Is American Market Dominance Over?

As we look ahead to 2023, we see a divergence away from the trends of 2022 in key areas across growth, inflation, and central bank policy. Chief Cross Asset Strategist Andrew Sheets and Global Chief Economist Seth Carpenter discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's chief cross-asset strategist. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's global chief economist. Andrew Sheets: And on the special two-part episode of the podcast, we'll be discussing Morgan Stanley's Global Year Ahead outlook for 2023. Today, we'll focus on economics, and tomorrow we'll turn our attention to strategy. It's Tuesday, November 15th at 3 p.m. in London. Seth Carpenter: And it's 10 a.m. in New York. Andrew Sheets: So, Seth I think the place to start is if we look ahead into 2023, the backdrop that you and your team are forecasting looks different in a number of important ways. You know, 2022 was a year of surprisingly resilient growth, stubbornly high inflation and aggressively tightening policy. And yet as we look ahead, all three of those elements are changing. I was hoping you could comment on that shift broadly and also dig deeper into what's changing the growth outlook for the global economy into next year. Seth Carpenter: You're right, Andrew, this year, in 2022, we've seen growth sort of hang in there. We came off of last year in 2021, a super strong year for growth recovering from COVID. But the theme this year really has been a great deal of inflation around the world, especially in developed markets. And with that, we've seen a lot of central banks everywhere start to raise interest rates a great deal. So what does that mean as we end this year and go into next year? Well, we think we'll start to see a bit of a divergence. In the developed market world where we've seen both a lot of inflation and a lot of central bank hiking, we think we get a great deal of slowing and in fact a bit of contraction. For the euro area and for the U.K, we're writing down a recession starting in the fourth quarter of this year and going into the beginning of next year. And then after that, any sort of recovery from the recession is going to be muted by still tight monetary policy. For the US, you know, we're writing down a forecast that just barely skirts a recession for next year with growth that's only slightly positive. That much slower growth is also the reflection of the Federal Reserve tightening policy, trying to wrench out of the system all the inflation we've seen so far. In sharp contrast, a lot of EM is going to outperform, especially EM Asia, where the inflationary pressures have been less so far this year, and central banks, instead of tightening aggressively to get restrictive and squeeze inflation out, they're actually just normalizing policy. And as a result, we think they'll be able to outperform. Andrew Sheets: And Seth, you know, you mentioned inflation coming in hot throughout a lot of 2022 being one of the big stories of the year that we've been in. You and your team are forecasting it to moderate across a number of major economies. What drives a change in this really important theme from 2022? Seth Carpenter: Absolutely. We do realize that inflation is going to continue to be a very central theme for all sorts of markets everywhere. And the fact that we have a forecast with inflation coming down across the world is a really important part of our thesis. So, how can we get any comfort on the idea that inflation is going to come down? I think if you break up inflation into different parts, it makes it easier to understand when we're thinking about headline inflation, clearly, we have food, commodity prices and we've got energy prices that have been really high in part of the story this year. Oil prices have generally peaked, but the main point is we're not going to see the massive month on month and year on year increases that we were seeing for a lot of this year. Now, when we think about core inflation, I like to separate things out between goods and services inflation. For goods, the story over the past year and a half has been global supply chains and we know looking at all sorts of data that global supply chains are not fixed yet, but they are getting better. The key exception there that remains to be seen is automobiles, where we have still seen supply chain issues. But by and large, we think consumer goods are going to come down in price and with it pull inflation down overall. I think the key then is what goes on in services and here the story is just different across different economies because it is very domestic. But the key here is if we see the kind of slowing down in economies, especially in developed market economies where monetary policy will be restrictive, we should see less aggregate demand, weaker labor markets and with it lower services inflation. Andrew Sheets: How do you think central banks respond to this backdrop? The Fed is going to have to balance what we see is some moderation of inflation and the ECB as well, with obvious concerns that because forecasting inflation was so hard this year and because central banks underestimated inflation, they don't want to back off too soon and usher in maybe more inflationary pressure down the road. So, how do you think central banks will think about that risk balance and managing that? Seth Carpenter: Absolutely. We have seen some surprises, the upside in terms of commodity market prices, but we've also been surprised at just the persistence of some of the components of inflation. And so central banks are very well advised to be super cautious with what's going on. As a result. What we think is going to happen is a few things. Policy rates are going to go into restrictive territory. We will see economies slowing down and then we think in general. Central banks are going to keep their policy in that restrictive territory basically over the balance of 2023, making sure that that deceleration in the real side of the economy goes along with a continued decline in inflation over the course of next year. If we get that, then that will give them scope at the end of next year to start to think about normalizing policy back down to something a little bit more, more neutral. But they really will be paying lots of attention to make sure that the forecast plays out as anticipated. However, where I want to stress things is in the euro