Andrew Sheets: The Uncertainty of the Fed’s New Certainty

While many are hopeful for an easing of supply chain delays in 2022, the resolution of these issues may lead to new challenges and opportunities in key stock sectors investors should be watching.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, December 15th at 10:00 a.m. in New York. Inflation is a hot topic in Washington, D.C. The president talks about it regularly in his Twitter feed and on camera. It's also a favorite concern of Senator Manchin, who openly ponders whether inflation concerns will keep him from casting the deciding vote on the Build Back Better plan. Yet for investors, inflation has always been a necessary obsession, as its presence or lack thereof, typically drives impacts in the bond and foreign exchange markets. But today we want to focus not on the potential effects of inflation, but one of its causes - namely supply chain issues and how the resolution creates challenges and opportunities in some key stock sectors. But let's start with the why of supply chain issues. Why are the reports of shortages, ships waiting at ports to deliver goods, and rising prices because of the scarcity it creates? In short, it has to do with the extraordinary impact of the pandemic. Social distancing initially drove sharp but short-lived declines in consumer demand and companies' consumer demand expectations. But substantial fiscal aid to the economy led to a rebound in economic activity. Yet this was mostly focused on goods over services as COVID concerns continued to crimp the demand for activities, like eating out. This led to some abnormal and astonishing data. For example, personal consumption of durable goods declined 20% in the early days of the pandemic, more than 10x the decline from the prior recession. Yet by this past October, consumption of durable goods was 40% higher than pre-COVID. It's no wonder that container shipping rates from Shanghai to Los Angeles are 5x their normal run rate. Yet our colleagues see these pressures starting to abate in the US. Vaccines appear to have eased concerns among the population in consuming services in public spaces and service consumption is now rising sharply, whereas goods consumption growth has leveled off. Our economists expect this will help ease the pace of inflation starting in the first quarter of next year. While this would be good news for the economy overall, the story could be more mixed across stock sectors. Our tech hardware team, for example, sees a period of weaker orders for semiconductors after customers receive their currently delayed orders. This dynamic could open the door for earnings disappointment. On the other hand, our Capital Goods team sees opportunity, as the current bottleneck may have persuaded a variety of industries that they need to invest in reinventing their supply chains and potentially engage in some re or near shoring, which would require substantial equipment and materials investment. So as we head into the end of the year, supply chain delays are likely to continue to raise concerns around inflation, but the first half of 2022 will be telling. We'll keep you updated as the story develops. 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.

15 Joulu 20213min

Cryptocurrency companies have begun to act as banks in the US, and while regulators have expressed concerns over interest rates and the primacy of the dollar, this interplay has only just begun.----- Transcript -----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Analyst for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the escalating financialization of cryptocurrency markets. It's Tuesday, December 14th at 2:00 p.m. in London. BYOB - Be Your Own Bank. This has been the clarion call of Bitcoin evangelists since its very inception. But in an ironic turn of events, crypto companies Avanti, Anchorage and Kraken have all become banks in the US. Not in the sense espoused by bitcoin maximalists, but in the fiat - that is to say, government regulated sense. And regulators have shone much of their spotlight on the conspicuously outsized interest rates on offer to depositors through crypto lending. On the 10th of December, you could deposit a cryptocurrency called USDC with a company called BlockFi and receive an interest rate of 9%. Concern has arisen from the fact that the issuers of USDC aim to control its value, such that a single USDC should, in theory at least, always fetch a value of approximately one U.S. dollar. The disparity between a 9% rate on what is essentially a proxy for the dollar and the historically low rates on actual dollar deposits at retail banks, has regulators concerned about the emergence of a parallel banking system. The irony here is that it was preexisting banking regulation itself that played a hand in creating this high rate. Traditional banks have turned down crypto traders due to regulatory risk, and so these traders were forced to borrow from the crypto markets and offer lenders higher rates of return. Nevertheless, US regulators appear to be taking measures to limit competition with the dollar banking system. New Jersey regulators have ordered BlockFi to stop offering high interest crypto deposit accounts from February next year. And in September, the Securities and Exchange Commission sent Coinbase a Wells notice, following which Coinbase aborted a plan to offer 4% interest on USDC deposits. Ultimately, regulators will have to decide how aggressively they want to safeguard the primacy of the dollar. They could stymie much of the industry to be sure or hope the dollar stands up to scrutiny in order to allow the crypto industry to grow. The longer they wait, the higher the risk. Following multi-trillion stimulus packages and over a decade of quantitative easing, the dollar has been left as open to competitors as it has been since the Bretton Woods agreement in 1944. Investors should keep an eye on the direction that regulators take in the face of this and the broad spectrum of outcomes those regulations might portend for crypto valuations, ranging anywhere from new highs to the old lows of bygone price cycles. The meeting of crypto culture and traditional banking regulation is a seminal moment for the crypto industry. I, for one, am excited to see how this interplay evolves. Crypto companies are becoming more like banks, just as traditional banks have themselves begun to offer crypto products. Thanks for listening! If you enjoy Thoughts on the Market, share this and other episodes with a friend or colleague today.

