Economics Roundtable: Investors Eye Central Banks

Mortgage rates are down, sales volumes are rising and housing is gradually getting more affordable. Our analysts discuss why they think the U.S. housing market is on a healthy foundation. ----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co Head of Securitized Products Research at Morgan Stanley.Jay Bacow: And I'm Jay Bacow, the other Co Head of Securitized Products Research.Jim Egan: And on this episode of the podcast, we'll be talking about mortgage rates, home sales volumes and the U. S. housing market.Jay Bacow: Alright Jim. Mortgage rates are down. Sales volumes are up. [Is] the housing market back?Jim Egan: Sales volumes might finally be inflecting higher, or at least they might actually be finding that bottom. If we look at the seasonally adjusted annualized figures that came in in December, pending home sales increased 8 per cent to their highest level since July. Purchase applications, which -- little bit more high frequency, we have them through January -- they're up 23 percent from the lows that they put in in late October or early November.Jay Bacow: Alright, that sounds good, but seasonally adjusted annualized figure sounds like a mouthful. Can you lay that out a little easier for us?Jim Egan: I think that these numbers just need to be put [00:01:00] into a little bit more context. Yes, pending home sales were up 8 per cent month over month. But if I look at just the December print, it was the weakest pending home sales print for that month in the history of that index. Now, relative to 2022, it is improving. It was only down 1 per cent from December of 2022, and that's the lowest decrease we've had since 2021. But these numbers still aren't strong.Going around the horn to some of the other demand statistics, existing home sales finished 2023 down 19 per cent. But they also strengthened into year end only down 9 per cent in the fourth quarter. New home sales, as we've mentioned on this podcast before. That is the demand statistic that has actually been showing growth up 4 per cent in 2023 versus 2022. Up 15 per cent in the second half of 2023 versus the second half of 2022.Jay Bacow: Alright, so we’ve got a pickup or an inflection in housing activity, and we’ve had mortgage rates coming down. Affordability is also independent of home prices. So where does all this stand? Jim Egan: Right? [00:02:00] So because of those home price increases that you've mentioned, the monthly payment on the medium price home is still up almost $100 year over year. But the path of affordability, the deterioration that we've been talking about -- it's as small as it's been since February 2021. And if we're not looking at this on a year over year basis; if we're just looking at this on a month, over month, or every two-month basis. The two-month increase that we've seen in affordability is the steepest increase, or the steepest drop in unaffordability, if you will, since January of 2009.Suffice it to say, we think this is a much healthier housing market than 2009.Jay Bacow: Alright. Now what about the supply side? Because obviously, [there’s] a lot of ways we can get supply. One of the more straightforward methods is for someone just to build a new home. How’s that data looking? [00: 03:00]Jim Egan: We are building more homes. As new home sales have moved higher, single unit housing starts have moved higher as well. Now from cycle peak, which we estimate as April 2022, single unit starts fell about 23 per cent through the middle of 2023. And another thing that we've talked about on this podcast in the past is that build timelines have been elongating. And that was leading to a backlog in homes actually under construction.That decrease allowed that backlog to clear a little bit, and since the middle of 2023, June till the end of the year, single unit starts were actually up 7 per cent. We are building more homes.Jay Bacow: Alright. So new home sales are clearly, literally new homes. But people can also list their existing homes. What's that data look like?Jim Egan: Listing volumes are higher as well. In fact, as of this month, I can no longer say that we are at historic lows when it comes to for sale inventory. While inventory has also climbed throughout the second half of 2022 into the first half of 2023, [00:04:00] that historic low statement is something I could have made every month for the past 8 months.It's a statement I could have made for 41 of the past 54 months. Months of supply did retreat a little bit in December. But when we think about our models for housing activity and really for home prices, it's that growth in the absolute amount of for sale inventory that really plays a big role.Jay Bacow: Alright. I don’t have a PhD in economics. You’re the housing strategist. If we have more supply, does that mean prices are coming down?Jim Egan: That's what we think. We continue to think that these for sale inventory increases that are happening alongside what we do continue to believe will be sales growth in 2024 -- and we think we're seeing the first signs of now -- are going to be enough to bring home prices moderately negative in 2024. And alongside these recent activity prints, the most recent home price print was actually just a little bit softer than we thought it would be.We had forecasted about it a 15-basis point decrease in home prices in November. We saw an 18-basis point [00:05:00] decrease. It's not unusual for home prices to decrease month over month in November. But this is kind of from our perspective a little bit of validation from a home price forecast perspective.We're calling for them to fall 3 percent year over year in 2024. We think this is very moderate. We do not think this is a correction. We believe the housing market is on a very healthy foundation. Looks like we're moving towards sales increases. But we do still think you'll see a little bit of price weakness next year. Jay Bacow: Jim, thanks for taking the time to talk.Jim Egan: Great speaking with you, Jay.Jay Bacow: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcasts app; and share the podcast with a friend or colleague today.

