2026 Midterm Elections: What’s at Stake for Markets

The auto industry is pivoting from big spending to capital discipline. Our analyst highlights possible areas where investors may find opportunities this year.----- Transcript -----Welcome to Thoughts on the Market. I'm Adam Jonas, Morgan Stanley's Head of the Global Autos and Shared Mobility Team. Today I'll be talking about our U.S. autos outlook for 2024. It's Tuesday, January 2nd at 10 a.m. in New York. Heading into 2024, we remain concerned about the future of the U.S. auto industry, in some ways, even more so than during the great financial crisis of 2008 and 2009. But as the auto industry pivots away from big spending on EVs and autonomous vehicles to a relatively more parsimonious era of capital discipline, we see significant upside value unlock for investors. It's been a good run for the automakers. Just think how supportive the overall macroeconomic environment has been for the U.S. auto industry since 2010. U.S. GDP growth averaged well over 2%. Historically low interest rates helped consumers afford big ticket auto purchases. The Chinese auto consumers snapped up Western brands funding rich dividend streams for U.S. automakers. Used car prices were mostly stable or rising, supporting the auto lending complex. And COVID driven inventory scarcity lifted average transaction prices to all time highs, buoying auto companies margins. Looking back, the relatively strong performance of auto companies contributed to ever growing levels of CapEx and R&D in increasingly unfamiliar areas, ranging from battery cell development to software and A.I inference chips, to fully autonomous robotaxis. For years, investors largely supported Detroit's investments in Auto 2.0, with a glass half-full view of legacy car companies' ability to venture into profitable electric vehicle territory. But we're reaching a critical juncture now, and we believe the decisions that will be made over the next 12 months with respect to capital allocation and spending discipline will determine the overall industry and individual automakers performance. We forecast U.S. new car sales to reach 16 million units in 2024, an increase of around 2% from the November 2023 run rate of 15.7 million units. To achieve this growth, we believe car and truck prices need to fall materially. Given stubbornly high interest rates hampering affordability, a 16 million unit seasonally adjusted annual selling rate may require a combination of price cuts and transaction prices down on the order of 5% year-on-year, leaving the value of U.S. auto sales relatively stable year-on-year. We expect a continued melting in used car prices, but not a very sharp fall from here, owing to a continued low supply of certified pre-owned inventory in good condition coming off lease as we approach the third anniversary of the COVID lows. As new inventory continues to recover, we expect steady downward pressure on used prices on the order of 5 or 10% from December 23 to December 24. In terms of EV demand, we expect growth on the order of 15 to 20% in the U.S., keeping penetration in the 8% range. We continue to expect legacy automakers to pull back on EV offerings due largely to a lack of profitability. Startup EV carmakers will likely see constrained production, including by their own choice, into a slowing demand environment where we expect to see hybrid and plug-in hybrid volume making a comeback, potentially rising 40 to 50%. So what themes do we think investors should prepare for? First in an accelerating EV penetration world, we believe internal combustion exposed companies and suppliers may outperform EV exposed suppliers categorically. Secondly, we believe many companies in our coverage have an opportunity to greatly improve capital allocation and efficiency as they dial back expansionary CapEx and prioritize cash generating parts of the portfolio. And finally, we would be increasingly selective on picking winners exposed to long term secular trends like electrification and autonomy, focusing on those firms that can scale such technologies profitably. 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.

