Relief and Volatility Ahead for U.S. Stocks

While the consumer has been a pillar of strength this year, continued high inflation, household debt and slowing payroll growth could pose challenges to consumer spending. ----- Transcript -----Welcome to Thoughts on the Market. I'm Sarah Wolfe from Morgan Stanley's U.S. Economics Team. Along with my colleagues, bringing you a variety of perspectives, today I will give you a year end 2022 update on the U.S. consumer with a bit of our outlook for 2023. It's Thursday, December 15th, at 10 a.m. in New York. So it's very clear the consumer has been a pillar of strength this year amid a very tough macro environment, but as rates keep rising and the labor market slows, consumers will likely need to find ways to cut costs. We are already seeing some weakness in subprime consumers and trade down among middle and higher income households. While the wallet shift away from goods and towards services is definitely playing out, we continue to see relatively more strength than expected from consumers across both categories. This is because households have lowered their savings rates significantly as they draw down excess savings. We do not expect a material drawdown in excess savings, however, into next year as savings dwindle. We are already seeing it this morning in the November retail sales data, where spending slowed down fairly dramatically across most goods categories. We're talking about home furnishing, electronics and appliances, sporting goods, motor vehicles. On the other hand, the one category of retail sales that reflects the services side of the economy, dining out, was very strong in the retail sales report and has continued to be very strong. Looking at the trends that will force consumers to spend less, rising interest rates are lifting the direct costs of new borrowing and slowly feeding through into higher overall debt service costs. For example, new car loan rates are at their highest level since 2010, mortgage rates are at 20 year highs, they've come off a little bit, and commercial bank interest rates on credit card plans are at 30 year highs. It takes time for new debt issued at higher rates to lift household debt service costs, especially as over 90% of outstanding household debt is locked in at a fixed rate. But it's happening. Looking at the data by household income shows more stress from higher rates among subprime borrowers. Credit card delinquencies are modestly below pre-COVID levels, but are accelerating at the fastest pace since the financial crisis. In the auto space, delinquencies across subprime auto ABS surpassed 2019 levels earlier this year and have stabilized at relatively high rates over the last six months. Lower income households are also most affected by the combination of higher interest rates and higher inflation. They rely more heavily on higher interest rate loan products and variable rate credit card lines. Consider this, the bottom 20% income quintile spend 94% of their disposable income on essential items, including food, energy and shelter. This compares to only 20% of disposable income for the top 20% income quintile. As such, higher inflation on essential items weighs more heavily on lower income households. Higher inflation is also pushing lower income households to buy fewer full price items and wait for promotions. They are also choosing smaller items, value packs, or less expensive brands. While price inflation has turned a corner, it's not enough to ease the pressure on consumers from elevated price levels, rising rates and additionally a decelerating labor market. We expect labor income growth to slow next year alongside a weakening labor market, troughing in mid 2023, in line with sharply slower payroll growth and softer wage gains. Wage pressures are coming off in industries that saw the largest wage gains over the past year due to labor shortages, including leisure and hospitality and wholesale trade. But for the moment, with jobs still growing, consumer spending remains positive as well. Together, our base case for real spending is a weak 1% year over year growth in 2023, down from 2.6% this year. In the end, the extent that consumers pull back spending will hinge on how the labor market fares. 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.

