Mike Wilson: Are We Ripe for a U.S. Equities Correction?

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.

17 Marras 20233min

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.

16 Marras 20234min

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 individuallytailored investment advice. It has been prepared without regard to the individual financialcircumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC(“Morgan Stanley”) recommends that investors independently evaluate particular investmentsand strategies, and encourages investors to seek the advice of a Financial Advisor. Theappropriateness of a particular investment or strategy will depend on an investor’s individualcircumstances 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.

15 Marras 20233min

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.

15 Marras 202310min

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.

14 Marras 20238min

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.

10 Marras 20233min

Despite some falloff in consumer interest, anti-obesity drugs are still likely to have profound implications at both the macro and sectoral level.----- Transcript -----Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Along with my colleagues, bringing you a variety of perspectives, today I'll give you an update on the all important obesity theme and how it's impacting a wide range of industries. It's Thursday, November the 9th at 2 p.m. in London. GLP-1s, a type of anti-obesity medicine, have been on the market since 2010, but it's taken until 2023 for this theme to really come to life. We believe that GLP-1s will clearly have profound implications over the long term, both on a macro and micro level. Obesity has far reaching implications for the global economy as it leads to lost productivity and significant health care costs. We estimate the macro impact of obesity at 3.6% of US GDP, with potentially $1.24 trillion in lost productivity indirect costs. Anti-Obesity drugs have the potential to address at least some of this economic burden and at a reasonable cost. The micro implications on businesses year-to-date have seen about a $600 billion swing in market cap. That includes, to the upside, $340 billion for the GLP-1 makers and over $260 billion lost in market value for the stocks that are potentially disrupted. For context, that compares to a total US drug market of $430 billion annually. 2023 saw an impressive surge in investor interest in anti-obesity drugs. Yet and perhaps surprising to some based on hashtag and web traffic data we track, consumer interest appears to have waned in recent weeks. We think this notable dip from the peak in activity is driven in part by supply constraints, paused geographic expansion and curtailed promotional activity. Importantly though, this fade in initial consumer excitement is occurring at the same time that company transcript mentions of obesity or GLP-1 by non-pharma companies are reaching new highs. This disconnect between sain street moderation and excitement versus Wall Street's rise in excitement, is very typical of short term hype cycle tops in equity markets, particularly given the current environment of higher interest rates. But even as the initial buzz around obesity drugs is fading back to more moderate levels in the near term, we do believe there will be wide ranging implications over the long term that are hard to deny. And our global analysts have been all over this on a sector by sector basis. First off, we believe that US alcohol beverages per capita will correct due to abnormally high consumption in recent years and longer term structural challenges such as demographic, health and wellness. For beer growing adoption of obesity medication presents an incremental risk factor to consumption, although many of these companies are already working on healthier options. Across packaged foods, patients on anti-obesity medications have been cutting back the most on foods high in sugar and fat, such as confections, baked goods, salty snacks, sugary drinks and alcohol. Companies with a weight management or better for you portfolio appear to be better positioned for here. Within US food retail, we think dollar stores which target lower end consumers with outsized exposure to high calorie foods, will be the most adversely impacted in the context of increased adoption of these drugs. Separately, insulin pump makers should be only minimally impacted, we think, by GLPs by 2027, which suggests that the share price reaction to the downside for these stocks year-to-date may be materially overdone. Obesity has a direct impact on osteoarthritis, with about twice the prevalence of arthritis in obese versus non obese patients. A much higher need for arthroplasty with higher BMIs and obese patients having higher surgical complications. GLP-1 usage could have some complex effects on these ortho stocks. We also see longer term risk for most of the US and European fast food industry. The same goes for carbonated sugary drinks and for chocolate lovers out there, the rising GLP-1 adoption could pressure chocolate consumption longer term. But the magnitude of these impacts remains uncertain, as indulgence will still remain a core consumer need even in this new GLP-1 paradigm. All in all, we remain bullish on the anti-obesity drug market, particularly given the staggering 750 million people globally living with obesity, and this continues to be a dynamic space for investors to watch closely. Thanks for listening. If you enjoyed this show, please leave a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

9 Marras 20234min

The recent treasury rally signals that perhaps the U.S. fiscal trajectory isn't as challenging as bond investors had feared.----- 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 U.S. fiscal policy on markets. It's Wednesday, November 8th at 10 p.m. in New York. As Congress gets back to work on funding the government and avoiding a government shutdown, investors' attention has turned back to public finances. In particular, as bond markets sold off much of the year, a common theory posited by clients to our team was that U.S. fiscal policy was to blame. Expanding deficits meant higher supply and could also mean higher inflation, growth and ultimately a higher peak Fed funds rate. But upon closer examination, maybe the U.S. fiscal trajectory isn't as challenging as feared, and the bond market may be finally noticing. Treasuries have rallied in the past week. Which makes sense to us as our assessment is that U.S. fiscal expansion at all levels has either peaked or is near its peak. Consider that the federal deficit this year rose largely based on lower revenues driven by factors that are unlikely to repeat. For example, Fed remittances zeroed out, and there's about $85 billion of deferred collection of tax revenue due to natural disasters. Together with other factors, we think this year's nearly 1% growth in deficits as a percentage of GDP will be followed next year by a decline of about 0.2%. Further downside is possible if a spending sequester kicks in, in April. Also, consider that major deficit expansion isn't likely to be on Congress's agenda. Between now and the 2024 election, there's little reason to expect deficit expanding bills beyond the current baseline. Government control is divided, and history shows that makeup rarely does fiscal expansion unless it's responding to an economic crisis. After Election Day, Republicans and Democrats do have deficit additive policies they say they want to pursue, but the numbers are relatively modest. Republicans' plan to extend parts of prior tax cuts would add about 0.3% to deficits as a percentage of GDP in the first year, and we estimate the consensus tax and spending plans of Democrats would add about 0.1%, both manageable numbers. Also worth noting is that state and local governments seem near their peak fiscal expansion. Their recent expansion appears tied to spending of prior COVID aid, which is quickly depleting, as well as hiring, which is nearly back to pre-COVID levels. So bottom line, if you're concerned about Treasury yields resuming their upward trend, look elsewhere for a catalyst. Consumption would be the most likely culprit but at the moment, our economists are still seeing downside there in the near term. This gives us confidence that the worst of U.S. government bond returns is probably behind us for this cycle. 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.

8 Marras 20232min