2 Jan 20244min

Original Release on November 14th, 2023: Our roundtable discussion on the future of the global economy and markets continues, as our analysts preview what is ahead for government bonds, currencies, housing and more.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what is ahead for the global economy and markets in 2024. It's Tuesday, November 14th at 10 a.m. in New York. Yesterday you heard from Seth Carpenter, our Global Chief Economist, and Mike Wilson, our Chief Investment Officer and the Chief U.S. Equity Strategist. Today, we will cover what is ahead for government bonds, corporate credit, currencies and housing. I am joined by Matt Hornbach, our Chief Macro Strategist, James Lord, the Global Head of Currency and Emerging Markets Strategy, Andrew Sheets, Global Head of Credit Research, and Jay Bacow, Co-Head of U.S. Securities Products.Vishy Tirupattur: Matt, 2023 was quite a year for long end government bond yields globally. We saw dramatic curve inversion and long end yields reaching levels we had not seen in well over a decade. We've also seen both dramatic sell offs and dramatic rallies, even just in the last few weeks. Against this background, how do you see the outlook for government bond yields in 2024? Matt Hornbach: So we're calling our 2024 outlook for government bond markets the land of confusion. And it's because bond markets were whipped around so much by central banks in 2023 and in 2022. In the end, what central banks gave in terms of accommodative monetary policy in 2020 and 2021, they more than took away in 2022 and this past year. At least when it came to interest rate related monetary policies. 2024, of course, is going to be a pretty confusing year for investors because, as you've heard, our economists do think that rates are going to be coming down, but so too will balance sheets. But for the past couple of years, both G10 and EM central banks have raised rates to levels that we haven't seen in decades. Considering the possibility that equilibrium rates have trended lower over the past few decades, central bank policy rates may be actually much more restricted today than at any point since the 1970s. But, you know, we can't say the same for central bank balance sheets, even though they've been shrinking for well over a year now. They're still larger than before the pandemic. Now, our economists forecast continued declines in the balance sheets of the Fed, the ECB, the Bank of England and the Bank of Japan. But nevertheless, in aggregate, the balance sheet sizes of these G4 central banks will remain above their pre-pandemic levels at the end of 2024 and 2025.Vishy Tirupattur: Matt, across the developed markets. Where do you see the best opportunity for investors in the government bond markets? Matt Hornbach: So Vishy we think most of the opportunities in 2024 will be in Europe given the diverging paths between eurozone countries. Germany, Austria and Portugal will benefit from supportive supply numbers, while another group, including Italy, Belgium and Ireland will likely witness a higher supply dynamic. Our call for a re widening of EGB spreads should actually last longer than we originally anticipated. Elsewhere in Europe, we're expecting the Bank of England to deliver 100 basis points of cumulative cuts by the end of 2024, and that compares to significantly less that's priced in by the market. Hence, our forecasts for gilts imply a much lower level of yields and a steeper yield curve than what you see implied in current forward rates. So the UK probably presents the best duration and curve opportunity set in 2024. Vishy Tirupattur: Thank you, Matt. James, a strong dollar driven by upside surprises to U.S. growth and higher for longer narrative that has a world during the year characterized the strong dollar view for much of the year. How do you assess 2024 to be? And what differences do you expect between developed markets and emerging market currency markets? James Lord: So we expect the recent strengthening of US dollar to continue for a while longer. This stronger for a longer view on the US dollar is driven by some familiar drivers to what we witnessed in 2023, but with a little bit of nuance. So first, growth. US growth, while slowing, is expected to outperform consensus expectations and remain near potential growth rates in the first half of 2024. This is going to contrast quite sharply with recessionary or near recessionary conditions in Europe and pretty uncompelling rates of growth in China. The second reason we see continued dollar strength is rate differentials. So when we look at our US and European rate strategy teams forecasts, they have rates moving in favor of the dollar. Final reason is defense, really. The dollar likely is going to keep outperforming other currencies around the world due to its pretty defensive characteristics in a world of continued low growth, and downside risks from very tight central bank monetary policy and geopolitical risks. The dollar not only offers liquidity and safe haven status, but also high yields, which is of course making it pretty appealing. We don't expect this early strength in US Dollar to last all year, though, as fiscal support for the US economy falls back and the impact of high rates takes over, US growth slows down and the Fed