Japan Summit: Consumer Resilience and Trade Uncertainty

Original Release on April 26th, 2022: Global supply chains have been under stress from the pandemic, geopolitical tensions, and inflation, and the outlook for transportation in 2022 is a mixed bag so far. Chief U.S. Economist Ellen Zentner and Equity Analyst for North American Transportation Ravi Shanker discuss.-----Transcript-----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research, Ravi Shanker: and I'm Ravi Shanker, Equity Analyst covering the North American Transportation Industry for Morgan Stanley Research. Ellen Zentner: And today on the podcast, we'll be talking about transportation, specifically the challenges facing freight in light of still tangled supply chains and geopolitics. It's Tuesday, April 26, at 9:00 a.m. in New York. Ellen Zentner: So, Ravi, it's really good to have you back on the show. Back in October of last year we had a great discussion about clogged supply chains and the cascading problems stemming from that. And I hoped that we would have a completely different conversation today, but let's try to pick up where we left off. Could we maybe start today by you giving us an update on where we are in terms of shipping - ocean, ground and air? Ravi Shanker: So yes, things have materially changed since the last time we spoke, some for the better and some for the worse. The good news is that a lot of the congestion that we saw back then, whether it was ocean or air, a lot of that has eased or abated. We used to have, at a peak, about 110 ships off the Port of L.A. Long Beach, that's now down to about 30 to 40. The other thing that has changed is we just went from new peak to new all time peak on every freight transportation data point that we were tracking over the last two years. Now all of those rates are collapsing at a pace that we have not seen, probably ever. It's still unclear whether this legitimately marks the end of the freight transportation cycle or if it's just an air pocket that's related to the Russia Ukraine conflict or China lockdowns or something else. But yes, the freight transportation worlds in a very different place today, compared to the last time I was on in October. Ellen, I know you wanted to dig a little more deeply into the current challenges facing the shipping and overall transportation industry. But before we get to that, can you maybe help us catch up on how the complicated tangle created by supply chain disruptions has affected some of the key economic metrics that you've been watching over the last six months? That is between the time we last spoke in October and now. Ellen Zentner: Sure. So, we created this global supply chain index to try to gauge globally just how clogged supply chains are. And we did that because, what we've uncovered is that it's a good leading indicator for inflation in the U.S. and on the back of creating that index, we could see that the fourth quarter of last year was really the peak tightness in global supply chains, and it has about a six month lead to CPI. Since then, we started to see some areas of goods prices come down. But unfortunately, that supply chain index stalled in February largely on the back of Russia, Ukraine and on the back of China's zero COVID policy, starting to disrupt supply chains again. So the improvement has stalled. There are some encouraging parts of inflation coming down, but it's not yet broad based enough, and we're certainly watching these geopolitical risks closely. So, Ravi, I want to come back to freight here because you talked about how it's been underperforming for a couple of months now and forward expectations have consistently declined as well. You pointed to it as possibly being just an air pocket, but you're pointing, you're watching closely a number of things and anticipate some turbulence in the second half of the year. Can you walk us through all of that? Ravi Shanker: What I can tell you is that it's probably a little too soon to definitively tell if this is just an air pocket or if the cycles over. Again, we are not surprised, and we would not be surprised if the cycle is indeed over because in December of last year, we downgraded the freight transportation sector to cautious because we did start to see some of those data points you just cited with some of the other analysts. So we were expecting the cycle to end in the middle of 22 to begin with, but to see the pace and the slope of the decline and a lot of these data points in the month of March, and how that coincides with the Russia-Ukraine conflict and that the lockdowns in China, I think, is a little too much of a coincidence. So we think it could well be a situation where this is an air pocket and there's like one or two innings left in the cycle. But either way, we do think that the cycle does end in the back half of the year and then we'll see what happens beyond that. Ellen Zentner: OK, so you're less inclined to say that you see it spilling over into 2023 or 2024? Ravi Shanker: I would think so. Like if this is just a normal freight transportation cycle that typically lasts about 9 to 12 months. The interesting thing is that we have seen 9 to 12 months of decline in the last 4 weeks. So there are some investors in my space who think that the downturn is over and we're actually going to start improving from here. I think that's way too optimistic. But if we do see this continuing into 2023 and 2024 I think there's probably a broader macro consumer problem in the U.S. and it's not just a freight transportation inventory destocking type situation. Ellen Zentner: So Ravi, I was hoping that you'd give me a more definitive answer that transportation costs have peaked and will be coming down because of course, it's adding to the broad inflationary pressures that we have in the economy. Companies have been passing on those higher input costs and we've been very focused on the low end consumer here, who have been disproportionately burdened by higher food, by higher energy, by all of these pass through inflation that we're seeing from these higher input costs. Ravi Shanker: I do think that rates in the back half of the year are going to be lower than in the first half of the year and lower than 2021. Now it may not go down in a straight line from here, and there may be another little bit of a peak before it goes down again. But if we are right and there is a freight transportation downturn in the back of the year, rates will be lower. But, and this is a very important but, this is not being driven by supply. It's being driven by demand and its demand that is coming down, right. So if rates are lower in the back half of the year and going into 23, that means at best you are seeing inventory destocking and at worst, a broad consumer recession. So relief on inflation by itself may not be an incredible tailwind, if you are seeing demand destruction that's actually driving that inflation relief. Ellen Zentner: That's a fair point. Another topic I wanted to bring up is the fact that while freight transportation continues to face significant headwinds, airlines seem to be returning to normal levels, with domestic and international travel picking up post-pandemic. Can you talk about this pretty stark disparity? Ravi Shanker: Ellen it's absolutely a stark disparity. It's basically a reversal of the trends that you've seen over the last 2 years where freight transportation, I guess inadvertently, became one of the biggest winners during the pandemic with all the restocking we were seeing and the shift of consumer spend away from services into goods. Now we are seeing the reversion of that. So look, honestly, we were a little bit concerned a month ago with, you know, jet fuel going up as much as it did and with potential concerns around the consumer. But the message we've got from the airlines and what we are seeing very clearly in the data, what they're seeing in the numbers is that demand is unprecedented. Their ability to price for it is unprecedented. And because there are unprecedented constraints in their ability to grow capacity in the form of pilot shortages, obviously very high jet fuel prices and other constraints, I guess there's going to be more of an imbalance between demand and supply for the foreseeable future. As long as the U.S. consumer holds up, we think there's a lot more to come here. So Ellen, let me turn back to you and ask you with freight still facing such big challenges and pressure on both sides on the supply chain. What does that bode for the economy in terms of inflation and GDP growth for the rest of this year and going into next year? Ellen Zentner: So I think because, as I said, you know, our global supply chain index has stalled since February. I think that does mean that even though we've raised our inflation forecasts higher, we can still see upside risk to those inflation forecasts. The Fed is watching that as well because they are singularly focused on inflation. GDP is quite healthy. We have a net neutral trade balance on energy. So it actually limits the impact on GDP, but has a much greater uplift on inflation. So you're going to have the Fed feeling very confident here to raise rates more aggressively. I think there's strong consensus on the committee that they want to frontload rate hikes because they do need to slow demands to slow the economy. They do almost need that demand destruction that you were talking about. That's actually something the Fed would like to achieve in order to take pressure off of inflation in the U.S.. But we think that the economy is strong enough, and especially the labor market is strong enough, to withstand this kind of policy tightening. It takes actually 4 to 6 quarters for the Fed to create enough slack in the economy to start to bring inflation down more meaningfully. But we're still looking for it to come in, for core inflation, around 2.5% by the fourth quarter of next year. So, Ravi, thanks so much for taking the time to talk. There's much more to cover, and I definitely look forward to having you back on the show in the future. Ravi Shanker: Great speaking with you Ellen. Thanks so much for having me and I would love to be back. Thanks for listening. If you're interested in learning more about the supply chain, check out the newest season of Morgan Stanley's podcast, Now, What's Next? If you enjoyed this 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.