area, for example, where we see a recession already starting about now, we don't think the ECB is going to start to cut rates just because they see the first indications of a recession. All of the indications from the ECB have been that they think some form of recession is probably necessary and they will wait for that to happen. They'll stay in restrictive territory while the economy's in recession to see how inflation evolves over time. Andrew Sheets: So I think one of the questions at the top of a lot of people's minds is something you alluded to earlier, this question of whether or not the US sees a recession next year. So why do you think a recession being avoided is a plausible scenario indeed might be more likely than a recession, in contrast maybe to some of that recent history? Seth Carpenter: Absolutely. Let's talk about this in a few parts. First, in the U.S. relative to, say, the euro area, most of the slowing that we are seeing now in the economy and that we expect to see over time is coming from monetary policy tightening in the euro area. A lot of the slowing in consumer spending is coming because food prices have gone up, energy prices have gone up and confidence has fallen and so it's an externally imposed constraint on the economy. What that means for the U.S. is because the Fed is causing the slowdown, they've at least got a fighting chance of backing off in time before they cause a recession. So that's one component. I think the other part to be made that's perhaps even more important is the difference between a recession or not at this point is almost semantic. We're looking at growth that's very, very close to zero. And if you're in the equity market, in fact, it's going to feel like a recession, even if it's not technically one for the economy. The U.S. economy is not the S&P 500. And so what does that mean? That means that the parts of the U.S. economy that are likely to be weakest, that are likely to be in contraction, are actually the ones that are most exposed to the equity market and so for the equity market, whether it's a recession or not, I think is a bit of a moot point. So where does that leave us? I think we can avoid a recession. From an economist perspective, I think we can end up with growth that's still positive, but it's not going to feel like we've completely escaped from this whole episode unscathed. Andrew Sheets: Thanks, Seth. So I maybe want to close with talking about risks around that outlook. I want to talk about maybe one risk to the upside and then two risks that might be more serious to the downside. So, one of the risks to the upside that investors are talking about is whether or not China relaxes zero COVID policy, while two risks to the downside would be that quantitative tightening continues to have much greater negative effects on market liquidity and market functioning. We're going through a much faster shrinking of central bank balance sheets than you know, at any point in history, and then also that maybe a divided US government leads to a more challenging fiscal situation next year. So, you know, as you think about these risks that you hear investors citing China, quantitative tightening, divided government, how do you think about those? How do you think they might change the base case view? Seth Carpenter: Absolutely. I think there are two-way risks as usual. I do think in the current circumstances, the upside risks are probably a little bit smaller than the downside risks, not to sound too pessimistic. So what would happen when China lifts those restrictions? I think aggregate demand will pick back up, and our baseline forecast that happens in the second quarter, but we can easily imagine that happening in the first quarter or maybe even sometime this year. But remember, most of the pent-up demand is on domestic spending, especially on services and so what that means is the benefit to the rest of the global economy is probably going to be smaller than you might otherwise think because it will be a lot of domestic spending. Now, there hasn't been as much constraint on exports, but there has been some, and so we could easily see supply chains heal even more quickly than we assume in the baseline. I think all of these phenomena could lead to a rosier outlook, could lead to a faster growth for the global economy. But I think it's measured just in a couple of tenths. It's not a substantial upside. In contrast, you mentioned some downside risks to the outlook. Quantitative tightening, central banks are shrinking their balance sheets. We recently published on the fact that the Fed, the Bank of England and the European Central Bank will all be shrinking their balance sheet over the next several months. That's never been seen, at least at the pace that we're going to see now. Could it cause market disruptions? Absolutely. So the downside risk there is very hard to gauge. If we see a disruption of the flow of credit, if we see a generalized pullback in spending because of risk, it's very hard to gauge just how big that downside is. I will say, however, that I suspect, as we saw with the Bank of England when we had the turmoil in the gilt market, if there is a market disruption, I think central banks will at least temporarily pause their quantitative tightening if the disruption is severe enough and give markets a chance to settle down. The other risk you mentioned is the United States has just had a mid-term election. It looks like we're going to have divided government. Where are the risks there? I want to take you back with me in time to the mid-term elections in 2010, where we ended up with split government. And eventually what came out of that was the Budget Control Act of 2011. We had split government, we had a debt limit. We ended up having budget debates and ultimately, we ended up with contractionary fiscal policy. I think that's a very realistic scenario. It's not at all our baseline, but it's a very realistic risk that people need to pay attention to. Andrew Sheets: Seth, thanks for taking the time to talk. Seth Carpenter: Andrew, I always like getting a chance to talk to you. Andrew Sheets: And thanks for listening. Be sure to tune in for part two of this episode where Seth and I will discuss Morgan Stanley's year ahead. Strategy Outlook. If you enjoy thoughts of the market, please leave us a review on Apple Podcasts and share this podcast with a friend or colleague today.