starts to cut around the middle of the year. And once it starts cutting, our U.S. econ team expects it to cut all the way back to 2.25 to 2.5% by the end of 2025. So a deep easing cycle. As that outlook gets increasingly priced into the US rates, market rate differentials start moving against the dollar to push the currency down. Vishy Tirupattur: Andrew, we are ending 2023 in a reasonably good setup for credit markets, especially at the higher quality end of the trade market. How do you expect this quality based divergence across global trade markets to play out in 2024? Andrew Sheets: That's right. We see a generally supportive environment for credit in 2024, aided by supportive fundamentals, supportive technicals and average valuations. Corporate credit, especially investment grade, is part of a constellation of high quality fixed income that we see putting up good returns next year, both outright and risk adjusted. When we talk about credit being part of this constellation of quality and looking attractive relative to other assets, it's important to appreciate the cross-asset valuations, especially relative to equities, really have moved. For most of the last 20 years the earnings yield on the S&P 500, that is the total earnings you get from the index relative to what you pay for it, has been much higher than the yield on U.S. triple B rated corporate bonds. But that's now flipped with the yield on corporate bonds now higher to one of the greatest extents we've seen outside of a crisis in 20 years. Theoretically, this higher yield on corporate bonds relative to the equity market should suggest a better relative valuation of the former. So what are we seeing now from companies? Well companies are buying back less stock and also issuing less debt than expected, exactly what you'd expect if companies saw the cost of their debt as high relative to where the equities are valued. A potential undershoot in corporate bonds supply could be met with higher bond demand. We've seen enormous year to date flows into money market funds that have absolutely dwarfed the flows into credit. But if the Fed really is done raising rates and is going to start to cut rates next year, as Morgan Stanley's economists expect, this could help push some of this money currently sitting in money market funds into bond funds, as investors look to lock in higher yields for longer. Against this backdrop, we think the credit valuations, for lack of a better word, are fine. With major markets in both the U.S. and Europe generally trading around their long term median and high yield looking a little bit expensive to investment grade within this. Valuations in Asia are the richest in our view, and that's especially true given the heightened economic uncertainty we see in the region. We think that credit curves offer an important way for investors to maximize the return of these kind of average spreads. And we like the 3 to 5 year part of the U.S. credit curve and the 5 to 10 year part of the investment grade curve in Europe the most. Vishy Tirupattur: Thanks, Andrew. Jay, 2023 was indeed a tough year for the agency in the US market, but for the US housing market it held up quite remarkably, despite the higher mortgage rates. As you look ahead to 2024, what is the outlook for US housing and the agency MBS markets and what are the key drivers of your expectations? Jay Bacow: Let's start off with the broader housing market before we get into the views for agency mortgages. Given our outlook for rates to rally next year, my co-head of securitized products research Jim Egan, who also runs US housing, thinks that we should expect affordability to improve and for sale inventory to increase. Both of these developments are constructive for housing activity, but the latter provides a potential counterbalance for home prices. Now, affordability will still be challenged, but the direction of travel matters. He expects housing activity to be stronger in the second half of '24 and for new home sales to increase more than existing home sales over the course of the full year. Home prices should see modest declines as the growth in inventory offsets the increased demand. But it's important to stress here that we believe homeowners retain strong hands in the cycle. We don't believe they will be forced sellers into materially weaker bids, and as such, we don't expect any sizable correction in prices. But we do see home prices down 3% by the end of 2024. Now, that pickup in housing activity means that issuance is going to pick up as well in the agency mortgage market modestly with an extra $50 billion versus where we think 2023 ends. We also think the Fed is going to be reducing their mortgage portfolio for the whole year, even as Q2 starts to taper in the fall, as the Fed allows their mortgage portfolio to run off unabated. And so the private market is going to have to digest about $510 billion mortgages next year, which is still a concerning amount but we think mortgages are priced for this. Vishy Tirupattur: Thanks, Jay. And thank you, Matt, James and Andrew as well. And thank you to our listeners for joining us for this 2 part roundtable discussion of our expectations for the global economy and the markets in 2024. As a reminder, 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.

