Europe in the Global AI Race

As China tries to smooth out its COVID caseload, investors should take note of the impacts those COVID policies have on global economies and key markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, 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 Wednesday, November 30th, at 11 a.m. in New York. Investors remain intently focused on China's COVID policies, as the tightening and loosening of travel and quarantine policies has implications for key drivers of markets. Namely the outlook for global inflation, monetary policy and global growth. We're paying close attention, and here's what we think you need to know. Importantly, our China economics team thinks that China's restrictive COVID zero policy will be a thing of the past come spring of 2023, but there will be many fits and starts along the way. Increased vaccination, availability of medical treatment and public messaging about the lessening of COVID dangers will be signposts for a full reopening of China, but we should expect episodic returns to restrictions in the meantime as China tries to smooth out its COVID caseload. This dynamic is important to understand for its implications to the outlook for the global economy and key markets. For example, the economic growth story for Asia should be weak in the near term, but begin to improve and outperform the rest of the world from the second quarter of 2023 through the balance of the year. In the U.S., the reopening of the China economy should help ease inflation as the supply of core goods picks up with supply chains running more smoothly. This, in turn, supports the notion that the Fed will be able to slow and eventually pause its rate hikes in 2023, even if headline inflation sees a rebound via higher gas prices from higher China demand for oil. And where might this overall economic dynamic be most visible to investors? Look to the foreign exchange markets. China's currency should relatively benefit, particularly if reopening leads investors back to its equity markets. The U.S. dollar, however, should peak, as the Fed approaches pausing its interest rate hikes and, accordingly, ceasing the increase in the interest rate advantage for holding U.S. dollar assets versus the rest of the world. Of course, the evolution of the COVID pandemic has been anything but straightforward. So we'll keep monitoring the situation with China and adjust our market views as needed. 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.

30 Marras 20222min

Traditional ESG investing strategies highlight companies with top scores across ESG metrics, but new research shows value in focusing instead on those companies who have a higher rate of change as they improve their ESG metrics.----- Transcript -----Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Along with my colleagues, bringing you a variety of perspectives, today I'll focus on our new approach to identifying opportunities that can generate both Alpha and ESG impact. It's Tuesday, November 29th, at 10 a.m. in New York. On previous episodes of this podcast we've discussed how, although sustainable investing has been a trend over the past decade, it has faced significant pushback from critics arguing that ESG strategies - or environmental, social and governance - sacrifice long term returns in favor of the pursuit of certain ESG objectives. We have done some new work here at Morgan Stanley, suggesting that it is possible to identify opportunities that can deliver excess returns, or alpha, and make an ESG impact. Our research found that what we call "ESG rate of change", companies that are leaders on improving ESG metrics, should be a critical focus for investors looking to identify companies that meet both criteria. What do we mean by "ESG rate of change"? Traditional ESG screens focus on "ESG best-in-class" metrics. That is, companies that are already scoring well on sustainability factors. But there is a case to be made for companies that are making significant improvements. For example, we find that there are companies using innovative technologies that can reduce costs and improve efficiency. These companies, which we call deflation enablers, generally screen very favorably on a range of ESG metrics and are reaping the financial benefits of improved efficiency. A surprisingly broad range of technologies are dropping in cost to such an extent that they offer significant net benefits, both financial and ESG oriented. Some examples of such technologies are very cheap solar, wind and clean hydrogen, energy storage cost reductions, cheaper carbon capture, improved molecular plastics recycling, more efficient electric motors, a wide range of recycling technologies, and a range of increasingly inexpensive waste to energy technology. To get even more specific, as we look at these various technologies and the sectors they touch, we think the utility sector is arguably the most advantaged among the carbon heavy sectors in terms of its ESG potential. Why is that? Because many utilities have the potential to create an "everybody wins" outcome in which customer bills are lower, CO2 emissions are reduced, and utility earnings per share growth is enhanced. This is a rare combination. In the U.S. utility sector many management teams are shutting down expensive coal fired power plants and building renewables, energy storage and transmission, which achieve superior earnings per share growth. Many of these stocks would screen negatively on classic ESG metrics such as carbon intensity, but these ESG improvers may be positioned to deliver superior stock returns and play a critical role in the transition to clean energy. As with most things, applying this new strategy we're proposing isn't simply a matter of looking at companies with improving ESG metrics. It's about really understanding what's driving these changes. Here's where sector specific expertise is key. In fact, we believe that in the absence of fundamental insight, ESG criteria can be misapplied and could lead to unintended outcomes. The potential for enhanced performance, in our view, comes from a true marriage of ESG investing principles and deep sector expertise. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