16 Marras 202211min

As we transition away from our fire and ice narrative and into the late cycle stage, investors will want to change up their strategies as we finish one cycle and begin another.----- 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, November 14th, at 11 a.m. in New York. So let's get after it. Last year's fire and ice narrative worked so well, we decided to dust off another Robert Frost jewel to describe this year's outlook, with The Road Not Taken. As described by many literary experts, and Frost himself, the poem presents the dilemma we all face in life that different choices lead to different outcomes, and while the road taken can be a good one, these choices create doubt and even remorse about the road not taken. For the year ahead, we think investors will need to be more tactical with their views on the economy, policy, earnings and valuation. This is because we are closer to the end of the cycle at this point, and that means that trends in these key variables can zig and zag before the final path is clear. In other words, while flexibility is always important to successful investing, it's critical now. In contrast, the set-up was so poor a year ago that the trends in all of the variables mentioned above were headed lower in our view. Therefore, the right choice or strategy was about managing or profiting from the new downtrend. After all, Fire and Ice the poem is not a debate about the destination, it's about the path to that destination. In the case of our bear market call, it was a combination of both fire and ice - inflation and slowing growth, a bad combination for stocks. As it turned out, the cocktail has been just as bad for bonds, at least so far. However, as the ice overtakes the fire and inflation cools off, we're becoming more confident that bonds should beat stocks in this final verse that has yet to fully play out. That divergence can create new opportunities and confusion about the road we are on, and why we have recently pivoted to a more bullish tactical view on equities. In the near term, we maintain our tactically bullish call as we transition from fire to ice, a window of opportunity when long term interest rates typically fall prior to the magnitude of the slowdown being reflected in earnings estimates. This is the classic late cycle period between the Fed's last hike and the recession. Historically, this period is a profitable one for stocks. Three months ago, we suggested the Fed's pause would coincide with the arrival of a recession this cycle, given the extreme inflation dynamics. In short, the Fed would not be able to pause until payrolls were negative, the unequivocal indicator of a recession, but too late to kick save the cycle or the downtrend for stocks. However, the jobs market has remained stronger for longer, even in the face of weakening earnings. More importantly, this may persist into next year, leaving the window open for a period when the Fed can slow or pause rate hikes before we see an unemployment cycle emerge. That's what we think is behind the current rally, and we think it can go higher. We won't have evidence of the hard freeze for a few more months, and markets can dream of a less hawkish Fed, lower interest rates and resilient earnings in the interim. Last week's softer than expected inflation report was a critically necessary data point to fuel that dream for longer. We expect long duration growth stocks to lead the next phase of this rally as interest rates fall further. That means Nasdaq should catch up to the Dow's outsized move higher so far. Unfortunately, we have more confidence today than we did a few months ago in our well below consensus earnings forecast for next year, and that means the bear market will likely resume once this rally is finished. Bottom line, the path forward is much more uncertain than a year ago and likely to bring several twists and periods of remorse for investors wishing they had traded it differently. If one were to take our 12 month S&P 500 bear, base and bull targets of 3500, 3900, and 4200 at face value, they might say it looks like we are expecting a generally boring year. However, nothing could be further from the truth. In fact, we would argue the past 12 months have been boring because a bear market was so likely we simply set our defensive strategy and stayed with it. That strategy has worked well all year, even during this recent rally. But that kind of strategy won't work over the next 12 months, in our view. Instead, investment success will require one to turn over the portfolio more frequently as we finish one cycle and begin another. 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.

