Mike Wilson: Why the Correction May Not Be Over

Recent data indicates the economy may avoid either a soft or hard landing for now. Our Chief U.S. Equity Strategist explains why investors should seek out quality as the economy stays aloft.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the impact of better economic growth and stickier inflation on stocks.It's Monday, April 22nd at 11:30am in New York. So let’s get after it.In our first note of the year, I cited three potential macro-outcomes for 2024 with similar probability of occurring.First, a soft landing with slowing, below potential GDP growth and falling inflation toward the Fed's target of 2 per cent. Second, a no landing scenario under which GDP growth re-accelerated with stickier inflation. And third, a hard landing, or recession. Of course, each scenario has very different implications for asset prices generally and equity leadership, specifically. Just a few months ago, the consensus view skewed heavily toward a soft landing. However, the macro data have started to support the no landing outcome with recent growth and inflation data exceeding most forecasters' expectations – including the Fed’s. Over the past year, consensus views have gone from hard landing in the first quarter of 2023 to soft landing in the second quarter, back to hard landing in the third quarter to soft landing in the fourth quarter, and now to no landing currently. This shift has not been lost on markets with assets that benefit from higher inflation doing well over the past few months. However, while cyclically sensitive stocks and sectors have started to outperform, quality remains a key attribute for the leaders. We think this combination of quality and cyclical factors makes sense in the context of what is still a later, rather than early cycle re acceleration in growth. If it was more the latter, we would not be observing such persistent under performance of low-quality cyclicals and small caps. Furthermore, we continue to believe much of the upside in economic growth over the past year has been the result of government spending, funded by growing budget deficits. This has led to a crowding out of many smaller and lower quality businesses – and the lowest small business sentiment since 2012. As with most fiscal stimulus packages, the plan is for the bridge of support to buy time until a more durable growth outcome arrives – driven by organic private income, and consumption and spending. Until this potential outcome is more solidified, the equity market should continue to trade with a quality bias. The largest risk for stocks more broadly is higher 10-year Treasury yields as investors begin to demand a larger term premium due to higher inflation and the growing supply of bonds to pay for the endless deficits. While leadership within the equity market continues to broaden toward cyclicals it still makes sense to stay up the quality curve. Our recent upgrade of large cap Energy fits the shifting narrative to the no landing outcome, and it remains one of the cheapest ways to get exposure to the reflation theme. Other reflation trades are more extended in our view. Our primary concern for equities at this point is that aggressive fiscal spending has led to better economic growth. But it keeps upward pressure on inflation and prevents the Fed from cutting interest rates that many economic participants desperately need at this point. In short, a no landing outcome may make the crowding out problem even worse for smaller businesses, many consumers and even regional banks. This is all in-line with our 2024 outlook that suggests the major equity indices are overvalued while the best opportunities are likely beneath the surface in underappreciated sectors like energy that are positively levered to stickier inflation and higher interest rates. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to podcasts and share the podcast with a friend or colleague today.

