What the New Tax Bill Means for Cross-Border Portfolios

While stocks have recently rallied, the strength of the U.S. dollar has risen sharply over the past year, presenting a major potential headwind for equities in the coming earnings season.-----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, July 11th, at 11 a.m. in New York. One of the more popular views over the past decade has been the eventual decline of the U.S. dollar. After all, with the Fed printing so many dollars since the global financial crisis and then doubling down during the COVID pandemic, this idea has merit. However, after the great financial crisis, these printed dollars never made it into the real economy, as they were simply used to patch up broken balance sheets from the housing bust. Therefore, money supply never got out of hand. In fact, during the entire period after the Fed first embarked on quantitative easing in November 2008 through the end of the cycle in March of 2020, money supply growth averaged only 6%, right in line with the long term trend of money supply and nominal GDP growth. As a result, the U.S. dollar maintained its reserve currency status and actually rose 40% during that decade. However, as we pointed out back in April of 2020, the stimulus provided during COVID was very different. At the time, we suggested that the coordinated fiscal and monetary policy was unprecedented. The result is that money supply growth exploded and since February 2020 has averaged 17%, or three times a long term trend, a truly unprecedented outcome that left us with much more inflation than what was desired. Now, with the Fed reversing course so quickly and the checks having stopped long ago, money supply growth has fallen all the way back to its long term trend of just 6%. Given the projected path for rate hikes and quantitative tightening, money supply growth is likely to fall even further, and the dollar is unlikely to show any signs of decline until the Fed pivots. Such a pivot seems unlikely any time soon, especially after last week's strong jobs report. So why does this matter so much for stocks? Based on the extreme rally so far this year, the U.S. dollar is now up 16% year over year. This is about as extreme as it gets historically speaking and unfortunately it typically coincides with financial stress on markets, a recession or both. For stocks the stronger dollar is also going to be a major headwind to earnings for many large multinationals. This could not be coming at a worse time as companies are already struggling with margin pressure from cost inflation, higher or unwanted inventories and slower demand. The simple math on S&P 500 earnings from currency is that for every percentage point increase in the dollar on a year over year basis, it's approximately a 0.5 hit to earnings per share growth. Of course, things can change quickly, but it doesn't seem likely until the path of inflation slows enough to warrant a Fed pivot. The main point for equity investors is that this dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons. Therefore, the recent rally is likely to fizzle out before too long. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

11 Heinä 20223min

As investors in the internet industry have begun to wonder if online dating platforms will sink or swim in the case of a recession, looking back on the last recession may shed some light on a potential shelter from the storm.-----Transcript-----Welcome to Thoughts on the Market. I'm Lauren Schenk, Equity Analyst covering the small and mid-cap Internet Industry. Along with my colleagues, bringing you a variety of perspectives, I'll be giving some insight into consumer spending trends through the lens of online dating. It's Friday, July 8th, at noon in New York. How does online dating perform in a recession? Believe it or not, it's the number one question I've heard from investors over the last several weeks. And I think another way of getting at this question broadly, and you can really extrapolate this across many industries, is do consumers view a product as a necessary staple or as non-essential spending? On one hand amid elevated inflation on indispensable items like gas and groceries, you may think consumers would view online dating as a nonessential item. On the other hand, finding love or a significant other ranks usually pretty high in most people's life goals, so maybe it's a staple. So that's the question we sought to answer recently when we looked into how online dating platforms perform during a recession. To dig into this, we looked into some historical data from 2007-2010. What we found was that, for one online dating platform, subscriber growth was largely unaffected and actually accelerated slightly in 2008 and 2009. The net impact for this platform was a slight slowdown in organic revenue growth from low double digit growth in 2007, to mid-single digits in 2008 and 2009, and then accelerating to high teens by the end of 2010. So overall, we found that the continued need for human connection, and the low price of online dating, resulted in minimal business impact during the global financial crisis, despite a significant pullback in consumer spending. Looking at today, online dating has now become a more widely accepted service to a wider range of people. But how are things different from the last recession? Well, I'll share a few key differences from our research. First, online is now a primary way for couples to meet, with the percentage of U.S. relationships starting online increasing from 22% in 2009 to 39% in 2017, which makes it more of a staple than discretionary. Second, we believe there is greater pent up demand for the product today than in 2008 and 2009, given COVID. Which could better insulate online dating, since consumers may be less inclined to cut spending on services that were under consumed during the height of COVID. Third, the top brands have changed and are now predominantly mobile based versus desktop, and attract a younger user who typically have a lower income than 40 plus year olds. And finally, given the brand and geography shifts, a la carte revenue from things like profile boosting is a larger percentage of revenue today than during the global financial crisis, which may prove more discretionary than subscriptions. How does this impact our view of how online dating could perform in a potential recession? Given the 2008-2009 results and the differing macro factors of a potential 2023 recession we have increased confidence in our view that online dating is one of the best consumer internet sub industries to weather a potential recession storm. After all, people still need love and relationships in recession and you can argue they need it more. And the low average monthly cost means it's likely not an item that single consumers would cut first. 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 Heinä 20223min