15 Des 20224min

While “Moonshots” attempt to address climate concerns with disruptive technology, more immediate solutions are needed, so what are “Earthshots”? And which ones should investors pay attention to? Head of Global Thematic and Public Policy Research Michael Zezas and Head of Thematic Research in Europe Ed Stanley discuss.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research. Ed Stanley: And I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Michael Zezas: And on this special episode of Thoughts on the Market, we'll discuss the potential of "Earthshots" as an investment theme in the face of intensifying climate concerns. It's Wednesday, December 14th, at 10 a.m. in New York. Ed Stanley: And 3 p.m. in London. Michael Zezas: While climate continues to be a key political and economic debate, it's clear we're moving into a new phase of climate urgency. There's a significant mismatch between the pace of climate technology adoption, and the planet's need for those solutions. Here at Morgan Stanley we've done work around "Moonshots", ambitious and radical solutions to seemingly insurmountable problems using disruptive technology. There are some big hurdles with moonshots, however. First, they require significant political support. Also, the process of gradual, iterative decarbonization technology adoption will occur more slowly than investors expect. Given this backdrop, there's a growing need for urgent solutions. Enter what we call "Earthshots". Michael Zezas: Ed, can you maybe start by explaining what Earthshots are and what the framework for identifying these Earthshots is relative to Moonshots? Ed Stanley: So a Moonshot is an early stage technology with high uncertainty, but also high potential to solve a very difficult problem. And for Moonshots, the key investments are in R&D and proof of concept. An Earthshot, on the other hand, is more of a middle stage technology with generally lower uncertainty, proven potential and Earthshots the key investment here is really around scaling the technology quickly and cheaply. And Earthshots are more radical alternatives to otherwise slow and steady status quo in the decarbonization world. And we think about them broadly in two sets. Some are nearer term decarbonization accelerants, and others are longer term warming mitigations and adaptations. And I guess we can get into a bit more detail on examples in a minute. But to your question on frameworks, it's exactly the same framework that we used in Moonshots, and that is academia, patenting, venture capital and then public markets. Academia around breaking new ground and how quickly that's happening. Patenting to protect that intellectual property. Then venture steps in to provide some proof of concept for that idea. And then public investment is typically needed to scale it. And you can track almost any invention over time using that sequence of events all the way back to the patent for the light bulb in 1880, all the way up to carbon capture today. Michael Zezas: Ed, what types of specific problems are Earthshots trying to solve, and which ones should investors pay particular attention to, both near-term and longer term? Ed Stanley: So if you look at the nearly 40 billion tonnes of carbon dioxide emissions that we put into the atmosphere every year and you split it by industry, our Earthshot technologies catered to over 80% of those emissions. Be it electrification, manufacturing, food emissions, there's a radical Earthshot technology for decarbonizing each of those. But if we break them down into two categories, we have environmental Earthshots and biological Earthshots. On the environmental side, we have carbon capture, smart grids, fusion energy. And on the biological, we have cell based meat, synthetic biology and disease re-engineering. If we go into a bit more detail on the environmental Earthshots, there's been a lot of noise in fusion in recent days. But I think carbon capture for now is where investors need to focus. And for those thinking how is carbon capture an Earthshot, we've been hearing about this technology for years now, well, the unit economics and tech maturity are only really now getting to that critical balance where it can scale. And the 21 facilities globally that are doing this only capture around 0.1% of global emissions. The largest project in Iceland annually captures around 3 seconds worth of global emissions. So we're still very early days and it's all about scale, scale, scale now. On the biological side, I think the $4 trillion TAM in synthetic biology, which is the harnessing of biology and molecules to create net carbon negative products, is truly fascinating. But the one that piqued my interest the most doing this research, and has actually seen comparatively negligible funding is disease re-engineering. And if the planet does continue to warm, despite our best efforts in decarbonizing and carbon capture, then another 720 million people by 2050 will be in zones that are susceptible to malaria, mainly in Europe and the U.S. And companies using gene editing are having great success. There's a 99.9% efficiency and efficacy of wiping out malaria in the zones that these trials have taken place. Perhaps less pressing immediately than carbon capture, but from a social perspective, with half a million people dying per year from malaria and that number set to grow if warming grows, I don't think it's a theme that investors can ignore for very much longer. Michael Zezas: Got it. And Ed, it's often said that each decade has one investment theme that outpaces others. And while this decade's in its early innings, there's several contenders. There's the new commodity supercycle, there's digitalized assets and cybersecurity. Another theme in the running is Clean Transition Technologies. How does Earthshots fit into the investment megatrends for the next decade? Ed Stanley: I mean, that's absolutely fair. Markets move in ebbs and flows of macro themes and micro themes being the winning investment each decade. We had gold in the seventies, oil in the 2000, and then interspersed with that Japanese equities and U.S. Tech in the eighties and nineties respectively. And we do appreciate it's rare when you look back in time for hard assets, which clean tech and Earthshot technologies typically are, for hard assets to win that secular theme crown, so to speak. But we're already seeing a changing of the guards in private markets away from long secular bets on technology, SAS, fintech towards hard assets and security infrastructure. So that is the shift in investing from bits to atoms, which is well underway. And that's happening because not since the Industrial Revolution really have we been so uniformly mobilized to transition to a new paradigm in such a short space of time. But opposing that, I guess we should ask where could we be wrong? Well, for climate tech to be the winning investment trade of the next ten years, the irony is that this trade no longer lies in the tech proving itself necessarily or reaching cost parity. I think we've done that in many cases, that is in the bag. The success or otherwise of this being the secular investment theme for the 2020s will lie much more in reducing permitting bottlenecks, for example, and skills bottlenecks around the installation of some of this Earthshot technology. And that, too, actually is where investors can find opportunities in vast reskilling that's needed. But on balance, yes, this, in my view anyway, is the secular trade of the next decade. Michael Zezas: And you've argued that a challenging macro environment is precisely the time to dig into Moonshots. It seems that would even be truer of Earthshots, would you agree? Ed Stanley: I think that's a reasonable assumption, yes. If you look at companies over time, over 30% of Fortune 500 companies were founded during recession years, and many more of those were founded coming out of recessions as well. And crudely, the reasons are twofold. One, product market fit and unit economics have to be ideal in a downturn when you have consumers feeling the pinch and business customers reining back on spending. But secondly, investors pull back on their duration and risk appetite, clearly, and capital becomes more concentrated, and the R&D bang for your buck you get in downturns, ironically, is better. But when you add on to that current stimulus packages like the IRA in the US, you have all of the component parts you need for innovation breakthrough. And I would actually stress even more simply, we need some of these breakthroughs, more physical world breakthroughs than digital ones. Because without these breakthroughs, we simply won't have enough lithium for the EV rollout, for example, we'll be 22% light. It's not just will this happen in a downturn, it has to happen in a downturn, irrespective of the macro. So, yes, now I think is an excellent time to be looking at Earthshots and not simply just at the peak of frothy markets. Michael Zezas: Well, Ed, thanks for taking the time to talk. Ed Stanley: It's great speaking with you, Mike. Michael Zezas: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