29 Marras 20223min

As we head into a new year, Europe faces multiple challenges across inflation, energy and financial conditions, meaning investors will want to keep an eye on recession risk, the ECB, and European equities. Chief European Equity Strategist Graham Secker and Chief European economist Jens Eisenschmidt discuss.----- Transcript -----Graham Secker Welcome to Thoughts on the Market. I'm Graham Secker, Morgan Stanley's Chief European Equity Strategist.Jens Eisenschmidt And I'm Jens Eisenschmidt, Morgan Stanley's Chief European Economist.Graham Secker And on this special episode of the podcast, we'll discuss our 2023 outlook for Europe's economy and equity market, and what investors should pay close attention to next year. It's Monday, November the 28th, at 3 p.m. in London.Graham Secker So Jens, Europe faces multiple challenges right now. Inflation is soaring, energy supply is uncertain, and financial conditions are tightening. This very tricky environment has already impacted the economy of the euro area, but is Europe headed into a recession? And what is your growth outlook for the year ahead?Jens Eisenschmidt So yes, we do see a recession coming. In year-on-year terms we see negative growth of minus 0.2% next year. There's heterogeneity behind that, Germany is most affected of the large countries, Spain is least affected. In general, the drivers are that you mentioned, we have inflation that eats into real disposable income that is bad for consumption. We have the energy situation, which is highly uncertain, which is not great for investment. And we do have monetary policy that's starting to get restrictive, leading to a tightening in financial conditions which is actually already priced into markets. And, you know, that's the transmission lack of monetary policy. So that leads to lower growth predominantly in 23 and 24.Graham Secker And maybe just to drill into the inflation side of that a little bit more. Specifically, do you expect inflation to rise further from here? And then when you look into the next 12 months, what are the key drivers of your inflation profile?Jens Eisenschmidt So inflation will rise, according to our forecast, a little bit further, but not by an awful lot. We really see it peaking in December on headline terms. Just to remind you, we had an increase to 10.7 in October that was predominantly driven by energy and food inflation, so around 70% of that was energy and food. And of course, it's natural to look into these two components to see what's going to happen in the future. Here we think food inflation probably has still some time to go because there is some delayed response to the input prices that have peaked already at some point past this year. But energy is probably flat from here or maybe even slightly falling, which then gets you some base effects which will lead and are the main driver of our forecast for a lower headline inflation in the next year. Core inflation will be probably more sticky. We see 4% this year and 4% next. And here again, we have these processes like food inflation, services inflation that react with some lag to input prices coming down. So, it will take some time. Further out in the profile, we do see core inflation remaining above 2% simply because there will be a wage catch up process.Graham Secker And with that core inflation profile, what does that mean for the ECB? What are your forecasts for the ECB's monetary policy path from here?Jens Eisenschmidt We really think that the ECB needs to have seen the peak in inflation, and that's probably you're right, both core and headline. We see a peak, as I said, in December, core similarly, but at a high level and, you know, convincingly only coming down afterwards. So, the ECB will have to see it in the rear mirror and be very, very clear that inflation now is really falling before they can stop their rate hike cycle, which we think will be April. So, we see another 50 basis point increase in December 25, 25 in February, in March for the ECB then to really stop its hiking cycle in April having reached 2.5% on the deposit facility rate, which is already in restrictive territory. So, Graham, turning to you, bearing in mind all that just said about the macro backdrop, how will it impact European equities both near-term and longer term?Graham Secker Having been bearish on European equities for much of this year, at the beginning of October we shifted to a more neutral stance on European equities specifically. But we've had pretty strong rally over the course of the last couple of months, which sets us up, we think, for some downside into the first quarter of next year. In my mind, I really have the profile that we saw in 2008, 2009 around the global financial crisis. Then equity valuations, the price to earnings ratio troughed in October a weight, the market rallies for a couple of months, but then as the earnings downgrades kicked in the start of 2009, the actual index itself went back down to the lows. So, it was driven by earnings and that's what we can see happening again now. So perhaps Europe's PE ratio troughed at the end of September. But once the earnings downgrades start in earnest, which we think probably happens early in 2023, we can see that taking European equities back down towards the lows again. On a 12-month view from here we see limited upside. We have 1-2% upside to our index target by the end of next year. But obviously, hopefully if we do get that correction in the first quarter, then there'll be more to play for. We just got a time entry point.Jens Eisenschmidt Right. So how should I, as an investor, be positioned then in the year ahead?Graham Secker From a sector perspective, we would be underweight cyclicals. We think European earnings next year will fall by about 10% and we think cyclicals will be the key area of earnings disappointment. So, we want to be underweight the cyclicals until we get much closer to the economic and earnings trough. Having been positive on defensives for much of this year, we've recently moved them to neutral. We've upgraded the European tech sector, the medtech sector, and also luxury goods as well.Jens Eisenschmidt So what are the biggest risks then to your outlook for 23, both on the positive and the negative side?Graham Secker So on the positive side, I'd highlight two. Firstly, we have the proverbial soft landing when it comes to the economic backdrop, whether that's European and or global. That would be particularly helpful for equities, if that was accompanied by a bigger downward surprise on inflation. So, if inflation falls more quickly and growth holds up, that would be pretty positive for equity markets. A second positive would be any form of geopolitical de-escalation that would be very helpful for European risk appetites. And then on the negative side, the first one would be a bigger profit recession. If earnings do fall 10% next year, which is our projection, that would be very mild in the context of previous downturns. So in our base case, we see European earnings falling 20%, not the 10% decline that we see in that base case. The other negatives that I think a little bit about is whether or not what we've seen in the UK over the last couple of months could happen elsewhere. I.e., interest rates start to put more and more pressure on government finances and budget deficits, and we start to see a shift in that environment. So that could be something that could weigh on markets next year as well.Graham Secker But, Jens, thanks for taking the time to talk today.Jens Eisenschmidt 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.