As inflation continues to be a major concern for the U.S., investors will want to pay attention to how spending, travel and sentiment are changing for consumers.-----Transcript-----Welcome to Thoughts on the Market. I'm Michelle Weaver, a U.S. equity strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be sharing the pulse of the U.S. consumer right now amid elevated inflation and concerns about recession. It's Thursday, July 7th, at 2 p.m. in New York. Consumer spending represents roughly 65% of total U.S. GDP. So if we're looking for a window into how U.S. companies could perform over the next 12 months, asking consumers how confident they're feeling is a great start. Are consumers planning on spending more next month or less? Are people making plans for outdoor activities and eating out or are they staying at home? Are they changing travel plans because of spending worries? These are a few of the questions that the equity strategy team asks in a survey we conduct with the AlphaWise Group, the proprietary survey and data arm of Morgan Stanley Research. We recently decided to change the frequency of our survey to biweekly to get a closer look at the consumer trends that will affect our outlook. So today, I'm going to share a few notable takeaways from our last survey, which was right before the July 4th holiday. First, let's take a look at sentiment. The survey found that inflation continues to be the top concern for two thirds of consumers, in line with two weeks before that, but significantly higher compared to the beginning of the year. Concern over the spread of COVID-19 continues to trend lower, with 25% of consumers listing it as their number one concern versus 32% last month. And 41% of consumers are worried about the political environment in the U.S. versus 38% two weeks ago, a slight tick up. Apart from inflation, low-income consumers are generally more worried about the inability to pay rent and other debts, while upper income consumers over index on concerns over investments, the political environment in the U.S., and geopolitical conflicts. A second takeaway to note is that consumer confidence in the economy continues to weaken, with only 23% of consumers expecting the economy to get better. That's the lowest percentage since the inception of our survey and down another 3% from two weeks ago. In addition, 59% of consumers now expect the economy to get worse. This lines up with the all-time lows observed in a recent consumer sentiment survey from the University of Michigan. A third takeaway is that consumers are planning to slow spending directly as a result of rising prices. 66% of consumers said they are planning to spend less over the next six months as a result of inflation. These numbers are influenced by income level, with lower income consumers planning to reduce spending more. We also asked consumers where they were planning to reduce spending in response to inflation. Dining out and take out, clothing and footwear, and leisure travel were among the most popular places to cut back, and all represent highly discretionary spending. And finally, the survey noted that travel intentions are considerably lower to the same time last year, with 55% of consumers planning to travel over the next six months, versus roughly 64% in the summer of last year. We also asked consumers if they were planning to cancel or delay post-Labor Day travel because of inflation. Generally, planned travel post-Labor Day is in line with broader travel intentions. Cruises and international travel were the most likely to be delayed or postponed. So what's the takeaway for investors? It is important to allocate selectively as consumer behavior shifts in order to cope with inflation and company earnings and margins come under pressure. Our team recommends defensive positioning, companies with high operational efficiency, and looking for idiosyncratic stories where companies have unique advantages. 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.

