at 9 a.m. in New York. 

Vishy Tirupattur: Thanks to both of you for taking the time to talk. We have a lot to cover, so I am going to go right into it. Seth, I want to start with the global economy. As you look ahead to 2024, how do you see the global economy evolving in terms of growth, inflation and monetary policy? 

Seth Carpenter: Thanks, Vishy. As we look forward over the next couple of years, there are a few key themes that we're seeing in terms of growth, inflation and monetary policy. First, looks like global growth has stepped down this year relative to last year and we're expecting another modest step down in the global economy for 2024 and into 2025. Overall, what we're seeing in the developed market economies is restrictive monetary policy in general restraining growth, whereas we have much more mixed results in the emerging market world.

Inflation, though, is a clear theme around the world. Overall, we see the surge in inflation. That has been a theme in global markets for the past couple of years as having peaked and starting to come down. It's coming down primarily through consumer goods, but we do see that trend continuing over the next several years. 

That backdrop of inflation having peaked and coming down along with weaker growth means that we're setting ourselves up for overall a bit of an easing cycle for monetary policy. We are looking for the Fed and the ECB each to start an easing cycle in June of this year. For the Fed, it's because we see growth slowing down and inflation continuing to track down along the path that we see and that the Fed will come around to seeing. 

I would say the stark exception to this among developed market economies is the Bank of Japan. We have seen them already get to the de facto end of yield curve control. We think by the time we get to the January policy meeting, they will completely eliminate yield curve control formally and go from negative interest rate policy to zero interest rate policy. And then over the course of the next year or so, we think we're going to see very gradual, very tentative increases in the policy rate for Japan. So for every story, there's a little bit of a cross current going on. 

Vishy Tirupattur: Can you talk about some of the vulnerabilities for the global economy? What worries you most about your central case, about the global economy? 

Seth Carpenter: We put into the outlook a downside scenario where the current challenges in China, the risks, as we've said, of a debt deflation cycle, they really take over. What this would mean is that the policy response in beijing is insufficient to overcome the underlying dynamics there as debt is coming down, as inflation is weak and those things build on themselves. Kind of a smaller version of the lost decade of Japan. We think from there we could see some of that weakness just exported around the globe. And for us, that's one of the key downside risks to the global economy. 

I'd say in the opposite direction, the upside risk is maybe some of the strength that we see in the United States is just more persistent than we realize. Maybe it's the case that monetary policy really hasn't done enough. And we just heard Chair Powell talk about the possibility that if inflation doesn't come down or the economy doesn't slow enough, they could do more. And so we built in an alternate scenario to the upside where the US economy is just fundamentally stronger. Let me pass it back to you Vishy. 

Vishy Tirupattur: Thank you Seth. Mike, next I'd like to go to you. 2023 was a challenging year for earnings growth, but we saw significant multiple expansion. How do you expect 2024 to turn out for the global equity markets? What are the key challenges and opportunities you see for equity markets in 2024? 

Mike Wilson: 2023 was obviously, you know, kind of a challenging year, I think, for a lot of equity managers because of this incredible dispersion that we saw between, kind of, how economies performed around the world and how that bled into company performance. And it was very different region by region. So, you know, first off, I would say US growth, the economic level was better than expected, better than the consensus expected for sure, and even better than our economists view, which was for a soft landing. China was, on the other hand, much worse than expected. The reopening really never materialized in any meaningful way, and that bled into both EM and European growth. 

I would say India and Japan surprised in the upside from a growth standpoint, and Japan was by far the star market this year. The index was up a lot, but also the average stock performed extremely well, which is very different than the US. India also had pretty good performance equity wise, but in the US we had this incredible divergence between the average stock and the S&P 500 benchmark index, with the average stock underperforming by as much as 12 or 1300 basis points. That's pretty unusual. So how do we explain that and what does that mean for next year? Well, look, we think that the fiscal support is starting to fade. It's in our forecast now. In other words, economic growth is likely to soften up, not a recession yet for 2024, but growth will be deteriorating. And we think that will bleed into further earnings deterioration. 

So for 2024, we continue to favor Japan, where the earnings of breadth has been the best looks to us, and that's in a new secular bull market. In the US, it's really a tale of two worlds. It's companies that have cost leadership or operational efficiency, a thing we've been espousing for the last two years. Those types of companies should continue to outperform into the first half of next year. And then eventually we suspect, will be flipping pretty aggressively to companies that have poor operational efficiency because we're going to want to catch the upside leverage as the economy kind of accelerates again in the back half of 2024 or maybe into 2025. But it's too early for that in our view.