28 Marras 20227min

As we enter the holiday shopping season, the challenges facing consumers and retailers look quite different from 2021, so how will inflation and high inventory impact profit margins?----- Transcript -----Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley's U.S. Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss our outlook for holiday spending in the U.S. It's Friday, November 25th, at 1 p.m. in New York. With the holiday shopping season just around the corner, we collaborated with the Morgan Stanley U.S. economics team and several of the consumer teams, namely airlines, consumer goods, e-commerce and electronics, to analyze our consumer survey data around holiday spending. The big takeaway is that this year's holiday shopping season is going to be quite different from the one we had last year. In 2021, we saw major supply chain malfunctions that impacted inventories and caused shoppers to start buying much earlier in the season. Limited supplies also gave companies a lot of pricing power, and this year the situation looks like it is shaping up to be the exact opposite. High inventory levels should push stores to offer discounts as they attempt to clear merchandise off shelves. Companies offering the biggest discounts will be able to grab the largest wallet share, but this will likely be a hit to their profit margins. Additionally, inflation has weighed heavily on consumers throughout the year, and it remains their number one concern heading into the holiday shopping season. This year, we're likely to see a very bargain savvy consumer. Our survey showed that 70% of shoppers are waiting for stores to offer discounts before they begin their holiday shopping, and the majority are waiting to see deals in excess of 20%. Additionally, consumers are likely to be more price sensitive this year. About a third of consumers said they would buy a lot less gifts and holiday products if stores raise prices. U.S. consumers are largely expecting to spend about the same amount on holiday gifts and products this year versus last year. So retailers will be competing for a similarly sized pool of revenue as last year, and will have to offer competitive prices to get shoppers to choose their products. This creates a really tough environment for profit margins. We also asked consumers specifically if they are planning to spend more or less this year in a variety of popular gift areas. The biggest spending declines are expected for luxury gifts, sports equipment, home and kitchen and electronics, all areas where we saw overconsumption during lockdown. Looking at the industry implications, services are expected to hold up better than goods overall. Department stores and specialty retailers, consumer durable goods, large volume retailers and tech hardware are all likely to face a more challenging season. On the other hand, demand for travel and flights remains very strong, and the Morgan Stanley transportation team remains bullish on the U.S. airlines overall, as they believe travel interest remains resilient despite consumer and macro fears. 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.