7 Heinä 20224min

As media reports indicate a possible tariff reduction on imports from China, some investors are wondering if this is signaling a return of modest trade barriers and unfettered investment between the U.S. and China.-----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, July 6th, at 1 p.m. in New York. If media reports citing White House sources are to be believed, the U.S. is getting closer to reducing some tariffs on imports from China, motivated at least in part by trying to ease inflation pressures. This has prompted some investors to ask us if we think this is a signal that the U.S./China economic relationship is starting to head back toward what it was before 2018, where trade barriers between the two countries were modest, and U.S. corporate investment in China was largely unfettered. In short, we do not think this is the case and rather expect that the U.S. and China will continue on its current path of drawing up more barriers to commerce between them, particularly in the areas of new and emerging technologies. Let's break it down. Consider that the scope of the tariff reductions being reported is quite small. One report, citing a Biden administration official, suggested tariffs could be reduced on about $10 billion worth of goods, a sliver of the $370 billion of goods currently under tariff. Given that taking away all the tariffs would only result in shaving a few tenths of a percent off consumer price index growth, this modest change, though reportedly intended to curb inflation, is unlikely to be a meaningful inflation fighter. That suggests the U.S. continues to prioritize its long term competition goals with China over inflation concerns, which is not surprising given continued skepticism among U.S. voters of both parties over the role of China in the global economy. This leads to another important point, that tariff relief could counterintuitively accelerate U.S. policies that create commerce barriers with China. In line with our expectations, media reports suggest a tariff relief announcement could be paired with news of a fresh Section 301 investigation, which is the process to kick off a new round of tariffs that could be imposed on China. Again, this makes sense when accounting for the long term policy goals of the U.S., as well as the political considerations in a midterm election year. So bottom line, don't read too much into tariff relief if it's announced. The U.S. and China are likely to continue drawing up barriers, and accordingly rewiring the global economy as companies shift supply chains and end market strategies. This is 'slowbalization' in motion, and it will continue to drive challenges, such as margin pressure for U.S. multinationals, and opportunities, such as for key sectors like semiconductor capital equipment companies benefiting from a new wave of geopolitical CapEx. 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.

6 Heinä 20222min

Original Release on June 16th, 2022: While many investors may be curious to know what other investors are thinking and feeling about markets, there’s a lot more to the calculation of investor sentiment than one might think.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this episode of the podcast, we'll be discussing the path for both housing prices, housing activity and agency mortgages through the end of the year. It's Thursday, June 16th, at noon in New York. Jay Bacow: Jim, it seems like every time we come on this podcast, there's another record in the housing market. And this time it's no different. Jim Egan: Absolutely not. Home prices just set a new record, 20.6% year over year growth. They set a new month over month growth record. Affordability, when you combine that growth in home prices with the increase we've seen in mortgage rates, we've deteriorated more in the past 12 months than any year that we have on record. And a lot of that growth can be attributed to the fact that inventory levels are at their lowest level on record. Consumer attitudes toward buying homes are worse than they've been since 1982. That's not a record, but you get my point. Jay Bacow: All right. So we're setting records for home prices. We're setting records for change in affordability. With all these broken records, investors are understandably a little worried that we might have another housing bubble. What do you think? Jim Egan: Look, given the run up in housing in the 2000s and the fact that we,ve reset the record for the pace of home price growth, investors can be permitted a little anxiety. We do not think there is a bubble forming in the U.S. housing market. There are a number of reasons for that, two things I would highlight. First, the pre GFC run up in home prices, that was fueled by lax lending standards that really elevated demand to what we think were unsustainable levels. And that ultimately led to an incredible increase in defaults, where borrowers with risky mortgages were not able to refinance and their only real option at that point was foreclosures. This time around, lending standards have remained at the tight end of historical ranges, while supply has languished at all time lows. And that demand supply mismatch is what's driving this increase in prices this time around. The second reason, we talked about affordability deteriorating more over the past 12 months than any year on record. That hit from affordability is just not as widely spread as it has been in prior mortgage markets, largely because most mortgages today are fixed rate. We're not talking about adjustable rate mortgages where current homeowners can see their payments reset higher. This time around a majority of borrowers have fixed rate mortgages with very affordable payments. And so they don't see that affordability pressure. What they're more likely to experience is being locked in at current rates, much less likely to list their home for sale and exacerbating that historically tight inventory environment that we just talked about. Jay Bacow: All right. So, you don't think we're going to have another housing bubble. Things aren't going to pop. So does that mean we're going to continue to set records? Jim Egan: I wouldn't say that we're going to continue to set records from here. I think that home prices and housing activity are going to go their separate ways. Home prices will still grow, they're just going to grow at a slower pace. Home sales is where we are really going to see decreases. Those affordability pressures that we've talked about have already made themselves manifest in existing home sales, in purchase applications, in new home sales, which have seen the biggest drops. Those kinds of decreases, we think those are going to continue. That lack of inventory, the lack of foreclosures from what we believe have been very robust underwriting standards, that keeps home prices growing, even if at a slower pace. That record level we just talked about? That was 20.6% year over year. We think that slows to 10% by December of this year, 3% by December of 2023. But we're not talking about home prices falling and we're not talking about a bubble popping. Jim Egan: But with that backdrop, Jay, you cover the agency mortgage backed securities markets, a large liquid way to invest in mortgages, how would you invest in this? Jay Bacow: So, buying a home is generally the single largest investment for individuals, but you can scale that up in the agency mortgage market. It's an $8.5 trillion market where the government has underwritten the credit risk and that agency paper provides a pretty attractive way to get exposure to the housing outlook that you've described. If housing activity is going to slow, there's less supply to the market. That's just good for investors. And the recent concern around the Fed running off their balance sheet, combined with high inflation, has meant that the spread that you get for owning these bonds looks really attractive. It's well over 100 basis points on the mortgages that are getting produced today versus treasuries. It hasn't been over 100 basis points for as long as it has since the financial crisis. Jim, just in the same way that you don't think we're having another housing bubble, we don't think mortgages are supposed to be priced for financial crisis levels. Jim Egan: Jay, thanks for taking the time to talk. Jay Bacow: Great speaking with you, Jim. Jim Egan: 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.