14 Marras 20224min

Education technology, or EdTech, saw significant adoption during the COVID-19 pandemic, yet opportunity remains in this still young industry if one looks long-term. Head of Products for European Equity Research Paul Walsh and Head of the European Internet Services Team Miriam Josiah discuss.----- Transcript -----Paul Walsh:] Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Products for European Equity Research. Miriam Josiah: And I'm Miriam Josiah, Head of the European Internet Services Team within Morgan Stanley Research. Paul Walsh: And on this very special episode of the podcast series, we'll be talking about the long-term outlook for education technology, or EdTech. It's Friday, it's the 11th of November, and it's 2 p.m. here in London. Paul Walsh: So Miriam, next week you'll be heading to Barcelona for Morgan Stanley's annual Tech, Media and Telecom Conference, which focuses on key debates and trends in these industries. EdTech, while still in its infancy, is a segment where your team sees a lot of potential for growth. But before we get there, let's please start with the basics. What exactly is EdTech? Miriam Josiah: So people often think of it as online learning for K-12 or university students. But we found EdTech to be quite a broad term for the digitalization of learning. So there are actually dozens of segments within EdTech. One of them is workforce education, which we think is particularly interesting and underappreciated. Paul Walsh: And certainly many of us got a firsthand look at EdTech during COVID-19 lockdowns, whether through our children—as was the case for me personally—work related training or for our own amusement. And not surprisingly, companies in the education technology space saw a huge spike from pandemic-driven demand. So what's happening now that schools and businesses have reopened? Miriam Josiah: So here's one of the reasons our team looked closely at EdTech. Essentially, even as we've returned to in-person training and education, the demand for remote learning hasn't dropped off. Yes, COVID 19 accelerated industry growth by about two years, but the global EdTech market, currently valued at $300 billion, is still expected to grow at an annual rate of 16% to reach $400 billion by 2025. So this demand is here to stay. Paul Walsh: It sounds like it, and that's tremendously interesting. So can you explain why that is, please? Miriam Josiah: So we think there are a few reasons EdTech demand will continue to grow. Firstly, the pandemic changed our behaviors in many ways, including how we think about learning. For example, in many classrooms, students watch the lecture on their own time and use the classroom for more hands-on learning. This is one reason demand is still growing, particularly within K-12 education. Paul Walsh: And if we take a step back, Miriam, does a challenging macroeconomic environment help or hurt the outlook for EdTech? And can you help us understand why? Miriam Josiah: So, in many ways, we think it helps. You have global teacher shortages, rising school costs and, in the case of workplace, there's a need to reskill and upskill workers. So these are a few of the important drivers. Meanwhile, there's a few other positives for EdTech, such as a growing global population and lower penetration rates. To put things in perspective, global spending on education is around $6.5 trillion a year and even with double digit growth over the next few years, EdTech will only represent around 5% of total education spending in 2025. Suffice to say, we are in the very early stages of growth. Paul Walsh: Yeah, absolutely. It sounds like it. And thinking about stock valuations, they soared for companies that saw surging demand during the pandemic. And since then, we've seen that trend reverse, in some cases really quite dramatically. So where does that leave us today? Miriam Josiah: So one thing to note is that this segment is very fragmented with many small companies, some of which are not publicly traded. Among the larger players in the space, we've seen a similar trend with stock prices soaring and now correcting. And so valuations are attractive. And we think this is a good entry point for investors, especially if they have a longer time horizon. At the same time, the market's seeing a fair bit of M&A activity, which may present opportunities for upside for investors. Paul Walsh: Absolutely no doubt. Industries that are fragmented, hard to define and still in their infancy can really be fertile ground for investors who have the time and the wherewithal to research and invest in individual companies. So what are the biggest risks to your growth outlook for the EdTech industry? Miriam Josiah: So firstly, as I mentioned, a lot of the sector is made up of private companies and a lot of these are loss-making startups. So in an environment of tighter access to capital, this may be a growth inhibitor for some of the startups and we're already seeing companies starting to trim headcount as a way to cut costs. Another risk is government budget cuts. Remember, education spending is around 4% of GDP, and so cuts here could impact the B2B market in particular. The counter is that tighter budgets could lead to schools turning to EdTech instead, but this still does remain a risk. And then finally, the consumer willingness to pay is also being questioned in a recessionary environment. Paul Walsh: Miriam, that's really clear. I want to thank you very much for taking the time to talk. It's obviously been quite educational. Good luck with the TMT Conference in Barcelona next week. Miriam Josiah: Thank you. Great chatting with you, Paul. Paul Walsh: 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.