25 Marras 20223min

While the recent meeting between U.S. President Biden and China’s President Xi has signaled near term stability for the relationship between the two countries, investors will need to understand what this means for future economic disconnection.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, 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 U.S. public policy and financial markets. It's Wednesday, November 23rd, at 10 a.m. in New York. Last week, many of my colleagues and I were in Singapore meeting with clients for Morgan Stanley's annual Asia Pacific Summit. Top of mind for many was the recent meeting between U.S. President Biden and China's President Xi. In particular, there was much Thanksgiving that the two sides seemed to agree on a few points that would create some near-term stability in the relationship. But we caution investors not to read more into their meeting beyond that, and accordingly continue to prepare for a multipolar world where the U.S. and China disassociate in key economic areas. True, there were statements of respect for each other's position on Taiwan, a return to key policy dialogs, and a recognition on both sides of the importance of the bilateral relationship to the well-being of the wider world. But that doesn't mean the two sides found a way to remain interconnected economically. Rather, it just signals that economic disconnection may be orderly and spread out as opposed to disorderly and quick. Look beyond the soothing statements from the meeting, and you see policies on both sides showing work toward economic disconnection with industrial policies and trade barriers aimed at creating separate economic and technological ecosystems. An orderly transition to this state may be costly, but it need not be disruptive. This dynamic still leaves plenty of cross-currents for markets. It's good news overall for the macroeconomic outlook as it takes a potential growth shock off the table. It's also good for key geographies that will benefit from investment towards supply chain realignment, such as Mexico, as we recently highlighted in collaborative research with our Mexico strategist. But it poses challenges for companies that will be compelled to take on higher labor and CapEx costs as the U.S. seeks distance from China on key technologies. Semiconductors have been and will continue to be a key space to watch as the sector incrementally shifts production to higher cost areas in order to comply with U.S. regulatory demands. So bottom line, we should all feel a bit better about the outlook for markets following the Biden/Xi meeting, but just a bit. The U.S.-China relationship isn't going back to its inter-connected past, and the cost of disconnecting in key areas is sure to hurt some investments and help others. With Thanksgiving this week, I want to take a moment to thank you, our listeners, for sharing this podcast with your friends and colleagues. As we pass another exciting milestone of 1 million downloads in a single month, we hope you continue to tune in to thoughts on the market as we navigate our ever changing world. Happy Thanksgiving from all of us here at Morgan Stanley.