5 Heinä 20225min

For the last decade investors have been focused on highflying growth stocks, but this investing environment may be the exception rather than the rule. Chief European Equity Strategist Graham Secker and Global Head of Quantitative Investment Strategies Research Stephan Kessler discuss.-----Transcript-----Graham Secker: Welcome to Thoughts on the Market. I'm Graham Secker, Morgan Stanley's Chief European Equity Strategist. Stephan Kessler: I am Stephan Kessler, Global Head of Quantitative Investment Strategies Research. Graham Secker: And on this special episode of the podcast, we'll be talking about the potential return of value investing post its decade long decline since the global financial crisis. It's Friday, July the 1st, at 10 a.m. in London. Graham Secker: As most listeners of this particular podcast are probably aware, for much of the past decade, investors have had something of a love affair with the highflying growth stocks in the market. Meanwhile, their value priced counterparts, the shares of which tend to trade at relatively low price to earnings multiples and or offering higher dividend yields, have had a considerably rougher time of it. But I believe that the last decade is more the exception to the rule rather than the norm. And I think your analysis, Stephan, shows that this is true, yes? Stephan Kessler: Yes, I agree. We have looked at the performance of value as an investment style back to the 1920s, and we find that the period between the end of the global financial crisis and the COVID pandemic was only the decade where value did underperform. For me, the why here is really an interesting question to pick apart, which you and I look at through two different lenses. You're the fundamental strategist and I'm the quantitative analyst. So I think my first question to you is, from your fundamental point of view, what were the main drivers of value’s underperformance during this lost decade? Graham Secker: Yes. So from our perspective, we think there were two main drivers of values underperformance post the GFC. Firstly, a backdrop of low growth, low inflation and low and falling and negative interest rates, created a particularly problematic macro backdrop for value stocks. The former two factors were weighing on the relative profitability of value stocks, while the very low interest rates were actually boosting the PE ratio of longer duration growth stocks. This unpalatable macro backdrop then coincided with a challenging micro backdrop as the broad theme of disruption took hold across markets. This prompted greater hope among investors for the long term growth potential of the disruptors, while undermining the case for mean reversion across other areas of the market whereby cyclical slowdowns were often effectively viewed as structural declines. So, Stephan, you've said that the discount on value stocks cannot be explained fully by fundamentals or justified by the earnings overview. What do you believe are the deeper drivers for this discount? Stephan Kessler: When you look at the value, it faced over the past few years, a range of challenges really. On the behavioral side, investors have focused on growth stocks and growth opportunities. This led to a substantial and persistent deviation of equities from their fair values and an underperformance of value investors. Next to this more behavioral argument, we find that the environmental, social and governance related aspects or in short, ESG and monetary policy were themes which drove price action. Equity value has a negative exposure to those themes. And finally, when you look at the 2020 period, there was a classical value trap situation. Companies which were most affected by the COVID pandemic sold off and appear cheap based on quite a range of value metrics, while the COVID catalyst continued to disrupt markets and led to companies which were cheaply valued not being able to recover as they had exposure to these disruptors. This only start to resolve in 2021, which is also when we start to see value regain performance. To get back to a more generalist view of the main drivers of values underperformance, I'd like to get back to you, Graham. You've observed a link between the macro and the micro, which created something of a vicious circle for value in the last cycle. Can you talk