2 Feb 20245min

Our analyst explains what parts of the consumer staples sector could benefit from an aging global population.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European consumer staples team at Morgan Stanley, and today I’ll be talking the increasingly important longevity theme and its impact on consumers. It’s Thursday, the first of February, at 3 PM in London.It's no secret that global life expectancy is increasing. The rise of modern medicine, improved working conditions, urbanization, and greater access to food and water have all contributed to a greater life expectancy. According to the United Nations, global life expectancy has risen more than 54% since 1950, reaching about 71 years in 2021, with Asia improving the most. At the same time people are living longer, birth rates for most developed economies have dropped. Higher levels of education, the increasing proportion of women in the workforce, and modern medicine have all contributed to lower birth rates. In fact, over the last several decades, the global population has aged significantly, with the median global age increasing 8 years since 1950, hitting 30 years in 2021. Looking ahead, the United Nations expects the percentage of population aged 65+ will continue to increase at a faster rate than younger populations. An ageing population has far-reaching implications, but let’s consider the spending power of older adults. Real disposable income among older adults has increased throughout the years. In 2022, an older adult had about 50% more than in 2000. As a result, older adults today have more money to spend on consumer goods and services than in the last decades. Here are three categories within the Consumer Staples sector that could benefit from the rise in longevity.First, Consumer Health. As consumers skew older and their disposable income increases it bodes well for a wide range of consumer health products – think Vitamins, Minerals and Supplements (VMS), denture care, cold and flu remedies and more.Second, Active Nutrition, including protein supplements and probiotic-rich foods such as kimchi, kombucha, or yogurt, is a likely beneficiary of the longevity theme. This sub-category is currently growing mid- to high single digits on average (over 10% for protein-related categories), and we see room for further long-term growth.Finally, Medical Nutrition. With age comes increasing prevalence of chronic diseases, including cancers, and with malnutrition. Addressing malnutrition improves the cost, and effectiveness, of medical treatment and also allows for shorter hospital stays. To that end, healthcare providers are increasing turning to medical nutritional solutions--driving demand for these products.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.