23 Marras 20222min

The year ahead outlook is a process of collaboration between strategists and economists from across the firm, so what were analysts debating when thinking about 2023, and how were those debates resolved? Chief Cross-Asset Strategist Andrew Sheets and Head 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, Morgan Stanley's Head of Fixed Income Research. Andrew Sheets: And on this special episode of the podcast, we'll be discussing some of the key debates underpinning Morgan Stanley's 2023 year ahead outlook. It's Tuesday, November 22nd at 3 p.m. in London. Vishy Tirupattur: And 10 a.m. in New York. Andrew Sheets: So Vishy, within Morgan Stanley research we collaborate a lot, but I think it's not an exaggeration to say that when we sit down to write our year ahead outlooks for strategy and economics, it's probably one of the most collaborative exercises that we do. Part of that is some pretty intense debate. So that's what I was hoping to talk to you about, kind of give listeners some insight into what are the types of things that Morgan Stanley research analysts were debating when thinking about 2023 and how we resolved some of those issues. And I think maybe the best place to start is just this question of inflation, right? Inflation was the big surprise of 2022. We underestimated it. A lot of forecasters underestimated inflation. As we look into 2023, Morgan Stanley's economists are forecasting inflation to come down. So, how did that debate go? Why do we have conviction that this time inflation really is going to moderate? Vishy Tirupattur: Thanks, Andrew. And it is absolutely the case that challenging each other's view is critically important and not a surprise that we spent a lot of time on inflation. Given that we have many upside surprises to inflation throughout the year, you know, there was understandable skepticism about the forecasts that US inflation will show a steady decline over the course of 2023. Our economists, clearly, acknowledge the uncertainty associated with it, but they took some comfort in a few things. One in the base effect. Two, normalizing supply chains and weaker labor markets. They also saw that in certain goods, certain core goods, such as autos, for example, they expect to see deflation, not just disinflation. And there's also a factor of medical services, which has a reset in prices that will exert a steady drag on the core inflation. So all said and done, there is significant uncertainty, but there are still clearly some reasons why our economists expect to see inflation decline. Andrew Sheets: I think that's so interesting because even after we published this outlook, it's fair to say that a lot of investor skepticism has related to this idea that inflation can moderate. And another area where I think when we've been talking to investors there's some disagreement is around the growth outlook, especially for the U.S. economy. You know, we're forecasting what I would describe as a soft landing, i.e., U.S. growth slows but you do not see a U.S. recession next year. A lot of investors do expect a U.S. recession. So why did we take a different view? Why do we think the U.S. economy can kind of avoid this recessionary path? Vishy Tirupattur: I think the key point here is the U.S. economy slows down quite substantially. It barely skirts recession. So a 0.5% growth expectation for 2023 for the U.S. is not exactly robust growth. I think basically our economists think that the tighter monetary policy will stop tightening incrementally early in 2023, and that will play out in slowing the economy substantially without outright jumping into contraction mode. Although we all agree that there is a considerable uncertainty associated with it. Andrew Sheets: We've talked a bit about U.S. inflation and U.S. growth. These things have major implications for the U.S. dollar. Again, I think an area that was subject to a lot of debate was our forecast that the dollar's going to decline next year. And so, given that the U.S. is still this outperforming economy, that's avoiding a recession, given that it still offers higher interest rates, why don't we think the dollar does well in that environment? Vishy Tirupattur: I think the key to this out-of-consensus view on dollar is that the decline in inflation, as our economists forecast and as we just discussed, we think will limit the potential for US rates going much higher. And furthermore, given that the monetary policy is in restrictive territory, we think there is a greater chance that we will see more downside surprises in individual data points. And while this is happening, the outlook for China, right, even though it is still challenging, appears to be shifting in the positive direction. There's a decent chance that the authorities will take steps towards ending the the "zero covid" policy. This would help bring greater balance to the global economy, and that should put less upward pressure on the dollar. Andrew Sheets: So Vishy, another question that generated quite a bit of debate is that next year you continue to see quantitative tightening from the Fed, the balance sheet of the Federal Reserve is shrinking, it's owning fewer bonds and yet we're also forecasting U.S. bond yields to fall. So how do you square those things? How do you think it's consistent to be forecasting lower bond yields and yet less Federal Reserve support for the bond market? Vishy Tirupattur: Andrew, there are two important points here. The first one is that when QT ends, really, history is really not much of a guide here. You know, we really have one data point when QT ended, before rate cuts started happening. And the thinking behind our thoughts on QT is that the Fed sees these two policy tools as being independent. And stopping QT depends really on the money market conditions and the bank demand for reserves. And therefore, QT could end either before or after December 2023 when we anticipate normalization of interest rate policy to come into effect. So, the second point is that why we think that the interest rates are going to rally is really related to the expectation of significant slowing in the economic growth. Even though the U.S. economy does not go into a contraction mode, we expect a significant slowing of the U.S. economy to 0.5% GDP growth and the economy growing below potential even into 2024 as the effects of the tighter monetary policy conditions begin to play out in the real economy. So we think the rally in U.S. rates, especially in the longer end, is really a function of this. So I think we need to keep the two policy tools a bit separate as we think about this. Andrew Sheets: So Vishy, I wanted us to put our credit hats on and talk a little bit about our expectations for default rates. And I think here, ironically, when we've been talking to investors, there's been disagreement on both sides. So, you know, we're forecasting a default rate for the U.S. of around 4-4.5% Next year for high yield, which is about the historical average. And you get some investors who say, that expectation is too cautious and other investors who say, that's too benign. So why is 4-4.5% reasonable and why is it reasonable in the context of those, you know, investor concerns? Vishy Tirupattur: It's interesting, Andrew, when you expect that some some people will think that the our expectations are too tight and others think that they are too wide and we end up somewhat in the middle of the pack, I think we are getting it right. The key point here is that the the maturity walls really are pretty modest over the next two years. The fundamentals, in terms of coverage ratios, leverage ratio, cash on balance sheets, are certainly pretty decent, which will mitigate near-term default pressures. However, as the economy begins to slow down and the earnings pressures come into play, we will expect to see the market beginning to think about maturity walls in 2025 onwards. All that means is that we will see defaults rise from the extremely low levels that we are at right now to long-term average levels without spiking to the kinds of default rates we have seen in previous economic slowdowns or recessions. Andrew Sheets: You know, we've had this historic rise in mortgage rates and we're forecasting a really dramatic drop in housing activity. And yet we're not forecasting nearly as a dramatic drop in U.S. home prices. So Vishy, I wanted to put this question to you in two ways. First, how do we justify a much larger decrease in housing activity relative to a more modest decrease in housing prices? And then second, would you consider our housing forecast for prices bullish or bearish relative to the consensus? Vishy Tirupattur: So, Andrew, the first point is pretty straightforward. You know, as mortgage rates have risen in response to higher interest rates, affordability metrics have dramatically deteriorated. The consequence of this, we think, is a very significant slowing of housing activity in terms of new home sales, housing starts, housing permits, building permits and so on. The decline in those housing activity metrics would be comparable to the kind of decline we saw after the financial crisis. However, to get the prices down anywhere close to the levels we saw in the wake of the financial crisis, we need to see forced sales. Forced sales through foreclosures, etc. that we simply don't expect to see happen in the next few years because the mortgage lending standards after the financial crisis had been significantly tighter. There exists a substantial equity in many homes today. And there's also this lock-in effect, where a large number of current mortgage holders have low mortgage rates locked in. And remember, US mortgages are predominantly fixed rate mortgages. So the takeaway here is that housing activity will drop dramatically, but home prices will drop only modestly. So relative to the rest of the street, our home price forecast is less negative, but I think the key point is that we clearly distinguish between what drives home pricing activity and what drives housing activity in terms of builds and starts and sales, etc.. And that key distinction is the reason why I feel pretty confident about our housing activity forecast and home price forecast. Andrew Sheets: Vishy, thanks for taking the time to talk. Vishy Tirupattur: Always a pleasure talking to you, Andrew. Andrew Sheets: Happy Thanksgiving from all of us at Thoughts on the Market. We have passed yet another exciting milestone: over 1 million downloads in a single month. I wanted to say thank you for continuing to tune in and share the show with your friends and colleagues. It wouldn't be possible without you, our listeners.