about how this situation looks going forward? Graham Secker: Yes, going forward, we think this vicious cycle for value could actually turn to be something more of a virtuous cycle over the next few years. We argue that we've entered a new environment of higher inflation and associated with that higher nominal growth, and that drives a recovery in the profitability of these older economy type companies. And at the same time, a rising cost of capital undermines the case for the disruptors. And that can happen both in terms of lower valuations off the back of higher interest rates, but also as liquidity starts to subside, a lack of capital to fund their future business growth. Stephan, you mentioned two of these key disruptive forces, quantitative easing by the central banks and then the rise of ESG. Can you talk about the impact of these two elements on the equity investment landscape? Stephan Kessler: ESG is a major theme in financial markets today, and in particular in this 2018-20 period we saw ESG positive names build up a premium, which made them appear expensive in the context of value metrics. These ESG valuation premia then turned out to be persistent and at times even grew. This then goes, of course, against value investors who try to benefit from this missed valuations mean reverting. And to the extent these valuations even turn stronger, that drove their losses. Quantitative easing is another aspect that drove price action. We find that value tends to underperform in time periods of low interest rates and does well in a rising rates environment. The economic driver behind this empirical observation is that the very low rates you saw in the past make proper valuations of firms difficult as discounted cash flow approaches are challenged. And so on the back of that, lower rates simply lead to valuation and value as signals being challenged and not properly priced. So given the historical narrative and all the forces at play during the past decade, what is your preference between value versus growth for the second half of 2022 and beyond that, Graham? Graham Secker: Yes. So in the short term, a backdrop of continued high inflation and rising interest rates should we think continue to favor value over growth. However, perhaps right towards the end of this year, we do envisage a situation where that could reverse a little bit, albeit temporarily, once inflation has peaked and the economic downturn has materialized, investor attention may start to focus on rates no longer rising, and that will put a little bit of a bid back under the growth stocks again. But I think if we look longer term, actually, I'm beginning to think that what we'll see is the whole value versus growth debate actually becomes a bit more balanced and hence I can see more range bound relative performance thereafter. And Stephan, from your perspective, in a world of rising bond yields and lower or normalized QE, what is your outlook for value going forward, too? Stephan Kessler: Well, when we look at the two catalysts for value underperformance, ESG and quantitative easing I mentioned earlier, we see that their grip on the market is loosening. For one, markets have moved into rates tightening cycle which means investors focus more on near-term cash flows rather than terminal value. This is a positive for value companies, which tend to well under such considerations. Furthermore, the dynamism of ESG themes has abated compared to the 18-20 period, leading to a lower effect on value. Another angle on this is also a look at the valuation of value as a style. It's quite cheap, so it's a good entry point. This leads to a positive outlook for value, but also for other styles. We like, particularly the combination of value and quality as it benefits from the attractive entry levels for value, as well as the defensiveness of an investment in quality shares. Graham Secker: So to summarize from a fundamental and quantitative approach, both Stephan and I think that the extreme underperformance of value that we've seen over the prior decade has ended, value looks well-placed to return to its traditional outperformance trends going forward. Stephan, thanks for taking the time to talk today. Stephan Kessler: Great speaking with you, Graham. Graham Secker: 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.