14 Des 20229min

Over the past few years, the airline industry has faced fluctuations between too hot and too cold across demand, capacity and costs. Could conditions in 2023 be just right for increased profitability?----- Transcript -----Welcome to Thoughts on the Market. I'm Ravi Shankar, Morgan Stanley's Freight Transportation and Airlines Analyst. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss our 2023 outlook for the airline space and some key takeaways for investors. As 2022 draws to a close, the outlook for airlines going into next year continues to be bullish. We think that 2023 is going to be what we call a "Goldilocks" year for the airlines, simply because we go from three years of conditions being either too cold during the pandemic, or too hot last year, to conditions being just right. This should be enough for the airlines to remain stable and to top 2019 levels in terms of profitability. However, the biggest question in the space is about the macro backdrop and consumer resilience. Everything we are seeing so far suggests that there are no real cracks in terms of the demand environment. We expect a slight cool down on the leisure side, but some uptick on the corporate and international side going into next year. As for pricing, when the irresistible force of demand met the immovable object of capacity restrictions in 2022, the net result was a significant increase in price, which was up 20 to 25% above pre-pandemic levels. This is arguably the biggest debate between the bulls and the bears in the space, regarding where the industry eventually ends up. We believe the pricing environment will cool slightly sequentially as capacity incrementally returns, but will stabilize well above 2019 levels. In addition, the return of corporate and international travel will be a mixed tailwind to yield in 2023. Costs have been another big debate for the space over the last 18 to 24 months. New pilot contracts are one of the things that we are closely tracking. And we do think that inflation should start to moderate in the back half of the year as we lap some really difficult comps in the cost side, but also as airlines get a little more capacity in the sky with the delivery of new, larger gauge planes and the return of some pilots. There might be some risk for the space in 2024 and beyond, but for 23 we still think that capacity is going to be relatively constrained in the first half of the year, and only start to really ease up in the second half of the year. And lastly, jet fuel has been very volatile for much of 2022. Given this, we model jet fuel flat versus current levels, but continue to expect volatility in price and note that current levels already imply a year over year tailwind for most of 2023. So all in all, we do expect that 2023 earnings will be above 2019 levels. And we point out that the market has not yet priced this into the airline stocks, which are currently trading at roughly year end 2020 levels. 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.