11 Marras 20225min

It’s almost two full days after the midterm elections in the U.S. and while we still don’t know the outcome, markets may know enough to forecast its impact.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Jesus, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Thursday, November 10th, at 3 p.m. in New York. It's nearly two full days after polls closed across America, and we still don't know which party will control Congress. But for investors, we very likely know all we need to know at this point. Let me explain. It may take several days, maybe weeks to determine which party will control the Senate. But knowing which party controls the Senate won't matter much if Republicans gain a majority in the House of Representatives, as they appear likely to do as of this recording. That's because Republicans controlling at least one chamber of Congress is enough to yield a divided government, meaning that the party in control of the White House is not also in control of Congress and so can't unilaterally choose its legislative path. For bond markets, this is a mostly friendly outcome. It takes off the table the scenario that could have led to fiscal policy from Congress that would cut against the Fed's inflation goals. That scenario would have been one where Democrats keep control of the House and expand their Senate majority. That outcome might have suggested inflation was less a political and electoral concern than previously thought, and through a broader Senate majority, given Democrats more room to legislate. If markets perceived that combination of a willingness and ability to legislate as increasing the probability of enacting spending measures, like a child tax credit, that would support aggregate demand in the US economy, then investors would also have to price in the possibility of a higher than expected peak Fed funds rate, pushing Treasury yields higher. Of course, this appears not to be what happened. So, the bottom line, the election outcome is important and still up in the air, but markets may know enough to move on. 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.