14 Joulu 20213min

Our 2022 outlook presented a wider than normal range of potential paths. While our base case still appears likely, shifts in supply and Fed policy could cause a change in course.----- 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 13th at 11:30 a.m. in New York. So let's get after it. In writing our year ahead outlook, we were faced with what we think is a wider than normal range of potential economic and policy outcomes. This higher "uncertainty" was one of the inputs to our key conclusion - that valuations for U.S. equity markets were likely to come down over the next 3-6 months. In our discussions with hundreds of clients since publishing our outlook, the conversations have centered on these three potential outcomes and how to handicap them. First is Goldilocks. When we published our outlook on November 15th, this was the prevailing view by most clients. In this outcome, supply picks up in Q1 to meet the excess demand companies are having a hard time fulfilling. Inflation has a relatively fast but soft landing towards 2-3%, which allows for growth to remain strong and multiples to remain high. The S&P 500 reaches 5000 by year end 2022. And this was our bull case in our outlook with a 20% probability. In the second outcome, inflation remains hot and the Fed responds more aggressively. Under this outcome, inflation proves to be stickier as supply chains and labor shortages remain difficult to fix in the short term. The Fed is forced to taper faster and even raise rates on a more aggressive path. This was our base case, as it essentially lined up with our hotter but shorter cycle view we first wrote about back in March. At the same time, operating leverage fades as costs increase more in line with revenues. This leaves market breadth narrow in the near-term as valuations fully normalize in line with the typical mid-cycle transition. While there is some debate around how much P/Es need to fall, we believe 18x is the right number to use for year-end 2022. When combined with 10% earnings growth, that gives us a slight downside to the index from current prices, or 4400 on the S&P 500. We put a 60% probability on this outcome. The third outcome assumes supply ticks up, but demand fades. Under this scenario, we assume supply comes too late to meet what has been an unsustainable level of consumption for many goods. It's also too expensive for customers who have become wary of higher prices, which leads to demand destruction for many areas of the economy. While services should fare better and keep the economy growing, goods producing companies suffer. Under this scenario, the Fed may back off on their more aggressive tightening path. Rates fall, but not enough to offset the negative impact on margins and earnings, which will end up disappointing. This is essentially the "Ice" part of our Fire and Ice narrative turning out to be chillier. Equity risk premiums soar and multiples fall more than under our base case. This was our bear case with a 20% probability. Since publishing, we feel more confident about our base case being the most likely outcome. Inflation data continues to come in hot and companies are having little problem passing it along, for now. While this will likely lead to another good quarter of earnings, we suspect there will be more casualties too, as execution risk is increasing. This will leave dispersion high and leadership inconsistent - two more conclusions in our outlook. Stock picking will be difficult, but a necessary condition to generate meaningful returns in 2022 as the market index is flat to down over the next 12 months. This is a big week on policy outcomes, with the Fed likely to announce a more aggressive timeline for tapering its asset purchases. In short, we expect the Fed to tell us that they will end its asset purchase program by March 31st. While our base case always assumed the Fed would respond appropriately to higher inflation, this is a more aggressive pivot than what we expected a month ago. Importantly, the Fed is now suggesting stable prices are important to achieving its primary goal of full employment, which means inflation is taking center stage until it's under control. Finally, we think Jay Powell and the Fed will be under much less pressure from the White House versus the last time they were aggressively removing monetary accommodation in late 2018. Part of this is due to the fact that inflation is a much bigger problem today than it was in 2018, and part of it is due to the observation that the White House today is not as preoccupied with the stock market. Bottom line, the Fed is determined to bring down inflation, and falling stock prices are unlikely to stop them from trying. In this kind of an environment, we continue to favor companies with earnings stability and reasonable valuations. That means large cap defensive quality stocks. In short, boring can be beautiful. 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.