22 Apr 20244min

Japan and India are currently set to lead growth in these markets, but a higher-for-longer rate environment in the U.S. could favor China, Hong Kong and others, according to our analyst.----- Transcript -----Daniel Blake: Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia & Emerging Market Equity Strategy Team. Along with my colleagues bringing you a variety of perspectives, today I'll discuss whether U.S. macro resilience is too much of a good thing when it comes to its impact on Asia's equity markets.It's Friday 19th of April at 10am in Singapore.Our U.S. economics team has substantially lifted its forecast for 2024 and 2025 GDP growth following strong migration boosted activity and employment trends. Recent inflation readings have been bumpy, but our team still sees it moderating over the summer as core services and housing prices cool off. While the market has been focused on this silver lining of stronger global growth, the clouds are rolling in from expectations of a shallower and later easing of global monetary policy.Our team now believes that the first Fed rate cut won't come until July but does see two additional cuts coming in November and December. We've made similar adjustments in our outlook for Asia-ex-China's monetary policy easing cycle, seeing it coming later and shallower. Meanwhile, in Japan, our economists now expect two further hikes from the Bank of Japan -- in July this year, and again in January next year -- taking policy rates up to 0.5 per cent.But how does all this leave the Asia and EM equity outlook? In a word, mixed.We see this driving more divergence within Asia and EM, depending on how exposed each market is to stronger global growth, a stronger U.S. dollar or impacted by higher interest rates. On the positive side, Taiwan, Japan, Mexico, and South Korea have the most direct North American revenue exposure. And for Japan, the strong US dollar is also positive through the translation of foreign revenues back at this historically weak yen. However, in the short run, we do need to be mindful of any price momentum reversal as April is normally seasonally weak, and we do see dollar-yen approaching 155. So, any FX (foreign exchange) intervention could sharpen a price momentum reversal.Next up, we're paying close attention to India's equity market, where we have a secularly bullish view. India has remained resilient to date, consistent with our thesis that macro stability has become a key driver of the bull market. And this is in sharp contrast to prior cycles. For example, during the Taper tantrum of 2013, where India saw a sudden and sharp bear market as Fed expectations shifted.On the negative side then, we are seeing a breakdown in correlations of some markets with these higher Fed funds expectations, including in Indonesia and Brazil where policy space is being constrained, and in Australia where valuations were pushed up on hopes of an RBA easing cycle that won't come until next year in our view.So, this is indeed a mixed picture for Asia and EM, but we retain our core views that market leadership will continue coming from Japan and India through 2024. And so, what's the risk from here? The larger risk to Asia and EM markets, we think, comes from an even more inflationary and hawkish scenario where the Fed is forced to recommence rate hikes, ultimately bearing the risk of driving a hard landing to bring inflation back to target.In this scenario, we could see a pivot in leadership away from markets with high US revenue exposure, such as Taiwan and Japan, towards more domestically oriented and resilient late cycle markets, such as an emerging ASEAN partner, and potentially China and Hong Kong -- if additional stimulus is forthcoming there.Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

19 Apr 20243min

GenAI will likely drive the exponential growth of data centers. Listen as our Capital Goods Analyst shares key takeaways on the electrical equipment central to the data center market.----- Transcript -----Welcome to Thoughts on the Market. I’m Max Yates from the European Capital Goods team. Along with my colleagues bringing you a variety of perspectives, today I'll focus on the critical element of the AI revolution. It's Thursday, April 18, at 2pm in London. Over the last few weeks, several of my colleagues have come on to the show to talk about the exponential growth of data centers and just what it will take to power the GenAI revolution. Stephen Byrd, Morgan Stanley's Head of Global Sustainability, forecasts that in 2027 data center power consumption just from GenAI will equal 80 percent of the consumption from all data centers in 2022.This shows the sheer scale of necessary additions and upgrades. And it also makes clear that the AI push provides very significant opportunities for Electrical Equipment companies. It’s these businesses that are the picks and shovels of the AI revolution. These companies provide key solutions such as Data Center Infrastructure Management software, connected equipment, racks, switchgears, and last but not least, cooling. Keep in mind that in this breakneck AI race, ever-increasing efficiency is essential. So, imagine we’re inside an actual data center. What you’d see is a huge number of racks, the steel frameworks that house the servers, cables, and other equipment. The power needed to run GenAI then creates a lot of heat.Our recent work on the data center market suggests two key takeaways when it comes to the electrical equipment.First, there’s a significant imbalance in supply-demand. Data center vacancy rates and rental prices all point to an intensifying capacity shortage. This explains why the top 10 cloud providers have increased their capital expenditures this year by 26 per cent. Equipment shortages and lead times are still an issue in the industry and large electrical equipment suppliers have a clear competitive advantage at the moment, with their stronger supply chains and ability to actually deliver this equipment. The second thing we found from our work, there are well-known and less well-known ways to deal with increasing power density. Now why is power density rising? Because what we’re trying to do is cram more high-power chips into the same amount of space. There’s more power per rack, higher computing workload that all has to be accommodated into less floor space. This higher power density, however, requires more powerful cooling solutions. But there’s also smaller changes that can support airflow management that are less talked about in the industry. This is things like busways, to reduce cable density and promote airflow. Smart equipment provides information on power consumption. And another key element is rear-door cooling, which pushes airflow through the servers.The other theme that’s gaining traction in the industry to facilitate a faster ramp up is the idea of modular data centers. This helps equipment suppliers plan supply chains but also customers to quickly ramp up and meet the new data center demand with more standardized data center offerings. However, there’s not yet an industry standard to manage higher data center power and rack density for AI. There will be new builds. There will also be data center upgrades. However, there’s no consensus yet on exactly how the power equipment will be configured, and when the data centers will be upgraded. And in what style and what way. This is clearly a dynamic space to watch, and we’ll be keeping you updated.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to your podcasts. It helps more people to find the show.