10 Marras 20222min

Critics of sustainable investing have said that Environmental, Social, and Governance strategies require investors to sacrifice long-term returns, but is this really the case?----- Transcript -----Welcome to Thoughts on the Market. I'm Stephan Kessler, Morgan Stanley's Global Head of Quantitative Investment Strategies. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the value of a quantitative approach to low carbon investing. It's Wednesday, November 9th, at 2 p.m. in London. Sustainable investing has been a hot trend over the past decade, and most recently the new Inflation Reduction Act in the U.S. has brought it into even sharper focus. Short for environmental, social and governance, ESG covers a broad range of topics and themes, for example, carbon emissions, percentage of waste recycled, employee engagement scores, human rights policies, independent board members, and shareholder rights. This breadth, however, has made defining sustainable investing a key challenge for investors. Furthermore, critics of ESG have also pushed back, arguing that ESG strategies sacrifice long term performance in favor of alignment with what has been disparagingly termed "woke capitalism". This ongoing market debate shows no sign of abating any time soon, and so investors are looking for rigorous ways to assess ESG factors, with decarbonization being top of mind. In some recent work by quant analyst Jacob Lorenzen and myself, we decided to focus on climate change and more specifically carbon emissions as the key metric. Our systematic approach uses mathematic modeling to analyze how investors can integrate a low carbon tilt in various strategy portfolios and what kind of results they can expect. So what did this analysis tell us? Essentially, we found little evidence that incorporating an ESG tilt substantially affects a risk adjusted performance of equity portfolios, positively or negatively. While potentially disappointing to investors looking for outperformance via ESG overlays, this conclusion may be encouraging to others because it suggests that investors can create low carbon portfolios without sacrificing performance. In other words, our results for equity benchmark, smart beta and long/short portfolios argue that environmentally aware investing could be considered one of the few "free lunches" in finance. Our framework focused on carbon reduction portfolios, but also takes other ESG aspects into account. When screening companies for environmental harm, fossil fuel revenue, or non ESG climate considerations, our results are robust. This result is important as it shows that investors can focus on a broad range of ESG criteria or carbon alone- in all cases, the performance impact on portfolios is minimal. Thus, investors can adapt our framework to their objectives without needing to worry about returns. And so what does the future hold for ESG investing? While overall we find ESG to have a minor impact on performance, their investment strategies and time periods of the past decade where it did matter and created positive returns. One possible explanation for this effect is a build up of an ESG valuation premium. ESG may have been riding its own wave as global investors increasingly incorporated ESG into their investments, whether for value alignment or in search of outperformance. As we look ahead, the long run outperformance of broad ESG strategies may be more muted. In fact, ESG guidelines and requirements may even require companies causing significant environmental harm to pay a premium for market access. However, we do believe there are potential alpha opportunities using specialized screens, or in specific industries such as utilities and clean tech. 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.