13 Des 20223min

Looking to 2023, Emerging Markets and fixed income assets are forecasted to outperform, so what should investors pay close attention to in the new year? Head of FX and EM Strategy James Lord and Global Head of EM Sovereign Credit Strategy Simon Waever discuss.----- Transcript -----James Lord: Welcome to Thoughts on the Market. I'm James Lord, Morgan Stanley's Head of FX and EM Strategy. Simon Waever: And I'm Simon Waever, Global Head of EM Sovereign Credit Strategy. James Lord: And on this special episode of the podcast, we'll be discussing our 2023 outlook for global emerging markets and fixed income assets and what investors should pay close attention to next year. Simon Waever: It's Monday, December 12th, at 11 a.m. in New York. James Lord: A big theme from Morgan Stanley's year ahead outlook is the outperformance we're expecting to see from emerging markets. This isn't just about emerging market fixed income, though, which is what Simon and I focus on, but also equities. So across the board, we're expecting much brighter days ahead for EM assets. Simon Waever: And of course, the dollar is always key and it has been extremely strong this year. But what about next year? What do you think? James Lord: Yeah. So we are expecting the dollar to head down over 2023. In fact, it's already losing ground against a variety of G10 and EM currencies, and we're expecting this process to continue. So why do we think that? Well, there are a few key reasons. First, U.S. CPI should fall significantly over the next 12 months. This is because economic growth should slow as the rate hikes delivered this year by the U.S. Fed begin to bite. Supply chains are also finally normalizing as the world is getting back to normal following the pandemic. This should also help the Fed to stop hiking rates, and this has been a big reason for the dollar's rally this year. Simon Waever: Right. So that's in the U.S., but what about the rest of the world? And what about China specifically? James Lord: Yeah so, inflation is expected to fall across the whole world as well. And that is going to be a stepping stone towards a global economic recovery. Global economic recovery is usually something that helps to push the dollar down. So this is something that will be very helpful for our call. And third, we see growth outside of the U.S. doing better than the U.S. itself. This is something that will be led by China and other emerging markets. China is moving away from its zero-covid strategy and as they do so over the coming quarters, economic activity should rebound, benefiting a whole range of different economies, emerging markets included. So all of that points us in the direction of U.S. dollar weakness and EM currency strength over 2023. Simon, how does EM look from your part of the world? Simon Waever: Right, so away from effects, the main way to invest in EM fixed income are sovereign bonds and they can be either in local currency or hard currency. And the hard currency bond asset class is also known as EM sovereign credit, and these are bonds denominated in U.S. dollar or euro. We think sovereign credit will do very well in 2023 and we kept our bullish view that we've had since August. I would say external drivers were key this year in explaining why the asset class was down 27% at its worst. So that included hawkish global central banks, higher U.S. real yields, wider U.S. credit spreads and a stronger dollar. We think the same external factors will be key next year, but now they're going to be much more supportive as a lot of them reverses. James Lord: What about fundamentals, Simon? How are they looking in emerging markets? Simon Waever: Right. They do deserve a lot of focus themselves as well because after all, debt is very high across EM, far from all have access to financing and growth is not what it used to be. But they're also very dispersed across countries. For instance, you have the investment grade countries that despite not growing as high as they used to, still have resilient credit profiles and only smaller external imbalances this time around. Then you have the oil exporters that clearly benefit from high oil prices. Of course, there are issues in particularly those countries that have borrowed a lot in dollars but now have lost market access due to the very high cost. Some have, in fact, already defaulted, but on the other hand, a lot are also being helped by the IMF. And if we look ahead to 2023, there are actually not that many debt maturities for the riskiest countries. James Lord: And what about valuation, Simon? Is the asset class still cheap? Simon Waever: Yeah, I would say the asset class is still cheap despite the recent rebound, and that's both outright and versus other credit asset classes. We also see positioning as light, which is a result of the significant outflows from EM this year and investors having moved into safer and higher rated countries. So putting all that together, it leaves us projecting tighter EM sovereign credit spreads, and for the asset class to outperform within global bonds. And that includes versus U.S. corporate credit and U.S. treasuries. Within the asset class, we also expect high yield to outperform investment grade. But that's it for the hard currency bonds, what about the local currency ones? James Lord: Local currency denominated bonds could be a great way to position in emerging markets because you get both the currency and currency exposure, as well as the potential for bond prices to actually rise too. The bonds that you were just talking about Simon, are mostly dollar denominated, so you don't get that currency kicker. So not only do we think EM currencies should rally against the U.S. dollar, but yields should also come lower too, as inflation drops in emerging markets and central banks start cutting interest rates over the course of 2023, and do so much earlier than central banks in developed economies. We've also seen very little in the way of inflows into this part of the asset class over the past five years or so. So if the outlook improves, we could start seeing asset allocators taking another look, resulting in larger inflows over 2023. James Lord: Simon, thanks very much for taking the time to talk. Simon Waever: Great speaking with you, James. James Lord: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on Apple Podcasts' app. It helps more people to find the show.