18 Apr 20244min

As global conflicts escalate, our Global Head of Fixed Income and Thematic Research unpacks the possible market outcomes as companies and governments seek to bolster security. ----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about current geopolitical tensions and their impact on markets.It's Wednesday, April 17th at 10:30 am in New York.Continued tensions in Middle East kept geopolitics in focus with clients this week. But markets seem to be shrugging off the recent escalation in the conflict, with relative stability in oil prices and equities. This implies some faith in the idea that the involved parties benefit from no further escalation – and will design responses to one another that won’t lead to a broader conflict with bigger consequences. But obviously, this tricky dynamic bears watching, which we’ll be doing. In the meantime, there’s a key market theme that’s underscored by these tensions. And that’s the idea of Security as a secular market theme.This is a topic we’ve been collaborating with many research teams on, including Ed Stanley, our thematics analyst in Europe, and defense sector research teams globally. The idea here boils down to this. Russia’s invasion of Ukraine, the US’ increased rivalry with China, questions about the future of NATO, and of course the Middle East conflict, all reminds us that we’re in a transition phase to a multipolar world where security is more tenuous. That requires a lot of spending by companies and governments to cope with this reality. In fact, we estimate that supply chains, food and health systems, IT, and more will require about $1.5 trillion of investment across the US and EU to protect against rising geopolitical risks. This means a lot more demand for global tech and industrials.And of course it means more demand for the defense sector. Regardless of whether US military aid plans continue to stall, there’s news of increased spending in China, Canada, and Europe. Our head defense analyst in Europe, Ross Law, and our head European Economist Jens Eisenschmidt have looked at this in recent weeks. They argue there’s scope for tens of billions of euros in extra spend annually in Europe, with a greater geopolitical shock putting that number into the hundreds of billions. It’s a key reason our equity research colleagues favor the US and EU defense sectors.Bottom line, geopolitical events continue to reflect the transition to a multipolar world. And as companies and governments seek security in this world, there will be market impacts. We’ll be tracking them here.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.

