US Elections: Weighing the Options

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

Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, discusses long-term investors’ biggest concern – the amount and timing of interest rate moves.Lisa Shalett is a member of Morgan Stanley’s Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.----- Transcription -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: And on this special episode of the podcast, we'll be discussing some of the latest market trends and what they may mean for our retail clients. It's Tuesday, January 23rd at 4 p.m. in London. Lisa Shalett: And it's 11 a.m. here in New York. Andrew Sheets: Lisa, it's great to have you back on. So wealth management clients are typically investing for the long term in order to meet specific goals such as retirement. And with that in mind, let's start with the current market backdrop. You know, we've entered the year with increased market confidence. We've seen implied volatility near some of the lowest levels that we've seen in several years. And yet we've also seen some mixed economic data to start the year. So as you look out into 2024, what are the major risks that you're focused on? Lisa Shalett: Well, I think one of the first things that, you know, we're trying to impress upon our clients, who tend to be long term, who tend to be multi-asset class investors, very often owning a simple classical 60/40 portfolio, is that we've been in this very interesting potential regime change, where both bonds and stocks are sensitive to the same thing. And that is the level and rate of change of interest rates. And that's meant that the 60/40 portfolio and stocks and bonds are actually positively correlated with one another. And so the very first thing we're talking to clients about is the extent to which we believe they need to focus on diversification. I think a second factor that we're talking, you know, to clients a lot about is liquidity. Now in the macro sense, we know that one of the reasons that markets have been able to resist some of the pressure is coming from the fed. Raising rates 550 basis points in kind of 15, 16 month period has been because there have been huge offsets in the macro backdrop providing liquidity to the marketplace. So we're talking about the fact that some of those supports to liquidity may, in fact, fall away and go from being tailwinds to being headwinds in 2024. So what does that mean? That means that we need to have perhaps more realistic expectations for overall returns. The third and final thing that we're spending a lot of time with clients on is this idea of what is fair valuation, right? In the last eight weeks of the year, clients were, you know, very I think enamored is probably the right word with the move in the last eight weeks of the year, of course, people had, you know, the fear of missing out. And yet we had to point out that valuations were kind of reaching limits, and we therefore haven't been shocked at this January, the first couple of weeks, markets have maybe stalled out a little bit, having to kind of digest the rate that we've come and the level that we're at. So those are some of the themes that, you know, we've begun to talk about, at least with regard to portfolio construction. Andrew Sheets: So, Lisa, that's a great framing of it. You know, you mentioned the importance of rates to the equity story, this unusually high correlation that we've had between bonds and stocks. And you have this debate in the market, will the Fed make its first rate cut in March? Will it make its first rate cut in June, like the Morgan Stanley research call is calling for? Is that the same thing? And how important to you in terms of the overall market outlook is this question of when the Fed actually makes its first interest rate cut? Lisa Shalett: Yeah. For our client base and long term investors, you know, we try to push back pretty aggressively on this idea that any of us can time the market and that there's a big distinction and difference between a march cut and a may or June cut. And so what we've said is, you know, the issue is, again, less about when they actually begin, but why do they begin? And one of the reasons that they may begin later than sooner would be that inflation is lumpy. And I know that some of the economists on our global macro team have that perspective that, you know, the