29 Des 202311min

Original Release on November 13th, 2023: As global growth takes a hit and inflation begins to cool, how does the road ahead look for central banks and investors? Chief Fixed Income Strategist Vishy Tirupattur hosts a roundtable with Chief Economist Seth Carpenter and Chief U.S. Equity Strategist Mike Wilson to discuss.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today on the podcast we'll be hosting a very special roundtable discussion on what is ahead for the global economy and markets by 2024. I am joined by my colleagues, Seth Carpenter, Global Chief Economist and Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. It's Monday, November 13th at 9 a.m. in New York. Vishy Tirupattur: Thanks to both of you for taking the time to talk. We have a lot to cover, so I am going to go right into it. Seth, I want to start with the global economy. As you look ahead to 2024, how do you see the global economy evolving in terms of growth, inflation and monetary policy? Seth Carpenter: Thanks, Vishy. As we look forward over the next couple of years, there are a few key themes that we're seeing in terms of growth, inflation and monetary policy. First, looks like global growth has stepped down this year relative to last year and we're expecting another modest step down in the global economy for 2024 and into 2025. Overall, what we're seeing in the developed market economies is restrictive monetary policy in general restraining growth, whereas we have much more mixed results in the emerging market world.Inflation, though, is a clear theme around the world. Overall, we see the surge in inflation. That has been a theme in global markets for the past couple of years as having peaked and starting to come down. It's coming down primarily through consumer goods, but we do see that trend continuing over the next several years. That backdrop of inflation having peaked and coming down along with weaker growth means that we're setting ourselves up for overall a bit of an easing cycle for monetary policy. We are looking for the Fed and the ECB each to start an easing cycle in June of this year. For the Fed, it's because we see growth slowing down and inflation continuing to track down along the path that we see and that the Fed will come around to seeing. I would say the stark exception to this among developed market economies is the Bank of Japan. We have seen them already get to the de facto end of yield curve control. We think by the time we get to the January policy meeting, they will completely eliminate yield curve control formally and go from negative interest rate policy to zero interest rate policy. And then over the course of the next year or so, we think we're going to see very gradual, very tentative increases in the policy rate for Japan. So for every story, there's a little bit of a cross current going on. Vishy Tirupattur: Can you talk about some of the vulnerabilities for the global economy? What worries you most about your central case, about the global economy? Seth Carpenter: We put into the outlook a downside scenario where the current challenges in China, the risks, as we've said, of a debt deflation cycle, they really take over. What this would mean is that the policy response in beijing is insufficient to overcome the underlying dynamics there as debt is coming down, as inflation is weak and those things build on themselves. Kind of a smaller version of the lost decade of Japan. We think from there we could see some of that weakness just exported around the globe. And for us, that's one of the key downside risks to the global economy. I'd say in the opposite direction, the upside risk is maybe some of the strength that we see in the United States is just more persistent than we realize. Maybe it's the case that monetary policy really hasn't done enough. And we just heard Chair Powell talk about the possibility that if inflation doesn't come down or the economy doesn't slow enough, they could do more. And so we built in an alternate scenario to the upside where the US economy is just fundamentally stronger. Let me pass it back to you Vishy. Vishy Tirupattur: Thank you Seth. Mike, next I'd like to go to you. 2023 was a challenging year for earnings growth, but we saw significant multiple expansion. How do you expect 2024 to turn out for the global equity markets? What are the key challenges and opportunities you see for equity markets in 2024? Mike Wilson: 2023 was obviously, you know, kind of a challenging year, I think, for a lot of equity managers because of this incredible dispersion that we saw between, kind of, how economies performed around the world and how that bled into company performance. And it was very different region by region. So, you know, first off, I would say US growth, the economic level was better than expected, better than the consensus expected for sure, and even better than our economists view, which was for a soft landing. China was, on the other hand, much worse than expected. The reopening really never materialized in any meaningful way, and that bled into both EM and European growth. I would say India and Japan surprised in the upside from a growth standpoint, and Japan was by far the star market this year. The index was up a lot, but also the average stock performed extremely well, which is very different than the US. India also had pretty good performance equity wise, but in the US we had this incredible divergence between the average stock and the S&P 500 benchmark index, with the average stock underperforming by as much as 12 or 1300 basis points. That's pretty unusual. So how do