17 Apr 20242min

Our Global Head of Sustainability Research and U.S. Utilities Analyst discuss the rapidly growing power needs of the GenAI enablers and how to meet them.----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research.David Arcaro: And I'm Dave Arcaro, Head of the US Power and Utilities team.Stephen Byrd: And on this episode of the podcast, we'll discuss just what it would take to power the Gen AI revolution.It's Tuesday, April 16th at 10am in New York.Last summer, scientists used GenAI to find a new antibiotic for a nasty superbug. It took the AI system all of an hour and a half to analyze about 7,000 chemical compounds; something that human scientists would have toiled over for months, if not years. It's clear that GenAI can open up breathtaking possibilities, but you have to stop and think. What kind of compute power is needed for all of this?A few weeks ago, our colleague Emmet Kelly, who covers European Telecom, discussed the exponential growth of European data centers on this podcast. And today, Dave and I want to continue the conversation about this critical moment of powering the GenAI revolution.So, Dave, what is your current assessment of the global power demand from data centers?David Arcaro: Yeah, Stephen, we're expecting rapid growth in the power demand coming from data centers across the world. We're currently estimating data centers consume about one and a half per cent of global electricity today. We're expecting that to grow to almost four percent in 2027. And in the US, data centers represent roughly three percent of total electricity consumption now, and we expect that to escalate to eight per cent of the total US by 2027.And there will be even more dramatic impacts at the local and regional level. The data center landscape tends to be highly concentrated, and the next wave of GenAI data centers is likely to be much larger than the previous generation.So, the impact on specific regions will be magnified. To give an example, in Georgia, the utility there has previously forecasted just half a percent of annual growth in electricity use but is now calling for nine per cent of annual growth in electricity consumption, and that's largely driven by data centers.It's a dynamic that we haven't seen in decades in the utility space.Stephen Byrd: You know, what I find interesting about what you just said, Dave, is -- it is impressive to see growth go from one and a half to four per cent, but it's really these local dynamics where what we're seeing is just much more concentrated, and that's where we start to see the real issues with the infrastructure growing quickly enough.So, it's becoming obvious that the existing power grid infrastructure is not meeting the growth and capacity needs of data centers. And that's something that you refer to as the tortoise and the hare. How big of a mismatch are we exactly talking about here, Dave?David Arcaro: It's definitely a big mismatch. To your point before, the US electricity growth across the country has been flattish over the last 10 years.So, this is a step change in expectations now, from the impact from Gen AI going forward. And we're looking at over 100 per cent annual growth in the power consumed by data centers now in the US over the next four years. And for comparison, the US utility industry is growing at about 8 per cent a year.These data centers that are coming are huge. They can be 10 to 50 times as big as the last generation of data centers in terms of their power consumption. And this means it takes time to connect to the electric grid and get power. 12 to 18 months in the best case, three to five years plus in other locations, often because they might need to wait for the electric utility grid to catch up, waiting for grid upgrades and assessments and new power plants to get built.Stephen Byrd: Well, I think those delays are going to be fairly problematic for the fast-moving GenAI sector. So essentially there's a lot of pressure on data center developers to secure a power source as quickly as possible. And in our note, we described the mathematics around that. The time value to get these data centers online is absolutely enormous. But you've just described the power grid infrastructure as a tortoise.So, are there any other alternatives? How about nuclear power plants in this context?David Arcaro: There's a lot of urgency, as you can tell from the data center companies, to get online as fast as possible. It's a fast-moving market, very competitive, they need the power, they need to run these GenAI models as soon as possible. And the utility industry is not used to responding to demand that's coming this quickly.It's a slower moving industry. There's policies and processes and regulation that all utilities have to get through. They're not prepared strategically to move as quickly as the data center industry is moving. So, data center developers are getting creative and they're looking at all options to get power.And one that has an appealing value proposition is nuclear plants. By placing a data center at an existing nuclear plant, this can avoid the need to go through that lengthy electric grid connection process, providing a much faster timeline to get the data center powered up.And that has big benefits for the data center companies, as you can imagine. Nuclear plants also have other advantages. They have land available on site. They have water for cooling, security. It's 24x7 clean power with no emissions, and it's already up and running, so you don't have to go and build much.Over time, we do expect renewables to play a major role as well in powering data centers along with traditional power from the electric grid and even new gas plants, but the benefits of coming online quickly in this market we think, give nuclear an edge.So, Stephen, as much as I can talk about the massive power needs of Gen AI, we can't ignore