1 Feb 20243min

While 2023 was an active year for U.S. mergers and acquisitions, according to Wally Cheng, Head of West Coast M&A in our Technology Investment Banking Group, 2024 is positioned to be a busy year.Wally Cheng is not a member of Morgan Stanley’s Research department. Unless otherwise indicated, his views are his own and may differ from the views of the Morgan Stanley Research department and from the views of others within Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Wally Cheng: And I'm Wally Cheng, Head of West Coast Tech M&A for Investment Banking. Michael Zezas: And on this special episode of Thoughts on the Market, we'll focus on the outlook ahead for mergers and acquisitions in US tech. Michael Zezas: Wally, I really wanted to talk with you because 2023 was arguably the toughest year for U.S. mergers and acquisition markets since the global financial crisis. And we saw a three prong set of challenges in the form of rising interest rates, geopolitical conflicts and recession concerns. And that seems to have weighed on deal activity across the globe. Looking back, the first quarter of 2023 marked the lowest point of the M&A market, and since then we've seen deal activity tick higher. But from your perspective in tech banking, where are we right now and what should investors be watching for this year? Wally Cheng: The punch line answer that, Mike, is they should be looking for a bounce back in M&A in 2024 for all the reasons that you mentioned. Activity was very muted in 23. You highlighted rising interest rates. You highlighted geopolitical risks, wars, etc.. In that kind of environment deals just don't get done. There's not a meeting of the minds between buyer and seller. We're in a different environment now, I think what's happened over the last quarter or so is an appreciation or an acceptance of the new normal. The world has a lot of uncertainty around it, and that's no longer a new thing. It's a thing that buyers and sellers now know that they have to face for the foreseeable future. So my expectation for 2024 is much more activity, and we're seeing green shoots of that. And we saw a lot of that happening towards the end of last year. A number of large strategic deals that complemented the flow of private equity driven deals that we've seen for the last couple of years. The playing field now going into the full year of 2024 is really about all groups of buyers and sellers being active. What do I mean by that? I mean, on the buyer side, it's both corporate buyers and private equity buyers. Both active. First half of 2023 was only sponsors. Second half of 2023 was largely only strategics. Now they are both playing in the game. That's on the buyer's side. On the seller side, for the reasons that are articulated, sellers are no longer playing for a material change in the operating environment and a return or snap back, back to 2021 valuation levels. That was a blip on the screen, going to be a very long time to get back to there, if ever, and they're being much more sober and reasonable and realistic about valuations that they can get. So we're seeing much more of a meeting of the minds between buyer and seller. All buyer groups are active. Michael Zezas: So drilling down into your area of expertise a little bit more. It's been a slower tech IPO market recently. What's the impact of a slower IPO market on M&A? Wally Cheng: That is going to drive more M&A. And what I mean by that is when private companies can't get public, and return money to their private shareholders, they have to seek other ways of doing that. And that's M&A. Last year, and the year before were historically low in terms of IPO volume. Every year, on average over the last decade or so, there's been roughly 40 tech IPOs, last year and the year before less than ten. We're not expecting much more than that this year either. So with that kind of IPO volume, the huge number of private companies, by last count, about 1300 private companies of $1 billion in greater valuation were sitting in the private domain in technology. And of those 1300 companies, just a few of them are going to make it public in the next few years, which means they're going to have to seek other ways of monetizing for their shareholders. And that's going to be through M&A. Michael Zezas: So there's obviously a lot of discussion right now about when the Fed will begin cutting interest rates this year. But in any case, the consensus is that even when they are cutting, you're likely to see levels of interest rates also will be somewhat higher than what we saw in the decade between the financial crisis and the pandemic. So what's the potential impact on the next wave of M&A activity from having somewhat higher interest rates? Wally Cheng: It will be a factor that is going to hold back a more robust M&A market. But I think the real impact of it is going to be twofold. One is there are going to be many more stock deals. So deals where stock is used as an acquisition currency to buy the target. And then two is I think there's going to be a lot more activity from buyers who have a lot of cash firepower sitting on their balance already. They're going to press their advantage in an environment like this, where for many buyers who don't have that same luxury of cash on their balance sheet and require outside financing at the higher rates that you mentioned to go finance deals, which will make those deals a little bit more difficult to justify economically. So if you've got very inexpensive cash sitting on your balance sheet, now's the time to go use it. Michael Zezas: Drilling down a bit here, what sub sectors within technology do you think will see the most M&A activity? Wally Cheng: Number one software. And number two Semis with an asterisks on Semis, which I'll get to in a second. In both of those industries consolidation is imperative. In software. Customers are looking for best of platform solutions not best of breed anymore. So in a landscape where there are a thousand plus software companies valued at greater than $1 billion that are either public or private today there's going to be a lot of M&A happening, to get to a product offering that looks more like a best of platform solution for their customers. Similarly, in Semis, the dynamic is the same, a little bit more driven by scale, and that is really what's driving M&A in Semis. There's about 100 semiconductor companies that are public today with more than $1 billion in value. Our expectation is that the need for scale is going to drive that number down to about a third of that through M&A over the next 5 to 10 years. The asterisks that I mentioned on the semiconductor activity is that in order to get the semiconductor deal done today, given the global nature of their revenue, is that they require regulatory approval from governments all over the globe. And in today's environment, where East and West are in a tug of war for tech supremacy, those approvals are really difficult to get. Are they impossible? No. Does it take longer to get them? Yes. So buyers and sellers in semis are really, really taking a hard look at whether or not they can get regulatory approval before announcing their deals, because the last thing they want to do is announce a deal, wait for two years to get it approved, it not be approved, and they've got damaged companies coming out of the end of that. Michael Zezas: Got it. So geopolitical concerns, still a limiting factor for cross-border M&A, but overall we're seeing tailwinds for M&A activity picking up. Wally Cheng: You got it. Michael Zezas: Well Wally thanks for taking the time to talk. Wally Cheng: Super speaking to you Mike. Thanks. Michael Zezas: As a reminder if you enjoy Thoughts on the Market, please take a moment to rate review us on the Apple Podcasts app. It helps more people find the show.