13 Joulu 20214min

With recent central bank action raising questions on monetary policy, Global Head of Macro Strategy Matthew Hornbach takes us through the implications for the trajectory of rates and currency markets in the year ahead.----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the 2022 outlook for rates and currency markets. It's Friday, December 10th at 10:00 a.m. in New York. Every November my colleagues within research come together to discuss the year ahead outlook. And almost every year something happens in the month after we publish our forecast that changes one or more of our views. This year, several Morgan Stanley economists have changed their calls on central bank policies given higher than expected inflation and shifting central bank reaction functions. Our monetary policy projections have become more hawkish for central banks in emerging markets, mostly. But earlier this week, our projection for Federal Reserve policy became more hawkish as well. Our economists now see the Fed raising rates twice next year, whereas before they didn't see the Fed raising rates at all. Does this change alter our view on how macro markets will move next year? Well, it doesn't change our view on the direction of markets. We still think U.S. Treasury yields will rise and the U.S. dollar will strengthen in the first half of the year. But now we see a flatter U.S. yield curve and the U.S. dollar performing better than before. What hasn't changed in our outlook? We still see macro markets dealing with variable central bank policies in 2022. Some policies will be aimed at outright tightening financial conditions, such as in the UK, Canada, New Zealand and now the U.S. Other central banks will attempt to ease financial conditions further, albeit at a slower pace than before, like the European Central Bank. And some will aim to maintain accommodative financial conditions like the Reserve Bank of Australia and the Bank of Japan. For rates markets, we expect yields around the developed world to move higher over the forecast horizon, but only moderately so. And while we see real yields leading the charge, we don't foresee a tantrum occurring next year. We forecast 10-year Treasury yields will end 2022 just above 2%. That would represent a similar increase to what we saw in 2021. As for the US dollar, we see two primary factors lifting it higher next year. First, we see a continued divergence between U.S. and European economic data. Recent U.S. economic strength should continue into the first half of the year. And expectations for future growth should stay elevated, assuming additional fiscal stimulus measures are approved by the U.S. Congress, in line with the Morgan Stanley base case. At the same time, our economists have been expecting data in Europe to weaken. In addition, the worrying surge in COVID cases and the government responses across Europe pose additional downside risks. To be clear, we expect eurozone growth to be strong over the full year of 2022, yet it is likely that the economic divergence between the U.S. and Europe continues for a while longer. This should keep the U.S. dollar appreciating against low yielding G10 currencies, such as the euro. We also expect further upside for the US dollar against the Japanese yen, driven by higher U.S. Treasury yields. The second factor arguing for a stronger US dollar is central bank policy divergence. The Fed could strike a more upbeat and hawkish tone throughout next year, just as it has done more recently. On the other hand, the risk for the ECB is that its more hawkish members adjust their views in a more dovish direction, and then the ECB delivers more accommodation than expected, not less. If the upcoming Fed and ECB meetings this December go as we expect, they would set up the dollar for additional strength in the first half of next year. As for higher yielding riskier currencies, we think four factors will support them. First, our economists forecast robust global growth next year. Second, they also forecast inflation will moderate from unusually high levels. Third, they see central banks maintaining abundant pools of global liquidity. And finally, we think this leads to only a moderate rise in real yields. As a result, we have constructive views on the risk sensitive G10 currencies. In particular, we expect the Canadian dollar and the Norwegian krona to outperform the US dollar and lead the G10 pack. We see buoyant energy prices and hawkish central bank policies keeping these currencies running ahead of the U.S. dollar and far ahead of the euro and the yen. 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.