the issue of sustainability. So, what have you been thinking about when it comes to assessing the potential carbon footprint of powering data centers? What concerns are you seeing?Stephen Byrd: You know, Dave, this field is evolving so quickly that we've had to evolve our assessment of the carbon footprint of GenAI quite quickly as well. You know, traditionally what we would have seen is a data center gets connected to the grid. And then that data center developer would often sign a power contract with a renewable developer. And that results in a very low carbon footprint, if zero in many cases. But going forward, we do see the potential for increased natural gas usage in power plants, higher than we had originally forecast.And that's driven really by two dynamics. The first is the increased potential to site data centers directly at nuclear power plants, which you described, and there are a lot of benefits to doing so. In effect, what's going to happen then is, those data centers will siphon away that nuclear power, so less nuclear power goes to the grid. Something has to make up that deficit. That something is often going to be natural gas fired power plants.The second dynamic that we could see happening is an increased potential for just onsite natural gas fire power generation at the data centers that could provide shorter time to power, and also provide quite good power reliability.Now, when we sum these up and we look at the projected carbon footprint of data centers going forward, we could see an additional 70 million tons a year. We're about half a per cent of 2022 global CO2 emissions for data centers. That is quite a bit higher than we had previously forecast.Now that said, a wild card would be the hyperscalers and others who may decide to consciously offset this by signing additional power contracts with new renewables that could reduce this quite a bit. So, it's very much in flux right now. We frankly don't know what the carbon footprint is really going to look like.David Arcaro: You know, there's so much urgency to bring data centers online quickly that in the past many of these big hyperscalers especially have had quite ambitious sustainability goals and decarbonization goals. I'd say it's an open question on our end as to how flexible they might get in the near term or how strictly they do apply those decarbonization …Stephen Byrd: Exactly…David Arcaro: … targets going forward as they, y’know, also try to compete in an urgent grab for power in the near term.Stephen Byrd: That's exactly right. That's… You laid that tension out quite well.David Arcaro: And finally, from your global perspective, what regions are best positioned to keep pace with the power needs of Gen AI?Stephen Byrd: You know, Dave, I am thinking a lot about what you said a minute ago, about the size of these datacentres moving from, you know, quite small – often we would see datacentres at just 10 or 15 megawatts. Now the new designs are often above 100 megawatts.And now we're starting to hear and see some signs of truly mega data centers, essentially massive supercomputers that could be a thousand megawatts, a couple of thousand megawatts, and could cost tens of billions of dollars to build. So, when we think about that dynamic, that's a lot of power for any one location. So, to go back to your question, we think about the locations. It's very local specific.The dynamics all have to line up correctly, for this to work. So, we see pockets of opportunity around the world. Examples would be Pennsylvania, Texas, Illinois, Malaysia, Portugal -- these are locations for a variety of reasons where policy support is there, the infrastructure growth potential is there, and for a number of reasons, just it's the right confluence of dynamics. Most of the world doesn't have that confluence, so it's going to be very specific. And I think we're also setting up for a lot of concentration in those locations where all these dynamics line up.David Arcaro: You know, historically, the data center industry in the US has been highly concentrated, like you say, in Northern Virginia, in Northern California, they've been data center hubs, but we're running into infrastructure constraints there, we've got to look elsewhere. And some of these factors, geographically, are going to be extremely important.Where is their local support? And one of the dynamics we think could happen is that as you build more data centers that are very power hungry, that could push up the price of power. And what kind of local pushback might you get in that situation? What's the local desire to have a data center from an employment perspective and property tax and local benefit perspective? And how does the cost benefit weigh against the potential for higher power prices in those regions?Stephen Byrd: That's a great point. I mean, in places like Northern Virginia, to your point about property taxes, the value of all this data center equipment is in the tens of billions, which does help local tax revenue quite a bit. That said, there are offsetting impacts such as higher power prices. And this is why I think your original point about the local dynamics mattering so much is so critical because you really do need to see political support, policy support. You need to see the infrastructure that's available.So that's a fairly precious lineup, a fairly rare lineup of all the attributes you need to see to support new giant data center development.David Arcaro: Definitely a delicate balance that the industry needs to tread here as these huge data centers start to come online.Stephen Byrd: Well, I think a delicate balance is a good place to end this discussion. Dave, thanks so much for taking the time to talk.David Arcaro: Great to speak with you, Stephen.And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show, and share the podcast with a friend or colleague today.