11 Touko 20229min

U.S. markets and the Federal Reserve have been grappling with high inflation this year, but could changes in global supply chains help make this problem easier?-----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 Tuesday, May 10th, at 9 a.m. in New York. Inflation is perhaps the key to understanding the markets these days. Elevated inflation is what's driving the Fed to raise interest rates at the fastest pace in a generation. And at the risk of oversimplifying, when interest rates are higher, that means it costs more to get money. And when money is no longer cheap, anything that costs money is harder to buy and therefore might have to fall in value to find a buyer. This is the dynamic the Fed believes will eventually dampen price increases throughout the economy, and it's the dynamic that's likely contributed to stock market prices already declining. But what if inflation were to start easing without the Fed raising rates? Could the Fed slow its rate hikes and, consequently, help stop the current stock market sell off? It's an intriguing possibility and investors who want to understand if such an outcome is likely need to carefully watch global supply chains. And to be clear, when we're talking about the supply chain, we're talking about whether companies can produce and deliver sufficient goods in a timely manner to meet demand. When they cannot, as became the case during the pandemic when consumers stopped going out and started buying more things than normal for their homes, prices rise as choke points emerge in key markets where demand outstrips supply. By that logic, if goods producers are able to ramp up production or if consumers shift back to normal, balancing consumption of goods and services, inflation would ease, putting less pressure on the Fed to raise rates. So what's the state of global supply chains now? Are there any signs of supply chain easing that may make the Fed's job and investors near-term market experience easier? To answer this question my colleague, Asia and Emerging Market Equity Strategist Daniel Blake, formed a team to create a supply chain choke point tracker. What can we learn from this? In short, the picture is mixed. There's several factors that could lengthen global supply chain stress. COVID spread in China, for example, has led to lockdowns affecting about 26% of GDP, hampering their production of goods. And Russia's invasion of Ukraine, and resulting sanctions response by the U.S. and Europe, has crimped the global supply of oil, natural gas and key agricultural goods. But there's some good news too. Many companies are reporting initial investment and progress towards diversifying and, in some cases, reshoring supply chains, which over time should reduce choke points. Still, the challenging news for markets is that a mixed supply chain picture means that monetary policymakers are unlikely to see supply chain easing as a reliable outcome, at least in the near term. Unfortunately, that likely means we'll continue to see risk markets struggle with how to price in a Fed that stays on track to fight inflation through higher interest rates. Thanks for listening. If you're interested in learning more about the supply chain, check out the newest season of Morgan Stanley's podcast, Now, What's Next? If you enjoyed this 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.