Vishy Tirupattur: How do you expect the market breadth to evolve over 2024? Can you elaborate on your vision for market correction first and then recovery in the later part of 2024? 

Mike Wilson: Yes. In terms of the market breadth, we do ultimately think market breadth will bottom and start to turn up. But, you know, we have to resolve, kind of, the index price first. And this is why we've continued to maintain our $3900 price target for the S&P 500 for, you know, roughly year end of this year. That, of course, would argue you're not going to get a big rally in the year-end. And the reason we feel that way, it's an important observation, is that market breadth has deteriorated again very significantly over the last three months. And breadth typically leads the overall index. So until breadth bottoms out, it's very difficult for us to get bullish at the index level as well. So the way we see it playing out is over the next 3 to 6 months, we think the overall index will catch down to what the market breadth has been telling us and should lead us out of what has been, I think a pretty, you know, persistent bear market for the last two years, particularly for the average stock. 

And so we suspect we're going to be making some significant changes in both our sector recommendations. New themes will emerge. Some of that will be around existing themes. Perhaps AI will start to actually have a meaningful impact on overall productivity, something we see really evolving in 2025, more than 2024. But the market will start to get ahead of that. And so I think it's going to be another year to be very flexible. I'd say the best news is that although 2023 has been somewhat challenging for the average stock, it's been a great year for dispersion, meaning stock picking. And we think that's really the key theme going into 2024, stick with that high dispersion and stock picking mentality. And then, of course, there'll be an opportunity to kind of flip the factors and kind of what's working into the second half of next year. 

Vishy Tirupattur: Thanks, Mike. We are going to take a pause here and we'll be back tomorrow with our special year ahead roundtable, where we'll share our forecasts for government bonds, corporate credit, currencies and housing. As a reminder, if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

2023-11-14
Link to episode

Andrew Sheets: Will the Bond Market Suffer from Tax-Loss Selling?

Investors whose corporate bond holdings have lost value in 2023 could sell before the end of the year, locking in their losses to offset gains elsewhere. Here are three reasons that they probably won?t.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, November 10th at 2 p.m. in London.

 

One of the questions that's come up on my recent travels is the risk from so-called tax loss selling. Bonds of many stripes have had a tough year, and the concern would be that investors would like to sell now and crystallize any losses to offset other gains. 

Tax loss selling has been a recent driver of single stock performance, as often happens around this time of year, as noted by my colleague Michael Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist. But for corporate bonds, we think these risks look pretty modest. There are a few reasons why. 

First, while corporate bonds have had a tough year, the losses aren't particularly large and indeed have gotten a lot better in recent weeks, as yields have started to rally. US investment grade bonds or the U.S. aggregate bond index is plus or minus a couple of percentage points, and we're just not sure these are big enough losses for investors to take action. In equity markets, you generally need much larger drawdowns to generate year end tax selling. 

Second, the investor bases are different. Equity markets tend to see much more participation in individual stocks, which creates opportunities for tax loss harvesting. Investment credit, especially among individual investors, is more commonly done through funds, where the smaller drawdowns I just mentioned would mean less incentive to take action. These different investor bases also have different motivations. We think many individual investors, whether through funds or individual securities, invest in corporate bonds for a stable long term income. We think they're simply less likely to have the sort of trading mindset of the average investor holding stocks. 

Meanwhile, institutions who hold corporate bonds also face constraints. While some may sell for a capital gains offset, others face a penalty for realizing such a loss and thus are more incentivized to hold these securities they believe remain ultimately creditworthy. And for long dated corporate bonds, which have the largest year to date losses, well, those are certainly enjoying some of the strongest end-buyer demand. 

Finally, we think any tax related selling we do see in the credit market could wash at the overall market level. Similar to equities, investors selling losers at year end don't necessarily drive down the market overall, as these funds are often recycled into other securities. And indeed, October through December, when tax loss selling usually occurs, are seasonally strong months for the equity market or the credit market. And we think a similar thing could happen in corporate bonds, where investors who do sell a corporate bond fund for a tax loss may be likely to recycle this into another part of the bond market. 

Total returns for corporate bonds have been tough year-to-date, but we're skeptical that these would lead to tax loss selling and another like lower. The modest scale of year-to-date losses, the nature of the investor base and the potential for any such sales to be recycled into other parts of the market are all reasons why. 

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

2023-11-10
Link to episode
A tiny webapp by I'm With Friends.
Updated daily with data from the Apple Podcasts.