9 Marras 20223min

Increasingly, consumers are moving from traditional cable and satellite subscriptions to connected TV devices, so where do the advertisers go from here? U.S. Media Analyst Ben Swinburne and U.S. Internet Analyst Brian Nowak discuss.----- Transcript -----Ben Swinburne: Welcome to Thoughts on the Market. I'm Ben Swinburne, Morgan Stanley's U.S. Media Analyst. Brian Nowak: And I'm Brian Nowak, Morgan Stanley's U.S. Internet Analyst. Ben Swinburne: On this special episode of the podcast we'll focus on connected TV and the changing television space. It's Tuesday, November 8th, at 10 a.m. in New York. Ben Swinburne: Consumer behavior in the television space has been changing rapidly over the past decade, and the COVID pandemic further accelerated this trend. While most people still watch traditional linear TV through their cable and satellite subscription, consumers are shifting to streaming at a rapid pace. In fact, most of our listeners probably use some sort of connected TV, or CTV device at home that allows their television to support video content streaming. As our media analyst, I've watched how this has led to widespread "cord cutting", as an increasing number of customers cancel their traditional subscriptions in favor of only using these streaming or video on demand formats. So let's dig into the opportunities and challenges within the connected TV space and particularly interconnected TV advertising. Brian, let's start with some definitions. What is CTV advertising, what's so great about it? Brian Nowak: CTV advertising is nothing more than adding advertising to all that streaming engagement that you mentioned earlier. You talked about how people are increasingly watching connected television through streaming devices, through their televisions. The idea of showing ads around it is CTV advertising. As far as what's so great about it, for years traditional linear television has largely been driven by branded advertising to reach people. The hope with connected television over time is that not only will connected television enable you to have reach and strong branding capabilities, but also the potential for better targeting, a more direct link between an advertising dollar and an actual transaction from those ads. And the vision of connected television advertising over time is we may be able to have broad based performance advertising across all of the streaming television engagement. So with that as a backdrop Ben, who benefits in your view, from connected television? And which companies may be most at risk from this transition? Ben Swinburne: Well Brian, you talked about both targeting and performance ads, things that are not typically associated with broadcast or linear television advertising. So I have to say the biggest beneficiary of the shift to connected TV from an advertising point of view are marketers. Not only are marketers looking for ways to spend their money with a better return on an advertising spend, but they're facing rapidly declining audiences, meaning it's harder and harder to reach the audiences that they want to reach. Connected TV brings the promise of both greater audience, particularly "cord cutters", but also reaching them more effectively with performance based and targeting tools that don't exist in linear. Speaking of which, when we think about who may be at risk, well we don't think it's a complete zero sum game. And we do think connected TV expands the television ad market over the long term. We think the largest area of market share risk is linear television. Brian Nowak: So let's dig a little more into your point about linear television Ben. How do you think about the market share between linear television and connected television the next 5 to 10 years? And what role do sports and live sports play into that overall market share? Ben Swinburne: So we expect connected TV advertising to reach and ultimately surpass linear television by the end of the decade. It could happen faster, particularly we're focused on local markets, which right now connected TV doesn't really reach. And it it could also happen faster if sports moves quickly over from linear into streaming. Right now, live sports really dominates linear television. It is the by far source of the largest audiences, and those audiences are live, and it's really holding up the linear bundle more than any other kind of programing. But we are certainly starting to see sports content leak out into streaming services, which has both the potential to erode those live audiences that advertisers value so much, but also bring them into a streaming environment which would create more opportunities to use targeting and performance based tools. Brian, what are some of the challenges of connected TV advertising relative to linear? Brian Nowak: In the near term macro. Over the longer term proof that the technology works. As with any new, less proven advertising media, weaker macro backdrops can prove to be challenging. It is more difficult for advertisers to move large amounts of experimental dollars into new media when macro times are weaker. And if we think 2023 will be a more challenging macro backdrop, that could lead to slower overall adoption within the connected TV space. Over the long term, the technology has to be proven to work. We talked earlier about proving performance based advertising better, more directly linking advertising dollars to transactions. That technology has to be proven and built out. When you see an ad and you see an ad for a product directly linking that ad to the person actually buying that product is something that still has to be developed by some of the connected TV leaders. And so we're going to need to have better tools with more targeting, better attribution and scalability of the ad buys to really hit some of our longer term connected TV ad forecasts. Ben Swinburne: So Brian, you mentioned some of the macro weakness that we're seeing in the marketplace. What is the size of connected TV advertising right now, given that macro backdrop? And what's your near-term and long term outlook for online advertising more broadly and connected TV within that? Brian Nowak: In the United States the connected TV advertising market is currently about $17 billion. And as we look ahead, we expect the overall industry to grow at sort of a mid-teens rate, reaching $30 billion plus by 2026. And from a market share perspective, we do think that the largest four players across traditional media and big tech are going to drive a majority of that overall growth. Ben Swinburne: Brian, thanks for taking the time to talk. Brian Nowak: Great speaking with you, Ben. Ben Swinburne: 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 to find the show.