1 Feb 20247min

Who is going to buy nearly $11 trillion in new fixed-income assets in 2024? Find out where our Chief Cross-Asset strategist expects to see demand.----- Transcript -----Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset strategist. Along with my colleagues bringing you a variety of perspectives, today I'll discuss our outlook for global fixed income supply and demand in 2024. It's Tuesday, January 30th at 10 a.m. in New York. This year is shaping out to be a big year for bond markets. We see global fixed income growth supply rising 12% to almost $11 trillion in 2024, and expect U.S. Treasury gross supply alone to increase 30% to $4 trillion in 2024. So the big questions investors are grappling with are one, what drives this increase in supply? And two, will there be sufficient demand and from where to meet the supply?One of the drivers for this rise in supply is quantitative tightening or QT. As G4 central banks have undertaken aggressive measures to curb inflation, they've shrunk their balance sheets by about $250 trillion. Yes, that's trillion with a T, since January 2023, and we expect them to do so by another $245 trillion in 2024. With central bank buying of coupon bonds dropping off, someone else will need to step in. A prevailing narrative in 2023 was that markets would get overwhelmed by the amount of fixed income issuance, either because of quantitative tightening or maturing corporate bonds, and this would push yields higher. Yields were indeed pushed higher last year, but it wasn't on the back of supply, instead, the economy turned out to be stronger than expected. And we think that 2024 will be no different. Gross and net issuance across global fixed income products will likely rise versus last year, but demand should be there to meet supply, especially in the second half of 2024, when central banks are expected to start cutting rates and rates volatility normalizes. With that said, what is interesting to note is the shift in the type of buyers of bonds. Bank portfolios are the most likely to see a decrease in net buying, while we anticipate that demand will pick up for overseas investors, especially in the second half of the year. Meanwhile, we think demand from U.S. pension funds remains strong. They've been big buyers of treasuries in the last few quarters, and should continue to support demand on the very long end of the curve. Another important point is that foreign private demand for U.S. treasuries never really went away. Foreign official demand exhibits cyclicality with the fed rate cycle, that is, it decreases as the Fed hike rates and increases when the Fed cuts. Private demand from Japan is particularly cyclical, and we are already seeing signs of Japanese investors returning to the scene as the fed cycle peaks. We also think Japanese investors will find Agency Mortgage-Backed Securities, or MBS, attractive this year, but will likely commit capital only when volatility in both rates and the bases normalize. Bottom line: as global fixed income supply rises in 2024, we think there will be sufficient demand to meet this increase. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