1 Heinä 20228min

As the risks to international economic growth increase, global investors may find some good news in the Japanese equities market. -----Transcript-----Welcome to Thoughts on the Market. I'm Jonathan Garner, Morgan Stanley's Chief Asia and Emerging Markets Equity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll be reflecting on a recent visit to Japan. It's Thursday, June the 30th, at 1 p.m. in London. I spent two weeks in Tokyo meeting with a wide range of market participants and others. This trip came together as Japan opened up to business visitors and small groups of tourists, after a lengthy period of COVID related travel restrictions. Japan equities - currency hedged for the U.S. dollar based investor - are our top pick in global equities and have been doing well this year relative to other markets. My first impression was how cheap prices in Japan now are at the current exchange rate of ¥135 to the U.S. dollar. For example, a simple metro journey in the inner core of Tokyo is priced at ¥140, so almost exactly $1 USD currently. It's possible to get a delicious lunchtime meal of teriyaki salmon, rice, pickles, miso soup and a soft drink in one of the numerous small cafes under the giant urban skyscrapers of the Central District of Marinucci for ¥1,000 or even lower. So that's about $6 to $7 USD currently. We feel this competitive exchange rate bodes well for the major Japanese industrial, technology and pharmaceutical firms, which dominate the Japan equity market as they compete globally. Indeed, the currency at these levels is one of the reasons that earnings revisions estimates, by bottom up analysts covering these companies, continue to move higher. Unlike the overall situation in global equities currently. In meetings, I was often asked whether we shared some of the concerns which have been voiced by some commentators on the Bank of Japan's monetary policy stance. The Monetary Policy Committee meeting for June was held during my trip, and the Bank of Japan kept its short term policy rate at -0.1% and also reiterated its pledge to guide the ten year government bond yield at +/- 25 basis points around a target of zero. Clearly, this monetary policy is divergent with trends elsewhere in the world currently and in particularly with the U.S. And this divergence is a key reason why the yen has been weakening this year. We at Morgan Stanley feel strongly that this approach is the right one for Japan, for one key reason. Unlike the U.S., UK or other advanced economies, Japan's inflation rate remains in line with policy goals. Headline CPI inflation is running at just 2.5% year on year, while CPI ex food and energy is 0.8%. Japan does not have a breakout to the upside in wage inflation either. We also think BOJ Governor Kuroda-san was correct in identifying downside risks to international economic growth as a risk factor for Japan's own GDP growth going forward, which at the moment we think is likely to track at around 2% this year. During our trip, we also spent time with investors discussing Japan Prime Minister Kishida-san's modifications to the policies of his two predecessors, in particular around a more redistributive approach to fiscal policy and digitalization of the public sector. The trend to greater corporate engagement with minority investors and activist investors was also debated. Japan is now the second largest market globally after the US for activist investor campaigns to promote corporate restructuring, thereby unlocking shareholder value. For us. Ultimately, the proof of the pudding, and how the Japan story all comes together, is the trend in corporate return on equity for listed equities. This has risen from less than 5% on average in the 20 years prior to Abe-san's premiership to above 10% currently. And it's now converged with two key North Asian peers; China and Korea. With Japan equities trading at the low end of the valuation range for the last 10 years, below 12 x forward price to earnings multiple, we think it's a market which deserves more attention from global investors. 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.

30 Kesä 20224min

As legislators try to manage the U.S. and China’s economic relationship, outbound investors will want to keep tabs on potential policy coming down the pipeline.-----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, June 29th, at 10 a.m. in New York. Washington, D.C., continues to focus on two areas of bipartisan concern: fighting inflation and managing the economic relationship with China. To that end, deliberations continue on legislation intended to reduce reliance on China supply chains for semiconductors and rare earth materials, as well as invest in research and development for emerging technologies. The Senate and House have both passed versions of this legislation, respectively called the USICA and the COMPETES Act. Now there's a conference committee deciding what's in the final bill. And here's where investors need to pay attention, because there continues to be news that this committee could end up including a provision that would limit U.S. companies ability to make business investments in, quote, unquote, countries of concern. If they do, it could create downside pressure for markets in China in the near term, and would underscore the secular trend we continue to focus on: "slowbalization", which creates both equity sector challenges and opportunities. Consider that these outbound investment restrictions would mirror ones already in place for inbound investments through CFIUS. The Committee on Foreign Investment in the United States. In short, it could make it difficult for companies to, say, build a factory in China if the product or production process includes technology that the U.S. deems critical to its economic or national security. Some independent estimates suggest this could reduce foreign direct investment in China by as much as 40%. This is classic slowbalization in motion, where policy choices are cutting against the cost benefits of globalization, driven by security concerns as we move toward a multipolar world; one with more than one political economy power base. And the level of disruption from this particular provision could create downward pressure on equity markets in China. It could also underscore current headwinds to U.S. markets, suggesting that many U.S. companies' margins will be pressured as they spend more in the future to diversify supply chains away from China. Of course, in line with our thesis of slowbalization, there's opportunity too. The CapEx needed to build these new supply chains has to go somewhere, and for example, semiconductor capital equipment companies could see a major up shift in demand. So investors need to stay tuned to the deliberations on outbound investment restrictions. It's far from a done deal, to be clear, but a major policy development if it happens. While there's no timeline for when we will know if this provision is included, we recommend paying attention to the Biden administration's deliberations on China tariffs. If the administration decides to provide even just targeted and temporary tariff reductions, in an attempt to ease inflation pressures over the next couple of months, it might also feel compelled to, at the same time, announce new measures to demonstrate its continued seriousness about competing with China. An announcement of a legislative agreement on outbound investment restrictions could be one way to do this. 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.

29 Kesä 20223min