12 Des 20225min

2022 was an unusual year for stocks and bonds, and while the future is hard to predict, the start of 2023 is shaping up to look quite different across several metrics.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, December 9th, at 5 p.m. in London. We try to be forward looking on this program, but let's take a moment to appreciate just how deeply unusual this year has been. Looking back over the last 150 years of U.S. equity and long term bond performance, 2022 is currently the only year where both stocks and long term bonds are down more than 10%. Several factors conspired to create such an unusual outcome. To start, valuations for both stocks and bonds were expensive. Growth was weak in China, but surprisingly resilient in the developed markets. That resilient growth helped drive the highest rates of U.S. inflation in 40 years. And that high inflation invited a strong response from central banks, with the Federal Reserve's target rate rising at its fastest pace, over a 12 month period, since the early 1980s. Looking ahead, the next 12 months look different across all of those factors. First, starting valuations look different. U.S. BBB-rated corporate bonds began the year yielding just 3.3%, they currently yield 5.4%. The S&P 500 stock index began the year at 22x forward earnings, that's now fallen to 17.5x. And U.S. Treasury yields relative to inflation, the so-called real yield, have gone from -1% to positive 1.1%. Second, the mix of growth changes on Morgan Stanley's forecasts. After 12 months where U.S. growth outperformed China, U.S. growth should now decelerate while growth in China picks up as the country exits zero-covid. We think growth in Europe is likely to see a recession, further emphasizing a shift from developed market to emerging market leadership in global growth. That weaker developed market growth should mean weaker developed market inflation. After hitting 40 year highs in 2022, our forecasts show U.S. headline inflation falling sharply next year, with U.S. CPI hitting a year on year rate of just 1.9% by the end of 2023. Weaker demand, high inventories, lower commodity prices, healing supply chains, a cooler housing market, and easier year on year comparisons, are all part of Morgan Stanley's lower inflation forecast. As growth slows and inflation moderates, central banks will likely gain more confidence that they have taken rates high enough. After the fastest rate hiking cycle in 40 years, the next 12 months could see both the Federal Reserve and the European Central Bank make their final rate hike in the first quarter of 2023. We think different dynamics should mean different results. After a run of underperformance, we think these changes will help emerging market assets now do better and outperform developed market assets. After an unusually bad year for bonds, we continue to think that these shifts will support high grade fixed income. While the future is always hard to predict, we think investors should prepare for some very different stories. 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.