30 Jan 20243min

With the rise of technology, media and telecom credit markets, our analyst explains how companies are looking to manage the rapidly changing landscape. ----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. David Hamburger: And I'm David Hamburger, Head of U.S. Sector Corporate Credit Research and Lead Analyst for High Yield TMT here at Morgan Stanley. Andrew Sheets: And on today's special episode, the podcast, Dave and I will be discussing corporate credit analysis, the TMT sector and what may be ahead for credit investors. Andrew Sheets: David, I think it's safe to say that a lot of listeners are going to be a lot more familiar with what an equity analyst does. So before we get into your sector, I think it'd be great to just take a step back and how do you think about the role of a credit analyst, and how does your job differ from your equity analyst colleagues that sit across on the other side of the floor? David Hamburger: So, you know, we're primarily focused on the other side of the balance sheet compared to the equity analyst. So we'll be looking at the liabilities that companies have. Those liabilities do trade in the market and people invest in bonds, loans and otherwise. And importantly, the thing that we really do focus on the most is a company's willingness and ability to service debt and repay that debt. We are certainly concerned with how companies generate shareholder value. But importantly, it's really, really crucial and critical to understand a company's ability again and willingness to repay the debt that's on the balance sheet and the liability part of the balance sheet in particular. Andrew Sheets: We're also coming into 2024 at a pretty interesting time for corporate credit markets. You know, you've had yields on some of these high yield bond issuers or loan issuers, a double from where they were in 2021/2022. So you have a market that is offering higher yields than in the past, but also with quite a bit of volatility dispersion between better and weaker balance sheets, and quite a bit that's going on, that's getting investors attention. David Hamburger: Yeah. There are a lot of opportunities in corporate credit in general. And you know, people sometimes lose sight of the fact that there's quite a diversity of investment opportunities, whether you're looking at many different sectors in energy, consumer retail or importantly, the TMT sector that we look at, and you can really find situations that suit your risk profile and how much risk appetite an investor might have. Andrew Sheets: So let's dive a bit into that sector and how you're thinking about it. And again, there might be some investors that are very familiar with the idea of TMT credit and TMT standing for technology, media and telecom. What has been the story in TMT credit over the last five years? What has brought the sector to its current position? David Hamburger: I would say the thing that people have really focused on are some of the technological changes that emerged from the Covid pandemic. If you consider and you look at, you know, where we'll focus a lot of our attention on the telecom and cable sectors. And you look at what transpired during the pandemic. You really had two trends that were overarching. The first was connectivity. I mean, everyone was homebound in a situation where, you know, we were not going into work, going to our normal social interactions that we normally had. And connectivity was paramount. The second thing that it that helped spur huge technological advances, I think during that period of time, you probably saw what the types of technological advances that might have taken a cycle of a couple of years in just a few months, strikingly. And so what had transpired then is really we're seeing the fallout of some of those trends where you saw a number of consumers look at the opportunity to better connect through wireless, through broadband services, new technologies that those companies needed to embrace in order to reach the consumer and reach those new subscribers. And it's really been a trend that, you know, we continue to follow. And has really probably been that had the largest impact on this sector overall. Andrew Sheets: I think it's safe to say that consumers access to more media now than they've ever had before, which is a nice thing. But how do you think about the opportunities and the challenges that's created for companies, and how companies are dealing with that just seismic and rapid shift in the landscape. David Hamburger: So companies need to be extremely nimble. Management teams need a vision and have a lot of foresight how those technologies will evolve. For many of these companies and for this industry in general, that tend to be very high barriers to entry. Why is that? They're extremely capital intensive. So if you look at like a cable company or a telecom company, even a lot of the big media companies spend an incredible amount of money on their networks, on service, on content production and otherwise. And so importantly, what has ultimately been one of the most defining aspects of this period of time has been companies that are nimble, but really that have financial flexibility. When rates were very low and we had very accommodating credit markets, that helped facilitate a lot of that investment that companies needed. But now when we saw the rising rate environment, it really impacted the fact that a lot of these companies had elevated leverage, that needed it in order to undertake these intensive capital programs. So I would say what really has defined the trend in the space, is those companies with strong balance sheets, financial flexibility, management teams that have remained nimble, have succeeded and thrive in this environment. But on the contrary, companies that were extremely elevated amount of leverage on the balance sheet, found themselves with less financial flexibility to perform and compete. And we're really seeing the fallout from that trend over the last two years. Andrew Sheets: So, David, I think you've set that up really well. And so, I guess, as you think about the importance of flexibility, and you kind of highlighted the advantages of being more nimble and being more flexible. Do you think this is going to be a story where the market has already rewarded those better, more nimble companies? Or is this a theme that still has further to play out as the market does further differentiation between the two? David Hamburger: Yeah, it certainly has more room to run here in terms of differentiation. A lot of it is really around those new technologies. You begin to see this technological advances around more bandwidth and better networks and upgrades. And so, you know, that creates more competition. But at the same time, as we've seen the acceleration of the adoption of more connectivity, it becomes a more mature market. And so those competitive risks get exacerbated by some of the things like market maturation and even saturation. And as well, you can't minimize things like government subsidies that helped Americans stay connected. And so that dynamic continues to create a tension in the sector in terms of the haves and the have nots and the ability to better compete, the financial wherewithal to compete, and management teams that are very adept and nimble at, you know, embracing those new opportunities. And I think ultimately, what you will see is you're going to see further rationalization of the sector as a result of this, where you'll begin to see and particularly if rates start to come down, one of those follow throughs, or one of the potential outcomes of that is really a potential for more M&A in the space. Andrew Sheets: So, David, we started this conversation acknowledging that a credit investor and an equity investor might be looking at the same company, but approach that from a different point of view and different areas of emphasis. And I guess to conclude this conversation, as you look ahead, if you think about your sector, who do you think is in the driver's seat right now in the eyes of management, do you think it's more friendly to the equity holder, more friendly to the bondholder? Or does it really vary company by company? David Hamburger: A lot of it varies. Certainly in the interest rate regime we've been under for the last couple of years, the companies and their management teams have been more mindful of the balance sheet and more mindful of leverage. You know, we as credit investors, we're always kind of looking at the downside and the downside risks, because clearly we would just want those companies to pay back debt and always examining again the willingness and ability to do so. But to the extent that there's excess capital and excess financial flexibility, all things equal, you want to make sure they're staying nimble and investing in the business and remaining competitive. And one of the things is, you know, we look at this sectors now with a little more caution because of the amount of leverage, because, you know, there might be a tendency to look at the need to the business and to invest more aggressively should rates begin to come back down. We think the, you know, the higher leverage in the face of rising competition and intensity around consumer and enterprise demand, give us pause with regard to the, you know, these companies ability to to continue to focus on the balance sheet and creditors. And I think that's why, again, you're seeing a lot of these stress situations in this sector in particular. Andrew Sheets: David, thank you for taking the time to talk. David Hamburger: It's been my pleasure. Thank you. Andrew Sheets: And 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 find the show.