10 Joulu 20214min

The US economy is in a unique moment of uncertainty but headed into 2022, shifts in inflation, the labor market and Fed policy tell a constructive story.----- Transcript -----Ellen Zentner Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research.Robert Rosener And I'm Robert Rosener, Senior U.S. Economist.Ellen Zentner And on this episode of the podcast, we'll be talking about the 2022 outlook for the U.S. economy. It's Thursday, December 9th at noon in New York.Robert Rosener So, Ellen, we're headed into 2022. We're in a pretty unique moment for the U.S. economy. We see rising inflation, supply chain issues and uncertainty about Fed policy. Of course, we also had disappointing job growth in the month of November, but unemployment that is now not far from pre-COVID lows. So we've got a lot of different indicators sending very different messages right now. How should listeners be thinking about the U.S. economy right now and what that means for the outlook into 2022?Ellen Zentner Yeah. So we're pretty constructive on the U.S. economy, and it may be surprising with all the uncertainties that you noted. You know, consumers are in very good shape. We've been talking about excess savings for a long time on these podcasts. Excess savings is still there as a cushion. Look, inflation is rising and continues to rise, but it's rising because demand is still strong. At the same time, we don't have enough goods of what people want to buy. So I don't think we're out of the woods yet for rising inflation. I think we're going to get some more prints here that are even higher. But we already are getting indications from our equity analysts that their companies are saying that their supply chains are easing. So I think, within just a matter of months, we should start to see inflation come down. And while households are telling us in our surveys that inflation worries them even more so than COVID, they're still spending. And we expect that as we move into next year, we're going to recoup some of that deferred demand from goods that are going to be available that weren't there before.Ellen Zentner But the other thing that's really important for consumer spending is the jobs numbers, and you mentioned that, Robert, explained to people-- because this was the number one question we got after that jobs report: how is it that you get a headline number? That's so disappointing, but unemployment rate is that low? I mean, is it good? Is it bad?Robert Rosener Yeah, it's a really mixed picture and a lot of different indicators pointing in a lot of different directions. So of course, we got our latest read on the labor market that showed a slower than anticipated rise in jobs. In the month of November, we created 210,000 jobs. That was less than half of what was expected, but overall, the report still had a solid tone. And one of the reasons why there are still solid indications coming from the labor market is that we're seeing continued healing from some of the biggest effects of the pandemic and that came through, most notably in November in labor force participation. One of the biggest shortfalls in the labor market has been the number of individuals who are actually actively participating in the labor force. We saw the labor force participation rate, in total, rise 20 basis points in November to 61.8%. That's still well below the 63.4% peak we saw pre-COVID, but it's notably out of the very sticky range it's been in since the summer. So we're seeing continued healing there. We're expecting that healing is going to continue, and that's going to be a very important part of this labor market recovery.Ellen Zentner So what are you telling clients then that are worried about wage pressures and where those might go? Because participation, rising participation, does matter there. So what's our message?Robert Rosener Well, much like the inflation backdrop, we're moving through a period of more elevated wage growth. There's been a significant amount of disruption in the labor market and alongside it, wage pressures have risen. But labor supply opening back up is a very important way that we're going to see supply and demand come back into balance in the labor market. We just got data on job openings, which showed that aggregate job openings in the economy are in excess of 11 million. There's one and a half open jobs for every unemployed individual in the labor market. If we boost the number of people who are actively participating in the labor market, it's going to bring those supply and demand metrics in better balance, and it should help to ease wage pressures alongside that.Ellen Zentner OK, that's interesting because, you know, one conversation that we have with our equity investors quite a bit is, you know, how should companies be looking at higher wage pressures? And of course, if you talk to economists and academics, right, we love to see higher nominal wages because that means stronger backdrop for aggregate demand. But the other reason why I really like higher nominal wages, they precede capital deepening. So if companies want to offset a higher wage bill, then you've got to find efficiencies and to find efficiencies, you've got to invest. So we're seeing companies invest in IT and equipment. We are calling it 'the global COVID capex cycle.' And that's really a bright spot in the economy for next year's outlook as well. So we would expect that to continue.Robert Rosener So, Ellen, we talked about a lot there. We've got elevated inflation now, some of which may be passing as supply chain disruptions ease. We have labor markets that, on the one hand, look tight, on the other hand, look like they have scope for further recovery. What does this mean for Fed policymakers and how do they put together the puzzle of what's going on in the economy when they're thinking about normalizing monetary policy?Ellen Zentner Yeah, it's not an easy job, is it? But Chair Powell is going to continue that job, as we've learned, and it's not going to be an easy backdrop for him. The Fed is concerned about what looks like more persistent inflationary pressures than they had previously thought. So no doubt, you know, you and I can sit down and pick apart the data and easily point to areas of inflation that are clearly temporary. But we've just not seen evidence of it as early as expected. And markets are starting to pressure the Fed on really giving more weight to price stability. And so we have seen a shift from the Fed. Last week, we heard Chair Powell say that price stability is important and only price stability would then beget maximum employment. And so really putting a lot more pressure on the price stability side of things. So we think at this upcoming FOMC meeting next week that we're going to see quite a hawkish shift from the Fed, both in their message around how quickly they are reducing the pace of their purchases. We think that they'll end that early. And then we'll see their so-called dot plot show an indication that they're going to start rate hikes earlier than expected, probably two quarters earlier than expected. And so I think that's a really important shift. And what it means is that going forward, our forecast that inflation will eventually start slowing in the first quarter will be very important in determining when the Fed actually does start increasing rate hikes.Ellen Zentner So that was a lot to unpack about the outlook. There's many more details, and we'll pick out interesting parts for folks as we go along. A new podcast to come. And Robert. Thanks for taking the time to talk.Robert Rosener Great speaking with you, as always, Ellen.Ellen Zentner 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.