8 Marras 20226min

With the Fed continuing to focus on inflation and the upcoming midterm elections suggesting market volatility, investors may be wondering, is the U.S. equity market rally really over?----- 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, November 7th, at 11 a.m. in New York. So let's get after it. Last week's pullback in major U.S. stock indices was not a surprise as the Fed remained committed to its mandate of getting inflation under control. However, if our tactical rally in U.S. stocks is going to have legs, 10 year U.S. Treasury yields will need to come down from current levels. Otherwise, it will be difficult to see higher prices for the S&P 500, given how sensitive this large cap growth index is to interest rates. Furthermore, we remain of the view that 2023 earnings forecasts are as much as 20% too high, so it will be difficult for stocks to move higher without valuations expanding. Does this mean the U.S. equity rally is over? We don't think so, but it's going to remain very noisy in the near term. First, we have two more important events this week to contend with: the Consumer Price Index release on Thursday and the midterm elections on Tuesday. On the former, we aren't that focused on it because it tells us little about the trajectory of inflation going forward. Nevertheless, we appreciate that the bond market remains fixated on such data points and will trade it. Therefore, it's likely to keep interest rate volatility high through Thursday. If interest rate volatility falls with the passing of these data, equity valuations can then expand further. In terms of interest rate levels, we think next week's midterms could play a bigger role. Should the polls prove correct, the Republicans are likely to win at least one chamber of Congress. This should throw a wrench into the aggressive fiscal spending plans the Democrats would still like to get done. Furthermore, Republican leadership has talked about freezing spending via the debt ceiling, much like they did with the Budget Control Act in 2011. This would be a sharp reversal from the past few years when budget deficits reached levels not seen since World War II. In our view, a clean sweep by the Republicans on Tuesday could greatly raise the odds of such an outcome. Such a decisive win should invoke the kind of rally and 10 year Treasury bonds to keep the equity market moving higher. One caveat to consider is that the election results may not be clear on Tuesday night, given the delay in counting mail in ballots. That means we can expect price volatility in equity markets will remain high and provide fodder for bears and bulls alike. Bottom line, we remain tactically bullish on U.S. equities, assuming longer term interest rate levels begin to fall. This week's midterm elections provide a potential catalyst in that regard. If the Republicans win decisive control of both the House and Senate, as some polls and betting markets are suggesting. Because this is purely a tactical trading view and not in line with our core fundamental view which remains bearish, we will remain disciplined on how much leash to give it. Last week we said that 3700 on the S&P 500 is our stop loss level for this rally, and markets traded exactly to that level after Friday's strong labor report before recovering nicely. For this week, we think that level could be challenged again given the uncertainty around election results. Anxiety around the Consumer Price Index Thursday morning is another reason to think both interest rate and equity volatility will remain high. Therefore, we are willing to give a bit more wiggle room to our stop loss level for next week, something like 3625 to 3650, assuming the 10 year Treasury yields don't make a new high. Conversely, if 10 year Treasury yields do trade about 4.35% and the S&P 500 tests 3625, we would suggest clients to exit bullish trades at that point. In short, the bear market rally is likely to hang around for longer than most expect if it can survive this week's test. 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.

7 Marras 20223min

As prices for bonds go down and yields go up, investors may be asking why the price is so low, and what this shift may do to the broader market and asset allocation.----- 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, November 4th, at 2 p.m. in London. The market is a funny thing. Relative to January 1st of this year, the U.S. 30 year Treasury bond is set to pay out all of the same coupons, and return the exact same amount of principal when it matures in 2052. But the market has decided that that same bond today is worth 36% less than at the start of the year. So what happened? Well, yields rose. That 30 year U.S. bond might be the exact same entity, but investors now need all of those future payments to yield 4.2% per year, not the 1.9% they needed on January 1st. It's another way of saying that there's been a major change in what's considered the minimal accepted return on safe assets. And that large jump in yields has led to the largest drop in bond prices that we've seen in recorded history. But the implications are broader. Many assets have bond-like characteristics, where you pay money today for a string of payments in the future. Whether it's an office building, a rental unit or a company with a future set of earnings, you can get very different current values for the exact same asset today by varying what sort of yield it's required to produce. And so if bonds are now priced lower to generate higher returns in the future, so should many other assets that have similar bond-like characteristics. For markets, we see a couple of implications. First, these rising yields have made bonds increasingly competitive relative to stocks. Currently, $100 of the S&P 500 is expected to yield about $6.25 of earnings next year. $100 of U.S. 1 to 5 year corporate bonds yields about $6 of interest, despite having just one sixth the volatility of the stock market. It's been 14 years since the earnings yield on stocks and the yield on corporate bonds has been so similar. Higher yields on safe assets may also shift broader asset allocation decisions. At this time last year, 30 year BBB- rated investment grade bonds yielded just 3.3%. Given such low returns, it's no wonder that many asset allocators, especially those with longer time horizons, pushed into alternative asset classes and private markets in an effort to generate higher returns. But that calculus now looks different. Yields on those same investment grade bonds have risen from that 3.3% to 6.3%. With public markets now offering many more opportunities for a safe, reliable, long run return, we'd expect asset allocators to start to swing back in this direction, especially favoring various forms of investment grade debt. 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 Marras 20223min