30 Jan 20249min

Listen as our strategist cites which present-day factors and historical precedents should have investors expecting a big year in European equities.----- Transcript -----Welcome to Thoughts on the Market. I'm Marina Zavolock, Morgan Stanley's Chief European Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be discussing our new approach to European equity markets. It's Friday, January 26th at 4:00 pm in London. My team and I recently launched coverage of European equities, with a goal of offering investors a more dynamic and modern approach to stocks in the region. Bottom line we're bullish on European equities and see 11% upside to our year end target for MSCI Europe. This rises to 16% on a total return basis if we incorporate dividends and buybacks. Let me walk you through our thinking. We seek to bring traditional equity strategist to the modern data era by blending traditional European equity strategy metrics such as a focus on PMIs, valuations, flows, etc., with bottom up data driven analysis, unconventional factors, an in-depth cycle playbook and integration of important thematics such as AI diffusion, the rise of European M&A and geopolitics. For our cycle playbook, we worked closely with our global economics team to determine which specific cycle in long term history is most similar to today. Our work led us to the mid 1990s and specifically 1995, a soft landing in the US and a soft-ish, still very weak growth environment in Europe. This was a period where there was a major focus by market participants over rates and inflation, bad macroeconomic data was seen as good given its implication for future rate cuts, and there was an undercurrent of technological innovation. Other similarities included overoptimistic market pricing on fed rate cuts after the pivot, a later pivot from European central banks, and concerns about deficit reduction and a budget deal in the US. After an initial sharp Fed pivot related rally, there was a tactical pullback in 1995 in the market, and at this point leadership changed. From a bond proxy leverage cyclical driven rally, very similar to the one we saw into year end, to a rally driven more by idiosyncratic stock specific fundamentals and themes. At the headline level, the market continued to grind higher on the hope trade of future rate cuts and nearing bottom to earnings revisions, and the eventual return of flows into equities from money market funds. Like 1995, we are also seeing a return to M&A from cycle lows, which should further support this rally. Notably, Europe's low valuation starting point and rerating path so far is exactly in line with the 1995 Fed pivot playbook. From a factor perspective and to uncover that stock specific, idiosyncratic alpha, I mentioned earlier, we studied over 80 different factors or metrics and uncovered ten that work sustainably to drive relative performance in European equities over time. These range from the conventional, like earnings revisions to the unconventional, such as accruals, an accounting measure that works very well in Europe to predict future earnings quality. Bringing everything together, our cycle, factor and thematic analysis, we arrive at 16% total return upside to European equities this year and overweights on European software, aerospace and defense, diversified financials, pharmaceuticals and telecoms, among other sectors. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