10 Joulu 20216min

Headed into next year, ‘Build Back Better’ legislation remains a work in progress, but Congress may find common ground in both parties’ concerns around one issue: tech regulation.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between US public policy and financial markets. It's Thursday, December 9th at 10:00 a.m. in New York. Congress continued to check things off its year end to do list this week, following up its funding deal to avoid a shutdown with an agreement to raise the debt ceiling. The Build Back Better plan, which features new spending on environmental and social issues backed by new taxes, remains a work in progress. So, this week we want to look ahead a little to an issue which could feature heavily in congressional debate next year: regulation of the tech industry. Now, to be clear, we think the prospects for congressional action ahead of the midterms are quite low. But major legislation that drives sea changes in policy often is a multi-year process and you can learn a lot by paying attention to that process. Republicans spent a decade crafting the tax reform that would drive their actions in 2018. The same for Democrats with the years preceding the Affordable Care Act and the Dodd-Frank reforms of the banking industry. And this coming year could be a particularly educational one in terms of how DC wants to tackle the tech industry. That's because the industry could continue to be a popular issue for both Republicans and Democrats. Both parties share concerns about content moderation, data privacy and company size, though they differ on the approach to dealing with these issues. Crucially, they also share a political motivation, with a recent poll showing the tech industry's approval rating with the American public at 11%, one of the few institutions with a lower approval rating than Congress. So what do we think we'll learn as Congress focuses on this issue? Policymakers are likely to update existing templates for regulating traditional broadcast media. That's because there are already institutions in place to do this, and it's easier for voters to understand the process. A bear case for what this could look like comes from overseas. The United Kingdom's Online Safety Bill and the European Union's Digital Markets Act spell out some big and potentially costly regulatory challenges for social media companies. This includes requirements to allow users to easily move their data, disallowing product tie-ins and preferential product placement, and potentially, legal and financial liability for harmful content. If such measures were adopted in the US, our colleague and coauthor Brian Nowak estimates this could meaningfully crimp social media companies’ ad revenue, leading to underperformance of the sector. But for now, we expect next year will reveal the U.S. is likely headed in a more moderate direction. Early legislative proposals tend to gravitate toward codifying data transparency, portability rights and content moderation. Here, our colleague Brian Nowak notes that internet companies have already begun investing heavily to develop internal infrastructure that deals with these types of regulations, potentially limiting the cost impact of new laws. That's a key reason he still sees value in this stock sector. But of course, that also means if we've read the policy direction in the US incorrectly, there's downside for the sector. So, we'll be watching carefully in 2022 to see if the U.S. continues to forge its own path or follows Europe in its approach to tech regulation. 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.