16 Apr 202410min

Markets are suggesting that spirits consumption will return to historical growth levels post-pandemic, but our Head of European Consumer Staples Research disagrees.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about a surprising trend in the global spirits market.It's Monday, April 15, at 2pm in London. We all remember vividly the COVID-19 period when we spent much more on goods than services, particularly on goods that could be delivered to our homes. Not surprisingly, spirits consumption experienced a super-cycle during the pandemic. But as the world returned to normal, the demand for spirits has dropped off. The market believes that after a period of normalization, the US spirits market will return to mid-single-digit growth in line with history; but we think that’s too optimistic.Changes in demographics and consumer behavior make it much more likely that the US market will grow only modestly from here. There are several key challenges to the volume of US alcohol consumption in the coming years. Sobriety and moderation of alcohol intake are two rising trends. In addition, there’s the increased use of GLP-1 anti-obesity drugs, which appear to quell users' appetite for alcoholic beverages. And finally, there’s stiffer regulation, including the lowering of alcohol limits for driving.A slew of recent survey data points to consumer intention to reduce alcohol intake. A February 2023 IWSR survey reported that 50 per cent of US drinkers are moderating their consumption. Meanwhile, a January 2024 NCSolutions survey reported that 41 per cent of respondents are trying to drink less, an increase of 7 percentage points from the prior year. And importantly, this intention was most concentrated among younger drinkers, with 61 per cent of Gen Z planning to drink less in 2024, up from 40 per cent in the prior year's survey. Meanwhile, 49 per cent of Millennials had a similar intention, up 26 per cent year on year.Why is all this happening? And why now? Perhaps the increasingly vocal commentary by public bodies linking alcohol to cancer is really hitting home. Last November, the World Health Organization stated that "the higher the amount of alcohol consumed, the higher the risk of developing cancer" but also that "half of all alcohol-attributable cancers in the WHO European Region are caused by ‘light’ and ‘moderate’ alcohol consumption. A recent Gallup survey of Americans indicated that young adults are particularly concerned that moderate drinking is unhealthy, with 52 per cent holding this view, up from 34 per cent five years ago. Another explanation for the increased prevalence of non-drinking among the youngest group of drinkers may be demographic makeup: the proportion of non-White 18- to 34-year-olds has nearly doubled over the past two decades.And equally, the cost of alcohol, which saw steep price increases in the last couple of years, seems to be a reason for increased moderation. Spending on alcohol stepped up materially over the COVID-19 period when there were more limited opportunities for spending. With life returning to normal post pandemic, consumers have other – more attractive or more pressing – opportunities for expenditure.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to podcasts. It helps more people to find the show.

16 Apr 20244min

The math of ‘bond-equity correlation' is complicated. Our head of Corporate Credit Research breaks it down, along with the impact of bond rates on other asset classes.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why the same factors can have different outcomes for interest rates and credit spreads.It's Friday, April 12th at 2pm in London. Most of 2024 remains to be written. But so far, the financial story has been a tale of two surprises. First, the US Economy continues to be much stronger and hotter than expected, with growth and job creation exceeding initial estimates. Then second, due in part to that strong economy, interest rates have risen materially, with the yield on the US 10-year government bond about half-a-percent higher since early January. More specifically, market attention over the last week has refocused on whether these higher interest rates are a problem for other markets. In math terms, this is the great debate around bond-equity or bond-spread correlation, the extent to which assets move with bond yields, and a really important variable when it comes to thinking about overall portfolio diversification. But this somewhat abstract mathematical idea of correlation can also be simplified. The factors that are driving yields higher might look very different for other asset classes, such as credit. That could argue for a different correlation. Let’s think about how.Consider first why yields have been rising. Economic data has been good, with strong job growth and rising Purchasing Manager Indices or PMIs, conditions that are usually tough for government bonds. Supply has been heavy, with the issuance of Treasuries up substantially relative to last year. The so-called carry on government bonds is bad as the yield on government bond yields is generally lower, much lower, than the yield on cash. And the time-of-year is unhelpful: since 1990, April has been the worst month of the year for government bonds.But take all those same things thought the eyes of a different asset class, such as credit, and they look – well – different. Good economic data should be good for credit; historically, low-but-rising PMIs, as we’ve been seeing recently, is the most credit-friendly regime. Corporate bond supply hasn’t risen nearly as much as the supply for government bonds. The carry for credit is positive, thanks to still-steep credit curves. And the time of year looks very different: over that same period since 1990, April has been the best month of the year for corporate credit – as well as broader stock markets.Government bonds are currently being buffeted by multiple headwinds. Hot economic data, heavy supply, poor yields relative to cash, and unhelpful seasonality. The good news? Well, Morgan Stanley’s interest rate strategists expect these headwinds to be temporary, and still forecast lower yields by year-end. But for other asset classes, including credit, it’s also important to note that that same data, supply, carry and seasonality debate – fundamentally look very different in other asset classes.We think that means that Credit spreads can stay at historically tight levels in April and beyond, even as government bond yields have risen.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.