26 Jan 20243min

Investors are concerned that the upcoming election might interfere with policy decisions. Here’s why our view is different.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Matthew Hornbach: And on this episode of the podcast, we'll discuss whether the election will change Fed policy this year. It's Thursday, January 25th at 10 a.m. in New York. Matthew Hornbach: All eyes are on the Fed as 2024 gets underway. Investors are concerned not only about the timing and the magnitude of the expected rate cuts this year, but also on the liquidity in the funding markets, which is intricately linked to the Fed's ongoing quantitative tightening operations, or QT. Seth, let's dig right into it. Does the outcome of the US presidential election in November change your team's baseline view that the Fed will lower rates starting in June? Seth Carpenter: Matt, I think the short answer to your question is no. So our baseline forecast is, the Fed starts cutting rates in June. And over the second half of the year, it gets a total of 100 basis points worth of cuts in. But that forecast is predicated on the downward trajectory for inflation and the economy's slowing but not falling off of a cliff, or put simply, it's based on the Fed following their statutory objectives for stable prices and full employment, and not the political cycle. Matthew Hornbach: So, Seth, we often hear from investors that they believe that the election will have an impact on Fed policy and we also hear from FOMC participants from time to time about this topic. But why is it that FOMC participants dismiss this wisdom or conventional wisdom amongst investors that the election might interfere with Fed policy? Seth Carpenter: I think that question has a really simple answer, which is that the FOMC participants, they're the ones sitting around the table making the decisions, and they don't see themselves as being influenced by the politics. I mean, I can say I was at the Fed for 15 years. I was a staffer preparing memos, doing briefings to the committee in the 2000 election, the 2004 election, the 2008 election, the 2012 election. And I can honestly say from my firsthand experience, there really wasn't anything about the fact of the election that was doing anything to influence the way that monetary policy was being decided. Their eyes were fixed on those statutory objectives of full employment and stable prices. But let me turn it around to you, Matt, because I know that you did a lot of homework. You went back through the historical record and you looked at policy decisions in years when there were elections, in years when there weren't elections. When you do that really careful analysis, what comes out of that pattern? What do you see in the policy decisions that the committee took? Matthew Hornbach: Absolutely. We looked at actual policy rate changes going all the way back to 1971. So really getting in that period of time when inflation was also a problem in the 1970s and early 1980s. And we went all the way through the present day. And what we found was that the Fed doesn't shy away from changing policy, whether it be an election year, a general election year, a midterm election year or no election in a given year. They change policy all the time. You know, then we looked at, well, does the policy changes that occur in election years or non election years, does it differ in notable ways? Does the Fed tend to cut rates more in election years or hike rates more in non election years? And we didn't find any notable pattern at all. It just became very apparent in the data that we looked at that there isn't a political bias in terms of the policy rate, whether to change it or not, change it, to move it up, to move it down. The Fed seems, based on the data, to act in the best interest of what's going on in the economy at the time. Seth Carpenter: That makes sense to me, and that's very much consistent with my experience there. But let me push a little bit more, because I know that you didn't just do that wave of analysis and then stop. You always burn the midnight oil here, and you went back through the actual transcripts. Because one thing I know I hear from clients and you must hear it as well, is surely the FOMC has to be aware that the election is going on. How could they not be aware of it? It's got to come up during the meetings. It has to come up during the meeting. So when you look at the transcripts themselves, what was said during the meetings, how much do they talk about the election? Matthew Hornbach: They're definitely aware that there's an election, as I think most people around the world would be. And when they talk about the elections, you know, typically it comes up almost every election year. You typically get a handful of FOMC participants that bring up the election. 2008 was an interesting exception, where only one person mentioned the election the entire year. Seth Carpenter: They may have been thinking about other things. Matthew Hornbach: They may have other things on their mind, like the great financial crisis that was unfolding. But what we found is that not that many people actually bring it up every election year, but there are a handful here in there that talk about it. You typically find that in the first half of the calendar year, there's not that much discussion about the election. But as the election approaches in November, you get more discussion that ends up showing up in the transcript. So you typically find that the month of October, November and December will have the most discussion about the election by FOMC participants. The second thing we found, Seth, was that when they talk about the election, they typically talk about it in sort of two lines of thinking. One is with respect to fiscal policy. Elections can change fiscal policy, either going into the election or coming out of the election, fiscal policy can differ. And so they typically focus on the state of play with respect to fiscal policy. In 2012, which is when you were there at the fed. I'm sure you noticed that there were lots of discussions about the fiscal cliff. So we noticed that in the transcripts as well. Similarly, in 2016, in December, after the election, in 2016, when the markets were starting to price in the prospect of tax cuts and fiscal stimulus, there was a lot of discussion on the Fed at the time about fiscal policy. Seth Carpenter: Matt, it sounds like you're staking out the controversial view that the central bank of the country is paying attention to the macroeconomic environment and the main factors that drive the macro economy. Matthew Hornbach: That's absolutely right. We also found that they discussed the election in terms of the uncertainty that elections caused businesses and consumers. They typically grow more concerned about business investment as we head into an election and businesses pulling back on that investment for a short period of time, until they have clarity about the election outcome. So that's generally what they're talking about when they discuss the election, fiscal policy and uncertainty. Seth Carpenter: All right. So I feel a little bit relieved that my firsthand experience is fully consistent with all the digging that you did through the transcript through multiple decades. Matthew Hornbach: Absolutely. So, Seth, with that, let me just thank you for taking the time to talk with me. Seth Carpenter: Matt, I could talk to you all day, but particularly on this topic, it was a pleasure to be here. Matthew Hornbach: 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.