9 Des 20223min

As investors have kept China’s road to reopening top of mind, what comes after reopening and how might the Chinese economy and equity markets be impacted? Chief China Economist Robin Xing and Chief China Equity Strategist Laura Wang discuss.----- Transcript -----Laura Wang: Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. Robin Xing: I'm Robin Xing, Morgan Stanley's Chief China Economist. Laura Wang: On this special episode of the podcast we'll discuss our 2023 outlook for China's economy and equity market, and what investors should focus on next year. It's Thursday, December 8th at 9 a.m. in Hong Kong. Laura Wang: So, Robin, China's reopening is a top most investor concern as we head into next year. You've had a long standing call that China will be reopening by spring of 2023. Is that still your view, given the recent COVID policy changes? Robin Xing: Yes, that's still our view. In fact, recent developments have strengthened our conviction on that reopening view. After several weeks of twists and turns following the initial relaxation on COVID management on November 10th, we think policymakers have made clear their intent to stay on the reopening path. We have seen larger cities, including Beijing, Guangzhou and Chongqing, all relaxed COVID restrictions in last week. We have seen the top policymakers confirmed shift in the country's COVID doctrine in public communication, and COVID Zero slogan is officially removed from any press conference or official document. They started the vaccination campaign, and last but not least, we have also see a clear focus on how to shift the public perception with a more balanced assessment of the virus. All of these enhanced our conviction of a spring reopening from China. Laura Wang: What are some of the key risks to this view? Robin Xing: Well, I think the key risk is the path towards a reopening. Before full reopening in the spring, China will try to flatten the curve in this winter. That is, to prevent hospital resources being overwhelmed, thus limiting access and mortality during the reopening process. This is because the vaccination ratio among the elderly remains low, with only 40% of people aged 80 plus have received the booster shot. Meanwhile, the medical resources in China are unevenly distributed between larger cities and the lower tier areas. As a result, we do expect some lingering measures during the initial phase of reopening. Restrictions that could still tighten dynamically in lower tier cities should hospitalizations surge, but we will likely see more incremental relaxation in large cities. So cases might rise to a high level, before a more nonlinear increase occurs after the spring full reopening. So this is our timeline of reopening, basically flattening the curve in the winter when the medical system is ready, to a proper full reopening in the spring. Laura Wang: That's wonderful. We are finally seeing some light at the end of the tunnel. With all of these moving parts, if China does indeed reopen on this expected timeline, what is your growth outlook for Chinese economy both near-term and longer term? Robin Xing: Well, given this reopening timeline, we expect that GDP growth in China to remain subpar in near term. The economy is likely to barely grow in the fourth quarter this year, corresponding to a 2.8% year over year. Growth were likely improved marginally in the spring, but still subpar as the continued fear of the virus on the part of the population will likely keep consumption at a subpar level up to early second quarter. But as normalization unfolds from the spring, the economy will rebound more meaningfully in the second half. Our full year forecast for the Chinese growth is around 5%, which is above market consensus, and that will be largely led by private consumption. We are expecting pent up demand to be unleashed once the economy is fully reopened by summertime. Robin Xing: So Laura, the macro backdrop we have been discussing have made for a volatile 2022 in the Chinese equity market. With widely anticipated policy shifts on the horizon, what is your outlook for Chinese equities within the global EM framework, both in near-term and the longer term? Laura Wang: This is actually perfect timing to discuss it as we have just upgraded Chinese equities to overweight within the global emerging market context, after staying relatively cautious for almost two years since January 2021. We now see multiple market influential factors improving at the same time, which is for the very first time in the last two years. Latest COVID policy pivot, as you just pointed out, and property market stabilization measures will help facilitate macro recovery and will also alleviate investors concerns about policy priority. Fed rate hikes cycle wrapping up will improve the liquidity environment, stronger Chinese yuan against U.S. dollar will also improve the attractiveness for Chinese assets. Meanwhile, we are also seeing encouraging signs on geopolitical tension front, as well as the regulatory reset completion front. Therefore, we believe China will start to outperform the broader emerging market again. We expect around 14% upside towards the end of the year with MSCI China Index. Robin Xing: How should investors be positioned in the year ahead and what effects do you think will be the biggest beneficiaries of China's reopening? Laura Wang: Two things to keep in mind. Number one, for the past three years, we've been overweight A-Shares versus offshore space, which had worked out extremely well with CSI 300 outperforming MSCI China by close to a 20% on the currency hedged basis over the last 12 months. We believe this is a nice opportunity for the relative performance to reverse given offshore's bigger exposure to reopening consumption, higher sensitivity to Chinese yuan strengthening and to the uplifting effect from the PCAOB positive result. Secondly, it is time to overweight consumer discretionary with focus on services and durables. Consumption recovery is on the way. Robin Xing: What are some of the biggest risks to your outlook for 2023, both positive and negative? Laura Wang: I would say the positive risks are more associated with earlier and faster reopening progress, whereas the negative risk would be more around higher fatality and bigger drag to economy, which means social uncertainty as well as bigger macro and earnings pressure will amount. And then geopolitical tension is also worth monitoring in the course of the next 12 to 24 months. Laura Wang: Robin, thanks for taking the time to talk. Robin Xing: Great speaking with you, Laura. Laura Wang: 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 colleagues today.