22 Marras 202210min

While the outlook for 2023 may seem relatively unexciting, investors will want to prepare for a volatile path to get there, and focus on some key inflection points.----- 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 21st, at 11 a.m. in New York. So let's get after it. Last week, we published our 2023 U.S. equities outlook. In it, we detail the path to our 2023 year end S&P 500 price target of 3900. While the price may seem unexciting relative to where we're currently trading, we think the path will be quite volatile with several key inflection points investors will need to trade to make above average returns next year. The main pushback in focus from investors has centered around the first inflection - the near-term tactical upside call we made about a month ago.Let's review a few key points of the call as we discuss how the rest of the year may play out. First, the primary tactical driver to our bullish call was simply respecting the 200 week moving average. As noted when we made the call last month, the 200 week moving average does not give way for the S&P 500 until a recession is undeniable. In short, until it is clear we are going to have a full blown labor cycle where the unemployment rate rises by at least 1-1.5%, the S&P 500 will give the benefit of the doubt to the soft landing outcome. A negative payroll release also does the trick. Second, in addition to the 200 week moving averages key support, falling interest rate volatility led to higher equity valuations that are driving this rally. Much like with the 200 week moving average, though, this factor can provide support for the higher PE's achieved over the past month, but is no longer arguing for further upside. In other words, both the 200 week moving average and the interest rate volatility factors have run their course, in our view. However, a third factor market breadth has emerged as a best tactical argument for higher prices before the fundamentals take over again. Market breadth has improved materially over the past month. As noted last week, both small caps and the equal weighted S&P 500 have outperformed the market weighted index significantly during this rally. In fact, the equal weighted S&P 500 has been outperforming since last year, while the small caps have been outperforming since May. Importantly, such relative moves by the small caps and average stocks did not prevent the broader market from making a new low this fall. However, the improvement in breadth is a new development, and that indicator does argue for even higher prices in the broader market cap weighted S&P 500 before this rally is complete. Bottom line tactically bullish calls are difficult to make, especially when they go against one's fundamental view that remains decidedly bearish. When we weigh the tactical evidence, we remain positive for this rally to continue into year end even though the easy money has likely been made. From here, we expect more choppiness and misdirection with respect to what's leading. For example, from the October lows it's been a cyclical, smallcap led rally with the longer duration growth stocks lagging. If this rally is to have further legs, we think it will have to be led by the Nasdaq, which has been the laggard. In the end, investors should be prepared for volatility to remain both high intraday and day to day with swings in leadership. After all, it's still a bear market, and that means it's not going to get any easier before the fundamentals take over to complete this bear market next year. As we approach the holiday, I want to say a special thank you to our listeners. We've recently passed an exciting milestone of over 1 million downloads in a single month, and it's all made possible by you tuning in and sharing the podcast with friends and colleagues. Happy Thanksgiving to you and your families.