heavy lifting, if you will, or the easy money on the inflation trade has been made. And we were able to get from 9 to 4 on many inflation metrics, but getting from 4 to 2 may require patience as we have to, you know, kind of wait for things like owner occupied rents and housing related costs to come down. We have to wait for the lags in wage growth to come out of some of the calculations, and that may require a pickup in unemployment. We may have to wait for some of the services areas where there has been inflation, things related to automotive insurance and things related to health care for some of those items to settle down as well. And so that might be one of the issues that impacts timing. Andrew Sheets: So moving to your second key point around market liquidity. Another factor I want to ask you about, which I think is kind of adjacent to that debate, is what about all this cash? You know, we've heard a lot about record inflows into US money market funds over 2023. You have around $6 trillion sitting in US money market funds. How do you see that story playing out, and how do you think investors should think about that question of should I redeploy my cash, given it's still offering relatively high yields? Lisa Shalett: So for our clients, you know, one of the things that we're very focused on, again, because we're taking that much longer time frame is saying, look, how does the current 5.3, 5.25 money market yield compare with expected returns for stocks and bonds over the next couple of years? And in that framing from where we sit, what we're saying is cash is reasonably competitive still. Now if rates come down very, very quickly right, we again get back to that question of why. If rates are coming down very quickly because we have disinflationary growth then, then that might be a signal that it's time to redeploy into riskier assets. Alternatively, if they're cutting because they see deteriorating economic conditions, staying in cash for a little while longer during a slowdown might also be the right thing, even though your yields might be going from five to 4 to 3 and a half. And from where we sit, I think our clients know that our capital market assumptions have erred on the conservative side, no doubt about it. But, you know, we think U.S. equities are apt to return at best in 2024 something in the 4 or 5, 6 range against a backdrop where earnings growth could be 10%. And for, you know, investment grade credit, which I know is your expertise. We're saying, you know, we think that rate risk is moderate from here, that it's asymmetric. Andrew Sheets: Lisa, just to bring in your third point on valuations, especially valuations and a potentially higher real rate environment. What should investors do in your opinion to build those diversified portfolios given the valuation reality that they're having to deal with? Lisa Shalett: So look, I think our perspective is that in a world where, you know, real interest rates are higher, the dynamics around balance sheet quality really come into the fore dynamics around those business models, where you have to ask yourself, are the companies that I own, are the credits that I own truly able to earn their cost of capital? And you know, those questions tend to put pressure on excess valuations. So when we're building portfolios, at least right now, we have a bias to press up against the current skew in the market, right. We're currently skewed to growth versus value. So we've got a preference for value. We've got some skew towards mega-cap versus large mid or small cap. So we're skewing large mid and small cap and active management versus the cap weighted management. We've had this huge skew towards a US bias in our client portfolios, and we're trying to push back against that and say in a relative value context, other regions like parts of emerging markets, like Japan, like parts of Europe are showing genuine interest. So part of this idea of higher real rates in the US is this idea that other asset classes, other regions than this mega cap U.S. growth bias that has really dominated the themes over the last 18 months, that that might get challenged. Andrew Sheets: Lisa, thanks for taking the time to talk. We hope to have you back soon. Lisa Shalett: It's always great speaking with you, Andrew. Andrew Sheets: As a reminder, 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.