10 Touko 20223min

While the war in Ukraine has had an effect on the current pricing in European energy markets, there is more to the story of why high prices could persist for years to come. Chief Cross-Asset Strategist Andrew Sheets and Head of European Utilities and Clean Energy Research Rob Pulleyn discuss.-----Transcript-----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross-Asset Strategist. Rob Pulleyn: And I'm Rob Pulleyn, Head of the European Utilities and Clean Energy Research Team. Andrew Sheets: And today on the podcast, we'll be talking about the outlook for European energy supply and demand, in both the near and long term. It's Monday, May 9th, at 4 p.m. in London. Andrew Sheets: So, Rob, we talked a lot on this podcast since March about the effect of the Russia-Ukraine conflict on energy in Europe. I want to talk to you today in part because there are some interesting implications over the long term in the European energy and power markets. But just to level set a little bit what's been going on in European power prices. Rob Pulleyn: Sure. For context, Andrew, what's been happening is that European power prices versus 12 months ago are up between 150 and over 300%, depending on which country. They're pretty much at all time highs or slightly off them from where we were earlier this year. Now, what does that flow through to customer bills in places like the UK? Year over year customer bills are going up 60% so far, other country's a little bit lower due to some market intervention. But this is the backdrop. Andrew Sheets: Now, you've been talking to a lot of global investors around what's been going on in Europe. What's your most likely case? What's your base case? And then what are some realistic scenarios around that? Rob Pulleyn: We outlined four scenarios in the new note. The base case is that we get close to the FIT for 55 climate plan from last year, which envisages 65% renewables penetration by the end of the decade. Now, this is a long way short of the Repower EU plan, which would envisage about twice as much again in terms of the renewable capacity and getting to about an 80% penetration by the end of the decade. And so we see significant growth in renewables. We think coal will be phased out more or less by 2030, but with more burn in the next few years, less gas until gas supplies can be diversified. In terms of market intervention, we continue to think this will be relatively benign for utility stocks because effectively governments need to find a way to help the customer, but also ensure that utilities actually invest in the new power system that governments want. Andrew Sheets: But Rob, under your central scenario where power prices are significantly higher, isn't there a feedback mechanism there? Aren't people going to look at their sharply higher utility bills and say, I'm going to use less electricity, I'm going to put in double glazing, I'm going to improve my insulation, I'm going to do all these things that mean I use less energy. Which would hopefully mean less energy gets used and the power price impacts would be less significant. How much can energy efficiency influence the story or not? Rob Pulleyn: Now you're quite right. Demand destruction, one way or another, is part of the equation here. There's many renovation tools or new technologies which are now significantly more attractive in economic terms, simply because gas prices and power prices are so high. And whilst previously we thought there'd be a slow burn on many of those routes under the guise of decarbonization, now under cold, hard economics, as you highlight these things should all accelerate. And if I was going to point to one area of incremental policy support, I think it's got to be green gasses like hydrogen. I think that's a genuine route to both diversify gas supplies and also decarbonize. Andrew Sheets: So Rob, how do you think about the interplay between the economic backdrop and these power prices? Because it's been the energy shock from the conflict in Ukraine that's driven power prices up, but it's also been something that's led people to worry that European growth might slow, which would reduce the demand for power. So how does that play out as you're thinking about these various scenarios? Rob Pulleyn: Sure, it's a great question, Andrew. And let's just start by saying that as it stands today, utility bills contribute around about one third to the inflation rate that we have at the moment. And therefore, if these power prices and gas prices will persist as they stand, then that inflation will also be reasonably persistent. Now, of course, there is still upside risk to power price and gas prices in several scenarios, particularly those where supplies are interrupted, which would then create higher inflation on top of the rates we currently have. This would therefore then flow into the bear case that our economists have for GDP growth. And so the economic impact would of course, be there. Ultimately, GDP is sensitive to the input costs and energy is one of the biggest there is. Andrew Sheets: Rob, I also want to ask you about where technology fits into all of this. There are both some exciting advances in energy technology. On the renewable side, renewable energy is getting more efficient. We're seeing some interesting advances in battery storage. When you are trying to model European power consumption out over the next decade, how much of a technological impact are you putting in your numbers? Rob Pulleyn: Yeah. So the easy one to talk about is renewables, which is currently about 38% of the European stack. The Repower EU would imply something around 80%, which coincidentally is actually also the German target. Fit for 55 has a plan of 65% across the EU by 2030. We're modeling 62%. So significant increase from where we are today. And of course, where we are with power prices at the moment, then investing in European renewables is actually looking very attractive. I mean, very simply put, the offtake price is increasing more than the input cost inflation. That should lead to, you know, the right incentives to build more of these things. We talked about green gasses earlier. Now, whether it be market forces, the gas price, whether it be government support, ultimately we think green gasses is going to be accelerated and that can certainly help the economy beyond the power generation sector. So within European gas demand, power generation is around about 30% of it. The other two thirds, broadly evenly split, are residential heating and industrial heating furnaces and processes. And certainly hydrogen could be, in the long term, a solution for those aspects. Battery storage is a question we get a lot, particularly from the states where actually we're seeing some quite, quite stunning improvements in battery uptake. In Europe that is relatively small scale, but something which could also dramatically increase across the decade. Andrew Sheets: So, Rob, with all of this in mind, what should investors be looking at in European utilities and energy? Rob Pulleyn: Our preferred beneficiaries within the narrow definition of utilities and clean energy would be to combine the defensive nature of networks with clean energy growth. Right. And I think ultimately that that will be a very powerful combination for what the market's looking for with a macro backdrop. Your benefit for green growth from all the policy support and from the high power prices, at the same time, retaining these defensive qualities that the market increasingly seems to have an appeal for. A slightly more optimistic take would be to try and get that real power price sensitivity through some of the outright power producers, whether that's nuclear, hydro or renewables. Those stocks should benefit from significant earnings upgrades over the next few years. Andrew Sheets: Rob, thanks for taking the time to talk. Rob Pulleyn: Well, has been great speaking to you, Andrew. Thank you very much. Andrew Sheets: 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.