8 Des 20226min

As India enters a new era of growth, investors will want to know what’s driving this growth and how it may create once-in-a-generation opportunities. Head of Global Thematic and Public Policy Research Michael Zezas and Chief India Equity Strategist Ridham Desai discuss.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research. Ridham Desai: And I'm Ridham Desai, Morgan Stanley's Chief India Equity Strategist. Michael Zezas: And on this special episode of Thoughts on the Market, we'll discuss India's growth story over the next decade and some key investment themes that global investors should pay attention to. It's Wednesday, December 7th, at 7 a.m. in New York. Michael Zezas: Our listeners are likely well aware that over the past 25 years or so, India's growth has lagged only China's among the world's largest economies. And here at Morgan Stanley, we believe India will continue to outperform. In fact, India is now entering a new era of growth, which creates a once in a generation shift in opportunities for investors. We estimate that India's GDP is poised to more than doubled to $7.5 trillion by 2031, and its market capitalization could grow 11% annually to reach $10 trillion. Essentially, we expect India to drive about a fifth of global growth in the coming decade. So Ridham, what in your view are the main drivers behind India's growth story? Ridham Desai: Mike, the full global trends of demographics, digitalization, decarbonization and deglobalization that we keep discussing about in our research files are favoring this new India. The new India, we argue, is benefiting from three idiosyncratic factors. The first one is India is likely to increase its share of global exports thanks to a surge in offshoring. Second, India is pursuing a distinct model for digitalization of its economy, supported by a public utility called India Stack. Operating at population scale India stack is a transaction led, low cost, high volume, small ticket size system with embedded lending. The digital revolution has already changed the way India handles documents, the way it invests and makes payments and it is now set to transform the way it lends, spends and ensures. With private credit to GDP at just 57%, a credit boom is in the offing, in our view. The third driver is India's energy consumption and energy sources, which are changing in a disruptive fashion with broad economic benefits. On the back of greater access to energy, we estimate per capita energy consumption is likely to rise by 60% to 1450 watts per day over the next decade. And with two thirds of this incremental supply coming from renewable sources, well in short, with this self-help story in play as you said, India could continue to outperform the world on GDP growth in the coming decade. Michael Zezas: So let's dig into some of the specifics here. You mentioned the big surge in offshoring, which has resulted in India's becoming "the office of the world". Will this continue long term? Ridham Desai: Yes, Mike. In the post-COVID environment, global CEOs appear more comfortable with work from home and also work from India. So the emergence of distributed delivery models, along with tighter labor markets globally, has accelerated outsourcing to India. In fact, the number of global in-house captive centers that opened in India over the past two years was double of that in the prior four years. During the pandemic years, the number of people employed in this industry in India rose by almost 800,000 to 5.1 million. And India's share in global services trade rose by 60 basis points to 4.3%. In the coming decade we think the number of people employed in India for jobs outside the country is likely to at least double to 11 million. And we think that global spending on outsourcing could rise from its current level of U.S. dollar 180 billion per year to about 1/2 trillion U.S. dollars by 2030. Michael Zezas: In addition to being "the office of the world", you see India as a "factory to the world" with manufacturing going up. What evidence are we seeing of India benefiting from China moving away from the global supply chain and shifting business activity away from China? Ridham Desai: We are anticipating a wave of manufacturing CapEx owing to government policies aimed at lifting corporate profits share and GDP via tax cuts, and some hard dollars on the table for investing in specific sectors. Multinationals are more optimistic than ever before about investing in India, and that's evident in the all-time high that our MNC sentiment index shows, and the government is encouraging investments by building both infrastructure as well as supplying land for factories. The trends outlined in Morgan Stanley's Multipolar World Thesis, a document that you have co authored, Mike, and the cheap labor that India is now able to offer relative to, say, China are adding to the mix. Indeed, the fact is that India is likely to also be a big consumption market, a hard thing for a lot of multinational corporations to ignore. We are forecasting India's per capita GDP to rise from $2,300 USD to about $5,200 USD in the next ten years. This implies that India's income pyramid offers a wide breadth of consumption, with the number of rich households likely to quintuple from 5 million to 25 million, and the middle class households more than doubling to 165 million. So all these are essentially aiding the story on India becoming a factory to the world. And the evidence is in the sharp jump in FDI that we are already seeing, the daily news flows of how companies are ramping up manufacturing in India, to both gain access to its market and to export to other countries. Michael Zezas: So given all these macro trends we've been discussing, what sectors within India's economy do you think are particularly well-positioned to benefit both short term and longer term? Ridham Desai: Three sectors are worth highlighting here. The coming credit boom favors financial services firms. The rise in per capita income and discretionary income implies that consumer discretionary companies should do well. And finally, a large CapEx cycle could lead to a boom for industrial businesses. So financials, consumer discretionary and industrials. Michael Zezas: Finally, what are the biggest potential impediments and risks to India's success? Ridham Desai: Of course, things could always go wrong. We would include a prolonged global recession or sluggish growth, adverse outcomes in geopolitics and/or domestic politics. India goes to the polls in 2024, so another election for the country to decide upon. Policy errors, shortages of skilled labor, I would note that as a key risk. And steep rises in energy and commodity prices in the interim as India tries to change its energy sources. So all these are risk factors that investors should pay attention to. That said, we think that the pieces are in place to make this India's decade.Michael Zezas: Ridham, thanks for taking the time to talk. Ridham Desai: Great speaking with you, Mike. Michael Zezas: 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.