23 Jan 20249min

As the current economic cycle plays out, history suggests that stock prices could be in for large price swings in both directions.----- 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, January 22nd at 11am in New York. So let's get after it. For the past several weeks, we've engaged with many clients from very different disciplines about our outlook for 2024. From these conversations, the primary takeaway is that there isn't much conviction about how this year will play out or how to position one's portfolio. After one of the biggest rallies in history in both bonds and stocks to finish the year, there's a sense that markets need to take a rest before the next theme emerges. Our view isn't that different, except that from our perspective, not much has changed from three months ago other than the price of most assets. In our view, we remain very much in a late cycle environment, during which markets will oscillate between good and bad outcomes for the economy. The data continue to support this view, with both positive and negative reports on the economy, earnings and other risk factors. However, as noted, the price of assets are materially higher than three months ago, mainly due to the Fed's pivot from higher for longer, to we're done hiking and likely to be easing in 2024. In addition to the timing and pace of interest rate cuts, investors are also starting to ponder if and when the Fed will end its quantitative tightening or QT campaign. Since embarking on this latest round of QT, the Fed's balance sheet has shrunk by approximately $1.5 trillion. However, it's still $500 billion above the June 2020 levels immediately after the $3 trillion surge to offset the Covid lockdowns. To say that the Fed's balance sheet is normalized to desirable levels is debatable. Nevertheless, our economists and rate strategists think the fed will begin to taper the QT efforts starting sometime this summer. More importantly, we think equity prices now reflect this pivot, and the jury is out on whether it will actually increase the pace of growth and prevent a recession this year. Three weeks ago, we published our first note of the year, laying out what we think are three equally likely macro scenarios this year that have very different implications for asset markets. The first scenario is a soft landing with below potential GDP growth and falling inflation. Based on published sell side forecasts and discussions with clients, this is the consensus view, although lower than typical consensus probability of occurring. The second outcome is a soft landing with accelerating growth and stickier inflation, and the third outcome is a hard landing. There's been very little pushback to our suggestion of these three scenarios with equally likely probabilities, and why clients are not that convinced about the next move for asset markets, or what leads and lags. As an aside, this isn't that different from last year's late cycle backdrop, when macro events dictated several large swings in equity prices both up and down. We expect more of the same in 2024. While stock picking is always important, macro will likely remain a primary focus for the direction of the average stock price. In our view, the data tells us it's late cycle and the Fed will be easing this year. Under such conditions, quality growth outperforms just like last year. While lower quality cyclicals outperformed during the final two months of 2023, we believe this was mainly due to short covering and performance chasing into year end, rather than a more sustainable change in leadership based on a full reset in the cycle, like 1994. So far in 2024, that's exactly what's happened. The laggards of 2023 are back to lagging and the winners are back to winning. When in doubt, it pays to go with the highest probability winner. In this case it's high quality and defensive growth which will do best under two of the three macro scenarios we think are most likely to pan out this year. 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 for people to find the show.

22 Jan 20244min

Original Release on January 5, 2024: Should investors be concerned about a sluggish beginning to the year, or do they just need to be patient?----- 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, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 5th at 2 p.m. in London. 2023 saw a strong finish to a strong year, with stocks higher, spreads and yields lower and minimal market volatility. That strength in turn flowed from three converging hopeful factors. First, there was great economic data, which generally pointed to a US economy that was growing with inflation moderating. Second, we had helpful so-called technical factors such as depressed investor sentiment and the historical tendency for markets, especially credit markets, to do well in the last two months of the year. And third, we had reasonable valuations which had cheapened up quite a bit in October. Even more broadly, 2024 offered and still offers a lot to look forward to. Morgan Stanley's economists see global growth holding up as inflation in the U.S. and Europe come down. Major central banks from the US to Europe to Latin America should start cutting rates in 2024, while so-called quantitative tightening or the shrinking of central bank balance sheets should begin to wind down. And more specifically, for credit, we see 2024 as a year of strong demand for corporate bonds, against more modest levels of bond issuance, a positive balance of supply versus demand. So why, given all of these positives, has January gotten off to a rocky, sluggish start? It's perhaps because those good things don't necessarily arrive right away. Starting with the economic data, Morgan Stanley's economists forecast that the recent decline in inflation, so helpful to the rally over November and December, will see a bumpier path over the next several months, leaving the Fed to wait until June to make their first rate cut. The overall trend is still for lower, better inflation in 2024, but the near-term picture may be a little murky. Moving to those so-called technical factors, investor sentiment now is substantially higher than where it was in October, making it harder for events to positively surprise. And for credit, seasonally strong performance in November and December often gives way to somewhat weaker January and February returns. At least if we look at the performance over the last ten years. And finally, valuations where the cheapening in October was so helpful to the recent rally, have entered the year richer, across stocks, bonds and credit. None of these, in our view, are insurmountable problems, and the base case expectation from Morgan Stanley's economists means there is still a lot to look forward to in 2024. From better growth, to lower inflation, to easier monetary policy. The strong end of 2023 may just mean that some extra patience is required to get there. 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.

20 Jan 20243min