9 Touko 20227min

While oil prices usually rise and fall with the overall stock market, current prices have broken from this trend and oil may continue to outperform on a cross-asset basis.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist 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, May 6th, at 2 p.m. in London. Yesterday, U.S. equities fell more than 3% and U.S. 10 year Treasury bonds fell by more than 1%. This unusual pattern has only occurred 6 other days in the last 40 years. Markets are clearly continuing to struggle with major cross-currents, from a Federal Reserve that's raising interest rates, to mixed economic data, to the war in Ukraine. But one asset that's bucking the confusion is oil prices. Oil usually rises and falls with the overall stock market because the prices of both are seen as proxies for economic activity. But that relationship has broken down recently. As stock markets have fallen, oil prices have held up. We think that oil will continue to outperform on a cross-asset basis. Part of this story is fundamental. Demand for energy remains high, while energy supply has been slow to grow. The green transition is a big part of this. Consumers are likely to shift towards electric vehicles, but most cars currently on the road still burn fuel. Energy companies, seeing the shift in energy consumption coming, are more reluctant to invest in new production today. This has left the global oil market very tight, without much spare capacity. There's also a fundamental difference in the way asset classes discount future risks. Equity and credit markets are very forward looking, and their prices today should reflect how investors discount risks over the next several years. But commodity prices are different; when you need to fill up a car, or a plane, you need that fuel now. That distinction in timing doesn't always matter. But if you're in an environment where economic activity is strong right now, but it also might slow in coming years, equity and credit markets can start to weaken even as energy prices hold up. I think that's a pretty decent description of the current backdrop. A final part of this story is geopolitical. Oil prices could rise further if the war in Ukraine escalates, a scenario that would likely push prices down in other asset classes. But if geopolitical risk declines, there could be better growth, more economic confidence, and more energy demand, meaning oil might not fall much relative to forward expectations. That positive skew of outcomes should be supportive of oil. In the short term, high oil prices could weigh on consumer spending. In the long run, it creates a more powerful incentive to transition towards more energy efficiency and newer, cleaner energy sources. In the meantime, we forecast higher prices for oil, and for oil linked currencies like the Norwegian Krone. 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.