9 Joulu 20213min

With early data in on the Omicron variant, biotechnology analyst Matthew Harrison takes us through where we stand on vaccine efficacy headed into the winter.----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Matthew Harrison And I'm Matthew Harrison, Biotechnology Analyst. Andrew Sheets And on this special edition of the podcast, we'll be talking about updates on the Omicron variant and vaccine efficacy. It's Wednesday, December 8th at 4:00 p.m. in London. Matthew Harrison And it's 11:00 a.m. in New York. Andrew Sheets So, Matt, it's great to talk to you again. We've had a lot of small pieces of data come out recently on the Omicron variant and its ability or not to evade vaccines. What's the latest and what do we know? Matthew Harrison So, we've had three studies published so far. I would caution that the samples are small, and we have to take them as that, but we do have some interesting trends developing. So, the first one is: most of the data has demonstrated a substantial drop in what are called 'neutralizing titers' against two doses of the vaccine. And so that unfortunately means that protection against symptomatic infection for people that have had two doses of the vaccine is quite limited. We don't know exactly what, but it's definitely below or at 50%. What we've also learned is that a third dose can help restore some of that protection. We don't know the durability of that dose and we don't know how much protection it restores, but it does restore some protection. I think importantly, though, one of the things to remember is that most of the globe has only had two doses. And as we run through this potential spread of Omicron over the next few months, most of the globe will continue to only have two doses. So that data on two doses does suggest that there can be substantial reinfection risk for those that have had the vaccine. Andrew Sheets So Matthew, you know, when we're thinking about these numbers and we think about vaccine efficacy, maybe dropping to 50%, what does that mean in terms of the risks versus current variants and then the risks if you're not vaccinated at all? Matthew Harrison Right. So, I think there are two important things that I would say. So, the first is, what we're talking about here is symptomatic infection. Some of the other data that's come out has been on T cells. T cells are the second component of your immune system. They help kill virus once it's already infected in cells, and the T cell data looks like there remains substantial protection driven by T cells. And so, I think what that says is even though we're seeing substantial drops in protection against symptomatic infection, my hope continues to be based on these data and other data we've looked at, that protection against severe outcomes such as hospitalization and death could remain quite high. Andrew Sheets So that seems quite important for both the public health outcomes. And then, as would follow the impact in the economy, is that it might be more likely that somebody with two shots of a vaccination regime would get some form of COVID, would show symptoms, but it might be still much less likely that they would end up in the hospital with severe cases, as the vaccines would still help the body protect against those more extreme outcomes. Matthew Harrison That is my hope and based on the data that we're seeing so far, I would note, as we talked about at the beginning, that all of these studies that we're seeing come out right now are preliminary. You know, my hope is over the course of the next week or so, we're going to have a lot broader data set available to answer many of the questions we're talking about. And so, we're still going to have to, take our time with this because we don't have complete information yet. Matthew Harrison So, Andrew, one of the questions I've been thinking about here is, and you touched on it in some of the questions you were asking me, is how does the market handle a substantial increase in the number of infections, but maybe a lower proportion of those infections ending up with severe disease than we've seen in previous waves? Andrew Sheets Yeah, thanks Matthew. So look, I think this distinction between, you know, any case of COVID that shows symptoms and a case of COVID that results in somebody being hospitalized, you know, that is a pretty big distinction. And again, it's quite possible to see headlines and get quite worried about headlines that you know this variant evades vaccines and kind of to think that, "oh, then vaccines are powerless to stop it" when you know, I think as your research has rightly highlighted, if the vaccines can still provide a powerful mitigant against the most severe cases against hospitalizations, and you can still avoid some of the most severe public health outcomes that really would force much bigger restrictions. And those are the types of things that would really slow economic activity and really disrupt the economy, in addition to obviously having a really tragic impact on human life. So I think that distinction is important. Andrew Sheets We obviously, as you mentioned, it's early and we need to watch it in terms of just more cases, you know, evolving again, I think we have to see how public health officials react to that. How do consumers react to it? Does it impact consumer behavior around the holidays? And you know, we do think U.S. economic activity and European economic activity are pretty strong at the moment, so they have some cushion. But obviously it needs to be monitored. Andrew Sheets I think the other economy we need to watch is China, which is operating with a zero COVID policy. So, a quite restrictive policy trying to prevent any COVID cases. You know, if the indications are that we are dealing with now two more contagious variants: the Delta variant, and the Omicron variant, you know, there's a question of, does that complicate any sort of zero COVID strategy when you are dealing with a more contagious virus? And that's another big economic story that we have to keep our eye on. Matthew Harrison Andrew, that's great. Thanks for taking the time to chat today. Andrew Sheets Matt, always great to talk to you. Andrew Sheets 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.