7 Des 20227min

As bond markets appear to have already priced in what central banks will likely do in 2023, how will this path impact inflation and currencies around the world?----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today I'll talk about our 2023 outlook and how investors should view some key macro trends. It's Tuesday, December 6th, at 10 a.m. in New York. During the pandemic in 2020 and 2021, central banks provided the global economy a safety net with uber-accommodative interest rate and balance sheet policies. In 2022, central banks started to aggressively pull away that safety net. In 2023, we expect central banks to finish the job. And in 2024, central banks will likely start to roll out that safety net again, namely by lowering interest rates. Bond markets, which are forward looking discounting machines, are already pricing in the final stages of what central banks will likely do in 2023. The prospect of easier central bank policies should bring with it newfound demand for long term government bonds, just at a time when supply of these bonds is falling from decade long highs seen in 2021 and 2022. Central bank balance sheets will continue to shrink in 2023, meaning central banks are not aggressively buying bonds - but investors shouldn't be intimidated. These expected reductions in central bank purchases are already well understood by market participants and largely in the price already. In addition, for the largest central bank balance sheets, the reductions we forecast simply take them back to the pre-pandemic trend. Of course, for central bank policies and macro markets alike, the path of inflation and associated expectations will exert the most influence. We think inflation will fall faster than investors expect, even if it doesn't stabilize at or below pre-pandemic run rates. Lower inflation around the world should allow central banks to stop their policy tightening cycles. As lower U.S. inflation brings a less hawkish Fed to bear, the markets should price lower policy rates and a weaker U.S. dollar. Lower inflation in Europe and the U.K. should encourage a less hawkish ECB and Bank of England. This should help growth expectations rebound in those vicinities as rates fall, which will result in euro and sterling currency strength. We do think the U.S. dollar has already peaked and will decline through 2023. A fall in the U.S. dollar is usually something that reflects, and also contributes to, positive outcomes in the global economy. Typically, the U.S. dollar falls during periods of rising global growth and rising global growth expectations. As we anticipate the dollar's decline through 2023, it's worth noting that in emerging markets, U.S. dollar weakness and EM currency strength actually tend to loosen financial conditions within emerging market economies, not tighten them. Emerging markets that have U.S. dollar debt will also see their debt to GDP ratios fall as their currencies rise, further helping to lower borrowing costs and, in turn, boosting growth. In a nutshell, we see the negative feedback loops that were in place in 2022 reversing, at least somewhat in 2023 via virtuous cycles led by lower U.S. inflation, lower U.S. interest rates, and a weaker U.S. dollar. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

6 Des 20223min