6 Touko 20223min

As “The Gig Economy” has evolved to become the Multi-Earner economy, an entire ecosystem reinventing how people earn a living, equity investors will want to take note of the related platforms that are making an impact on the market. European Head of Thematic Research Edward Stanley and U.S. Economist Julian Richers discuss.-----Transcript-----Ed Stanley: Welcome to Thoughts on the Market. I'm Edward Stanley, Head of Thematic Research in Europe. Julian Richers: And I'm Julian Richards from Morgan Stanley's U.S. Economics Team. Ed Stanley: And today on the podcast, we'll be talking about a paradigm shift in the future of work and the rise of the multi-earner era. It's Thursday, May the 5th at 3 p.m. in London. Julian Richers: And 10 a.m. in New York. Ed Stanley: So, Julian, I'd wager that most of our listeners have come across news articles or stories or even anecdotes about YouTubers, TikTok stars who've made an eye popping amount of money making videos. But you and I have been doing some research on this trend, and in fact, it appears to be much larger than just people making videos. It's an entire ecosystem that can reinvent how people earn a living. In essence, what we used to call the 'gig economy' has evolved into the multi earning economy—the side hustle. And people tend to be surprised at the sheer extent of side hustles that are out there: from blogging to live streaming, e-commerce, trading platforms, blockchain-enabled gaming. These are just a handful of some of the platforms that are out there that are facilitating this multi-earning era that we talk about. But explain for us and for our listeners why the employment market had such a catalyst moment with COVID. Julian Richers: With COVID, really what has fundamentally changed is how we think about the nature of work. So people had new opportunities and new preferences. People really started enjoying working remotely. Lots of people embraced their entrepreneurial spirit. And everything has just gotten a lot faster and more integrated the more we've used technology. And so you add on top of this, this emergence of these new platforms, and it's dramatically lowering the hurdle to go to work for yourself. And that's really how I think about this multi-earn era, right? It's working and earning in and outside of the traditional corporate structure. Ed Stanley: And talk to us a little bit about the demographics. Who are these multi-earners we're talking about? Julian Richers: So right now in our survey, we basically observe that the younger the better. So really the most prolific multi-earners are really in Gen Z. But it's really not restricted to that generation alone, right? It's pretty clear that Gen Z really desires these nontraditional work environments, you know, the freedom to work for oneself. But the barriers are really lowered for everyone across the board that knows how to use a computer. So, yes, Gen Z and it's definitely going to be a Generation Alpha after this, but it's not limited to that and we see a lot of millennials dipping their toes in there as well. Ed Stanley: And how should employers be thinking about this trend in terms of what labor's bargaining power should be and where it is, and the competition for talent, which is something that we hear quite consistently now in the press? Julian Richers: My view on this is that we're really seeing a quite dramatic paradigm shift in the labor market when it comes to wages. So for the last two decades, you had long periods of very weak labor markets that have just led to this deterioration in labor bargaining power. Now, the opposite, of course, is true, right? Workers are the scarce resources in the economy, and employers really need to look far and wide for them. And then add on top of this, uh, this multi-earn story. If it's that easy for me to wake up and go to work for myself on my computer, doing things that I enjoy, you'll need to pay me a whole lot more to put on a suit and come back to my corporate job. So Ed, with this background in mind, why should equity investors look at this trend now? Ed Stanley: It's a great question, and it's one that we confront a lot in thematic research. And we think about themes and when they become investable. For equity investors, themes tend to work best when we reach or surpass the 20% adoption curve. And that applies for technology and it applies for themes. And after this 20% point, typically investors needn't sacrifice profit for growth, which is a really important dichotomy in the markets, particularly at the moment where inflation is is clearly high and the markets are resetting from a valuation perspective. So this multi-earner theme and it's enabling technologies have hit or surpassed this 20% threshold I've talked about. While this structural trajectory is is incredibly compelling, the stock picking environment is obviously incredibly challenging at the moment. Julian Richers: So Ed, at the top, you mentioned that there are actually more of these multi-earn platforms out there than people might think. What's the ecosystem like for 'X-to-earn' and how many platforms and verticals are really out there? Ed Stanley: So the way we tried to simplify it, given that it is so broad and sprawling and increasingly so, was to try to bucket them. And we bucketed them into nine verticals with one extra one, which essentially is the facilitators—these are the big recruitment companies who are also trying to navigate this paradigm shift alongside these 'X-to-earners, these multi-earners. And we lay this out from the most mature to the least mature. And in the most mature category, we have content creators. We have the e-commerce platforms. We have delivery, as in grocery and delivery drivers, and then we start to get into the least mature verticals. This is trading as an earnings strategy which has been very volatile and continues to be so. Gig-to-earn, where people are spending time doing small tasks which don't take up large amounts of time typically and can be done on the side of corporate roles. And then right at the most emergent, or least mature, end of the spectrum, we have play-to-earn. And these tend to be based on blockchain platforms where participation is rewarded, in theory, by tokens which are native to that blockchain. So incredibly emerging technology and one that we're, we're looking to watch closely. Julian Richers: Yeah. So among those platforms, is there one that you think is particularly worth watching? Ed Stanley: Well, I think actually it comes down to that that latter point, I think many of the ones at the more mature end of the spectrum are pretty self-explanatory. A lot of that, I think, is second nature, particularly for younger users who are trying to make money on on these platforms. But it's at that more emerging end of the spectrum, the blockchain enabled solutions, where a lot of this is incredibly new and the innovation is happening at a really quite alarming rate. That blockchain enabled solution essentially is a new challenge to legacy institutions who don't anymore have to compete just with these traditional earning platforms, but they also have to compete with the labor monetization tools that blockchains facilitate. And they'll also have to compete with the lifestyle that these tools offer, which essentially is that freedom to work for yourself and to earn multiplicatively. Julian Richers: So, my last question ties back to the question that you had for me about how employers should think about this. What does this trend actually mean for corporates? Ed Stanley: So, this is something that certainly seems to be inflationary in the short term and I think we both agree appears to be structurally inflationary in the longer term. The real question both corporates and investors seem to have is, 'what happens to all of this in a recession?' And the recession point is something that is obviously gathering traction in the markets. It's gathering traction in the news. And a lot of this will become potentially untenable as a sustainable earning platform. And so these earning platforms cannot yet be assumed to be stable, sustainable revenue streams, particularly during downturns. And so, these are the kind of debates that are happening. But longer term, through a recession and out the other side, we still believe that the ability to scale, the low upfront costs, the low opportunity costs or perceived low opportunity costs of careers, are really what's driving this, and that is not going to go away just because of a recession. And so with that, Julian, thank you very much for taking the time to talk to me. Julian Richers: Great speaking with you, Ed. Ed Stanley: 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.