12 Apr 20243min

With global temperatures rising and an increasing urgency to speed progress on the energy transition, our Head of Sustainability Equity Research examines the key materials needed—and the risks of disruption from US-China trade tensions.----- Transcript -----Welcome to Thoughts on the Market. I’m Laura Sanchez, Head of Sustainability Equity Research in the Americas. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss a highly topical issue: the impact of US-China trade tensions on the energy transition. It is Thursday, April 11, at 12 pm in New York.Last week, you may have heard my colleagues discuss the geopolitics at play around US-China trade tensions and the energy transition. Today I’m going to elaborate on that discussion, spearheaded by my team, with a deeper dive into the materials and minerals at risk and exactly what is at stake for several industries in the US.When we talk about clean technologies such as electric vehicles, energy storage and solar, it is important to note that minerals such as rare earths, graphite, and lithium — just to name a few — are crucial to their performance. At present, China is a dominant producer of many of those key minerals, whether at the mining level – which is the case with gallium, rare earths and natural graphite; at the refining level – the case for cobalt and lithium; or at the downstream level – that is, the final product, such as batteries and EVs.If trade tensions between the US and China rise, we believe China could implement new or incremental export bans on some of these minerals that are key for western nations’ energy transition as well as for their broad economic and national security.So, we have analyzed over 10 materials and found that the highest risks of disruption exist for rare earths and related equipment, as well as for graphite, gallium, and cobalt. Some minerals have already seen certain export bans but given the lack of diversification across the value chain, we actually see the potential for incremental restrictions.So, this led us to ask our research analysts: how should investors view rising trade tensions in the context of clean technologies’ penetration, specifically?While electric vehicles appear most at risk, we see the largest negative impacts for the clean technology sector as well as for large-scale renewable energy developers. This has to do with China dominating around 70 per cent of the battery supply chain and still having strong indirect ties in the solar supply chain. But there are important nuances to consider for renewable energy developers, such as their ability to pass the higher costs to customers, whether this higher cost could hurt the economics of projects and therefore demand, and the unequal impacts between large and small players – where large, tier 1 developers could actually gain share in the market as they have proven to navigate better through supply chain bottlenecks in the past.On the Autos side, slower EV adoption would naturally impact sentiment on EV-tilted stocks; but as our sector analyst highlights, this could also mean lighter losses near term, as well as market share preservation for the largest EV players in the market. US Metals & Mining stocks would likely see positive moves as further trade tensions incentivize onshoring of mining and increase demand for US-made equipment.Given strong bipartisan support in the US for a more hawkish approach to China, our policy experts believe that the US presidential election is unlikely to lead to easing trade restrictions. Nonetheless, in terms of the energy transition theme, a Republican win could create volatility for trade and corporate confidence, while a Democrat administration would be more sensitive to the balance between protectionism and achieving global climate goals.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

11 Apr 20244min