8 Joulu 20215min

With investors expected to deal with an increase in volatility in 2022, our outlook for European equities remains strong into next year.----- Transcript -----Welcome to Thoughts on the Market. I’m Graham Secker, Head of Morgan Stanley’s European and UK equity strategy team. Along with my colleagues, bringing you a variety of perspectives, I’ll be talking about the recent volatility in asset markets and how it impacts our 2022 outlook for European equities. It’s Tuesday, December the 7th at 4pm in London. In recent weeks we have been arguing that equity investors would likely face an increase in volatility over the coming year. However, we hadn't envisaged this manifesting itself quite so soon, or that markets would face a double challenge from a renewed covid-driven growth scare and a tighter US monetary policy shift weighing on sentiment at the same time. To make matters worse, calendar effects are magnifying these uncertainties, with investors wary of adding risk - or alternatively encouraged to de-risk further - as we approach year-end. In the very short-term market volatility may remain high, however absent a severe hit to growth from the new variant we think this will prove to be an attractive entry point over the medium term for two reasons. First, European equity valuations look increasingly appealing. We can find plenty of attractively valued stocks here in Europe with 28% of listed companies trading on a PE below 12. Second, some of our tactical indicators are now quite extreme, with the number of 'bears' in the AAII investor survey now up to its 90th percentile – an occurrence that has historically proved a very strong buy signal.Post this drop in both equity valuations and investor sentiment we think that the worst of this equity correction is now behind us - absent a material profit disappointment that we just don’t see at this time. Such a scenario would likely require a more extensive and sustained hit to activity from the Omicron virus and/or a sharp deceleration in end demand that could signal that inflation is morphing into a more stagflationary environment. Neither do we see any growth implications from the apparent recent shift in Fed policy. Here we think the biggest implications for equity markets comes from a potential increase in real yields which traditionally occurs at the start of a new Fed tightening cycle. Such a move would fit with our bond strategists forecast for a significant rise in US real yields up to -30bps next year, an outcome that would likely cause substantial disruption within equity markets. Specifically, higher real yields should increase valuation sensitivity and push equity investors to skew portfolios away from some of the most popular and expensive stocks in the market and towards those offering better value. At the regional level such a shift should favor European stocks over US peers as valuations here have already normalized. Looking out over the next 12 months our index target for MSCI Europe suggests 13% price upside from here, which rises to over 16% when we add in the dividend yield too. Within the market we prefer the more value-oriented sectors given the prospect of higher bond yields, attractive valuations and greater scope for earnings upgrades given that current expectations look unduly low. In particular, we like Autos, Banks and Energy – all three have outperformed the market in 2021 and we see more upside next year too.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.

8 Joulu 20213min