6 Touko 20228min

2022 has presented a complex set of challenges, meaning investors may want to take a step back and consult rules-based indicators and strategies for some clarity.-----Transcript-----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist 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 Wednesday, May 4th, at 2 p.m. in London. 2022 is complicated. Cross-asset returns are unusually bad and investors still face wide ranging uncertainties, from how fast the Federal Reserve tightens, to whether Europe sees an energy crisis, to how China addresses COVID. But step back a bit, and the year is also kind of simple. Valuations were high, policy is tightening and growth is slowing, and prices have fallen. Cheaper stocks are finally outperforming more expensive ones. Bond yields were very low and are finally rising. So what should investors do, given a complex set of challenges, but also signs of underlying rationality? This can be a good time to step back and look at what our rules-based indicators are saying. Let's start by focusing on what these indicators say about where we are in the cycle, and what that means for an investment strategy. Our cycle indicator looks at a range of economic data and then tries to map this to historical patterns of cross-asset performance. Our indicator currently sees the data as significantly above average. We call this 'late cycle', because historically readings that have been sharply above the average have often, but not always, occurred later in an economic expansion. This is not about predicting recession, but rather about thinking probabilistically. If the odds of a slowdown are rising, then it will affect cross-asset performance today, even if a recession ultimately doesn't materialize. At present, the 'late cycle' readings of this indicator are consistent with underperformance of high yield credit relative to investment grade credit, the outperformance of defensive equities, a flatter yield curve and being more neutral towards bonds overall. All are also current Morgan Stanley Research Views. A second question that comes up a lot in our meetings is whether or not there's enough worry and concern in the market to help it. After all, if most investors are already negative, it can be harder for bad news to push the market lower and easier for any good news to push the market higher. We try to quantify market sentiment and fear in our sentiment indicator. Our sentiment indicator works by trying to look at a wide variety of data, but also paying attention to not just its level but the direction of sentiment. At the moment, sentiment is not extreme and it's also not yet improving. Therefore, our indicator is still neutral. Given the swirling mix of storylines and volatility, a third relevant question is what would a fully rules-based strategy do today? For that we turn to CAST, our cross-asset systematic trading strategy. CAST asks a simple question with a rules-based approach; what looks most attractive today, based on what has historically worked for cross-asset performance. CAST is dialing back its market exposure, especially in commodities where it has become more negative on copper, although it still likes energy. CAST expects the Renminbi to weaken against the U.S. dollar, and Chinese interest rates to be lower relative to U.S. rates. In stocks, it is positive on Japan and healthcare, and negative on the Nasdaq and the Russell 2000. All of these align with current Morgan Stanley Research fundamental views and forecasts. Rules based tools help in markets that are volatile, emotional, and showing more storylines than a reasonable investor can process. For the moment, we think they suggest cross-asset performance continues to follow a late cycle playbook, that sentiment is not yet extreme enough to give a conclusive tactical signal, and that following historical factor-based patterns can help in the current market environment. These tools won't solve everything, but given the challenges of 2022 so far, every little bit helps. 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.