21 Marras 20223min

At the recent 20th Party Congress in China, policy makers made economic growth a top priority, but what are the roadblocks that may be of concern to global investors?----- Transcript -----Welcome to Thoughts on the Market. I'm Robin Xing, Morgan Stanley's Chief China Economist. Along with my colleagues, bringing you a variety of perspectives, today I will discuss the outlook for China after the 20th Party Congress. It's Friday, November 18th, at 8 a.m. in Hong Kong. China's Communist Party convenes a national Congress every five years to unveil mid to long term policy agenda and reshuffle its leadership. The one concluded two weeks ago marks the 20th Congress since the party's founding in 1921. One of the key takeaways is that economic growth remains the Chinese government's top priority, even as national security and the supply chain self-sufficiency have gained more importance. The top leadership's goal is to grow China to an income level on par with medium developed country by 2035. We think this suggests a per capita GDP target of $20,000, up from $12,000 today, and it would require close to 4% average growth in GDP in the coming decade. Well, this growth target is achievable, but only with continued policy focus on growth. While China's economy has grown 6.7% a year over the last decade, its potential growth has likely entered a downward trajectory, trending toward 3% at the end of this decade, there is aging of the Chinese population, which is a main structure headwind. That could reduce labor input and the pace of capital accumulation. Meanwhile, productivity growth might also slow as geopolitical tensions increase the trend towards what Morgan Stanley terms slowbalization. The result of which is reduced foreign direct investment, particularly among sectors considered sensitive to national security. In this context, we believe Beijing will remain pragmatic in dealing with geopolitical tensions because of its reliance on key commodities and the fact exports account for a quarter of Chinese employment. So China is very intertwined with global economy and it relies a lot on the access to global market. Another issue of concern to global investors is China's regulatory reset since 2020 and its impact on the private sector. It seems to have entered a more stable stage. We don't expect major regulatory surprises from here considering that the party Congress didn't identify any new areas with major challenges domestically, except for population aging and the self-sufficiency of supply chain. As investors adopt a "seeing is believing" mentality towards their long term concerns around China's growth, policy, geopolitics, the more pressing near-term risk remains COVID zero. This is likely the biggest overhang on Chinese economic growth and the news flow around reopening have tended to trigger market volatility. We see rising urgency for an exit from COVID zero in the context of its economic cost, including lower income growth, elevated youth unemployment and even fiscal sustainability risks. We think Beijing will likely aim for a calibrated COVID exit, and the three key signposts are necessary to facilitate a smooth reopening, elderly vaccination, availability of domestic COVID treatment pills and facilities, and continued effort to steer public opinion away from fear of the virus. Considering it could take 3 to 6 months for the key signposts to play out, we expect a full reopening next spring at the earliest. This underpins our forecast of a modest recovery starting in the second quarter of 2023, led by private consumption. Before a full reopening, we see growth continue to muddle through at the subpar level, sustained mainly by public CapEx. 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.

18 Marras 20224min