25 Jan 20246min

While it’s too early to tell who will win the U.S. presidential election ­­­– or how markets will respond to it – there are a few factors that investors should consider.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of the US election on markets. It's Wednesday, January 24th at 10 a.m. in New York. We're two states into the Republican primary election season. Former President Trump has won both contests, underscoring what polls have been suggesting for months now. That he's the heavy favorite to be the party's nominee for the presidency. But other than that, have we learned anything that might matter to markets? Not particularly in our view. This election will clearly be consequential, the markets, but for the moment we're more in watch and learn mode. Here's two reasons to consider. First, knowing who the Republican candidate will be doesn't tell us much about who will become president. While we've heard from some clients that they rate President Biden's chances of reelection as low, and therefore, knowing who will be the Republican nominee is the same as knowing who will be president, we don't agree with this logic. Sitting presidents have had low approval ratings this far ahead of an election and still won before. Also, polls may show that economic factors like inflation are a political weakness for Biden today, but those circumstances could change given how quickly inflation is easing. Now, this doesn't mean we expect Biden will win, it's just that we think it's far from clear who the favorite is in this election. Our second point is that, even if we know who wins, we don't necessarily know what reliable market impact this would have. That's because there are many crosscurrents to the policies each party is pursuing. Democrats may be interested in more social spending, which could boost consumption, but they may also be interested in taxes to fund it, which could cut against growth. Republicans may be interested in lower taxes, but the presumptive nominee is also interested in increased tariffs, which could mitigate tax impacts. To top it off, neither party may be able to do much with the presidency unless they also control Congress, something that polls show will be difficult to achieve. So, this all begs the question. What will make this election matter to markets? The answer, in our view, is time and market context. As we get closer to the election, what's in the price of equity in bond markets will largely shape the stakes for investors. For example, if markets are priced for weak economic outcomes, investors may embrace a unified government outcome regardless of party, as it opens the door to fiscal stimulus measures. Of course, this is only one scenario that may matter, but you can see the point on how context is important. So as the stakes become clearer, we'll define them here and let you know more about it. 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.

24 Jan 20242min