4 Touko 20224min

As U.S. voters continue to show support for trade policy in regards to China, investors will want to track which actions could have consequences for China equities and currency markets.-----Transcript-----Welcome to Thoughts on the Market. I'm Michal 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 Tuesday, May 3rd, at 2 p.m. in New York. You might recall that, for much of 2018 and 2019 financial markets ebbed and flowed on the tensions between the U.S. and China over trade policy that led to escalation of tariffs, export restrictions and other policies that still hinder commerce between the countries today. We remind you of those events because they could echo through markets this year as calls in the U.S. for concrete trade policy action have recently grown louder. The main catalyst for this has been reports showing that China has fallen short of its purchase commitments within the Phase One trade deal signed in February of 2020. And polls show that voters would continue to view U.S. trade protections favorably, which, of course, translates to strong political incentives for lawmakers to pursue 'tough on China' policies. So in light of this, it's worth calling out three potential policy actions and their potential effect on equities and currency markets. The first is a trade tool known as a '301 investigation.' I'll spare you the mechanics, but a 301 investigation allows the U.S. to impose tariff or non-tariff actions in response to unfair trade practices. Media reporting has indicated that the Biden administration is considering deployment of a 301 investigation. Should the U.S. adopt non-tariff measures under Section 301 against China, such as further restrictions on the technology supplied to Chinese firms, China may respond with non-tariff measures on specific American goods. For investors, a tariff escalation would likely be a drag on bilateral trade in affected sectors and discourage manufacturing capital expenditures. As a result, broad equity market sentiment in China would likely be dampened, and it could mean further downside to our already cautious view on China equities. The second potential action would be passage of the 'Make It In America Act,' which would enhance domestic manufacturing in some key industries and reduce reliance on foreign sources by reinforcing the supply chain in the U.S. The House and Senate have both passed versions of this bill, and we expect a blended version will become law this year. For investors, this event may be largely in the price. Currency markets will likely see it as just a continuation of ongoing competition between the two nations, without an immediate escalation. The effect on equity markets would be similarly mixed. Finally, the U.S. could escalate non-tariff barriers in places such as tech exports. This last policy action could be significant, since non-tariff measures negative effects tend to be bigger and more profound than direct tariff hikes. We expect China to respond in kind, perhaps by launching an 'unreliable entity' list, which would mean prohibitions on China-related trade, investment in China and travel and work permits. Currency markets would likely react, seeing this as a meaningful escalation, resulting in fresh U.S. dollar strength due to concerns about companies foreign direct investment into China. And for China equities, once again, it would mean further downside to our already cautious view. 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.

3 Touko 20223min

Credit markets are facing various headwinds, including policy tightening and slowing growth, and credit investors are looking for where they might see the best risk adjusted returns. Chief Cross-Asset Strategist Andrew Sheets and Global Director of Fixed Income Research Vishy Tirupattur discuss.-----Transcript-----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross-Asset Strategist. Vishy Tirupattur: And I am Vishy Tirupattur, Global Director of Fixed Income Research. Andrew Sheets: And today on the podcast, we'll be talking about the challenges facing credit markets. It's Monday, May 2nd at 1 p.m. in London. Vishy Tirupattur: And 8 a.m. in New York. Andrew Sheets: So Vishy, it's great to have you back on the show because I really wanted to speak to you about what's been happening in credit markets. There's been a lot of volatility across the whole financial landscape, but that's been particularly acute in fixed income and we've seen some large moves in credit. So maybe before we get into the rest of the discussion, let's just level set with what's been happening year to date across credit. Vishy Tirupattur: It's been a really rough ride to credit investors. Investment grade returns are down 12% for the year and for high yield investors are down 6% for the year and leveraged loan markets are up slightly, 1.4% up for the year. So pretty dramatic differences across different segments of the credit markets. Higher quality has significantly underperformed lower quality. Andrew Sheets: So Vishy where I think this is also interesting is that investors in other asset classes often really look to credit as both a warning sign potentially to other markets and as an overall indicator in the health of the economy, so when you think about what's been driving the credit weakness, you know, how much of it is a economic concern story? How much of it is an interest rate story? How much of it is other things? Vishy Tirupattur: Andrew, we should always remember that the total returns to bond investors come from two parts. There's an interest rate component and there is a credit quality component. And what has driven the markets thus far in the year is really higher interest rates. As you know, Andrew, interest rates have dramatically increased from the beginning of the year to now, and a lot of expectations of future interest rates is already reflected in price. Those higher interest rate expectations have really contributed to the underperformance of the higher quality bonds, which tend to be a lot more interest rate sensitive than the lower quality bonds. The lower quality bonds tend to be a lot more sensitive to perceptions of the quality of the credit, as opposed to the level of interest rates. And that is really what explains the market moment thus far. Andrew Sheets: So Vishy, after such a tough start to the year for credit, do you think those challenges persist and do you think we see the same pattern of performance, of investment grade underperforming high yield which is underperforming loans, translate over the rest of the year? Vishy Tirupattur: Andrew I think that is a change that is afoot here. A pretty aggressive rate of interest rate hikes is already priced into the interest rate market. Even though investment grade returns have been affected negatively, predominantly by higher level of interest rates, going forward we think that is changing. I think we are going to see changes in the expectations of credit worthiness of bonds, the credit risks in the tail parts of the credit markets taking a greater significance in terms of credit market returns going forward. Andrew Sheets: So in essence, Vishy, we've just had a period where higher quality credit has underperformed as interest rates have been the main factor driving bonds. But looking ahead, that interest rate move is, we think, largely done for the time being, whereas the market might start to focus more on the extra risk premium that needs to be applied for economic risk. Vishy Tirupattur: Indeed, I think the focus of the credit markets will change from a concern about incrementally higher interest rates to concerns about the quality of the credit markets. So credit concerns are building, the economy is showing signs of downdraft, we saw the negative GDP print. So we think going forward, the market will think about credit quality more than interest rate effects on the total returns. Andrew Sheets: And Vishy, if investors are looking at this large downdraft in the investment grade market, where do we see the best risk adjusted return within the investment grade credit market? Vishy Tirupattur: So within the investment grade markets, the back up in rates has really created pockets of value in low dollar price bonds. And this is where we think the best opportunity for investors lies. In the high yield world, we think double B's or triple C's is a good trade. Andrew Sheets: The final question I'd ask you that comes up a lot is, what is the outlook for defaults? How are you thinking about forecasting defaults, and are there aspects of the fundamental balance sheet trends of companies today that, you know, seem pretty important as we think about that cycle? Vishy Tirupattur: I'm glad you asked me that question, Andrew. Even though the economy is weakening a bit and credit concerns are rising a bit, it by no means means we will see a spike in default rates. Default rates are at historically low levels now. Defaults are probably going to rise from here, but not dramatically spike. We expect that defaults will remain below the long term average for some time to come. In fact, if we look at the fundamentals of the credit markets, they have been strongest they have ever been going into a credit cycle. Andrew let me turn it back to you. You know, one can argue that this rise in yields that we have seen from the beginning of the year to now will mean significant changes to fixed income asset allocation. And in fact, makes fixed income asset allocation much more interesting. On your total return focused optimal portfolio, what's the better risk reward proposition in the fixed income markets? Andrew Sheets: I think it's pretty interesting. You know, if you've been investing in the markets over the last decade you really feel like a broken record when you say that bond yields are low. I mean, bond yields have been low and then they've often kept going lower. So it's pretty notable that in a relatively short period of time, you know, in the last nine months, the yield picture has really changed. And bond prices going down is the way that yields go up, and we've seen the largest drawdown in bond prices since 1980 in the U.S. So that pain is painful to investors, that that drop in prices has hurt portfolios. If there's a silver lining, it means that the yields now on offer are a lot better. So as you mentioned, you know, U.S. investment grade credit yielding 4-4.25%, well that's a whole lot higher than it's been even recently. I think investors after a long drought of a lack of fixed income options, are going to start to come back to the bond market and say, look, this now has a better place in my portfolio. We've been underweight bonds from July of last year and through April 6th of this year. But we've closed that position and we now think the risk reward for bonds is a lot more balanced and investors who were underweight should start adding back. Vishy Tirupattur: So given the increase in rates, income is back into a fixed income, right? Andrew Sheets: It exactly is. And again, I think it's also interesting because, you know, investors, I think, no longer have to compromise quite so much between bonds that offer income and bonds that can offer some stability to a portfolio. You know, I think the other thing that's so interesting about the view that that you and our credit strategy team have changed, you know, moving up in quality and credit, moving from a preference of high yield over investment grade to the other way around is, you know, that's a similar signal that we're getting from a lot of our top down cross asset framework tools. When the unemployment rate is this low, when the yield curve is this flat, that tends to be a time when risks to high yield bonds are elevated relative to history. So I think that the bottom up, you know, fundamental view that you and the credit strategy team are talking about fits really well with some of the broader cross asset signals that we're seeing as we look across the global space. Andrew Sheets: Vishy, thanks for coming back on the show. It's always great to hear your insights. Vishy Tirupattur: Thanks for having me, Andrew. Andrew Sheets: 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.

3 Touko 20228min