we explain that and what does that mean for next year? Well, look, we think that the fiscal support is starting to fade. It's in our forecast now. In other words, economic growth is likely to soften up, not a recession yet for 2024, but growth will be deteriorating. And we think that will bleed into further earnings deterioration. So for 2024, we continue to favor Japan, where the earnings of breadth has been the best looks to us, and that's in a new secular bull market. In the US, it's really a tale of two worlds. It's companies that have cost leadership or operational efficiency, a thing we've been espousing for the last two years. Those types of companies should continue to outperform into the first half of next year. And then eventually we suspect, will be flipping pretty aggressively to companies that have poor operational efficiency because we're going to want to catch the upside leverage as the economy kind of accelerates again in the back half of 2024 or maybe into 2025. But it's too early for that in our view.Vishy Tirupattur: How do you expect the market breadth to evolve over 2024? Can you elaborate on your vision for market correction first and then recovery in the later part of 2024? Mike Wilson: Yes. In terms of the market breadth, we do ultimately think market breadth will bottom and start to turn up. But, you know, we have to resolve, kind of, the index price first. And this is why we've continued to maintain our $3900 price target for the S&P 500 for, you know, roughly year end of this year. That, of course, would argue you're not going to get a big rally in the year-end. And the reason we feel that way, it's an important observation, is that market breadth has deteriorated again very significantly over the last three months. And breadth typically leads the overall index. So until breadth bottoms out, it's very difficult for us to get bullish at the index level as well. So the way we see it playing out is over the next 3 to 6 months, we think the overall index will catch down to what the market breadth has been telling us and should lead us out of what has been, I think a pretty, you know, persistent bear market for the last two years, particularly for the average stock. And so we suspect we're going to be making some significant changes in both our sector recommendations. New themes will emerge. Some of that will be around existing themes. Perhaps AI will start to actually have a meaningful impact on overall productivity, something we see really evolving in 2025, more than 2024. But the market will start to get ahead of that. And so I think it's going to be another year to be very flexible. I'd say the best news is that although 2023 has been somewhat challenging for the average stock, it's been a great year for dispersion, meaning stock picking. And we think that's really the key theme going into 2024, stick with that high dispersion and stock picking mentality. And then, of course, there'll be an opportunity to kind of flip the factors and kind of what's working into the second half of next year. Vishy Tirupattur: Thanks, Mike. We are going to take a pause here and we'll be back tomorrow with our special year ahead roundtable, where we'll share our forecasts for government bonds, corporate credit, currencies and housing. As a reminder, 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.

28 Des 20239min

Original Release on December 7th, 2023: Will India equities continue to outperform China equities in 2024? The two key factors investors should track.----- Transcript -----Welcome to Thoughts on the market. I'm Jonathan Garner, Morgan Stanley's Chief Asia and Emerging Market Equity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'm going to be discussing our continued preference for Indian equities versus China equities. It's Thursday, December 7th at 9 a.m. in Singapore. MSCI India is tracking towards a third straight year of outperformance of MSCI China, and India is currently our number one pick. Indeed, we're running our largest overweight at 100 basis points versus benchmark. In contrast, we reduced China back to equal weight in the summer of this year. So going into 2024, we're currently anticipating a fourth straight year of India outperformance versus China. Central to our bullish view on India versus China, is the trend in earnings. Starting in early 2021, MSCI India earnings per share in US dollar terms has grown by 61% versus a decline of 18% for MSCI China. As a result, Indian earnings have powered ahead on a relative basis, and this is the best period for India earnings relative to China in the modern history of the two equity markets. There are two fundamental factors underpinning this trend in India's favor, both of which we expect to continue to be present in 2024. The first is India's relative economic growth, particularly in nominal GDP terms. Our economists have written frequently in recent months on China's persistent 3D challenges, that is its battle with debt, deflation and demographics. And they're forecasting another subdued year of around 5% nominal GDP growth in 2024. In contrast, their thesis on India's decade suggests nominal GDP growth will be well into double digits as both aggregate demand and crucially supply move ahead on multiple fronts. The second factor is currency stability. Our FX team anticipate that for India, prudent macro management, particularly on the fiscal deficit, geopolitical dynamics and inward multinational investment, can lead to continued Rupee stability in real effective terms versus volatility in previous cycles. For the Chinese Yuan, in contrast, the real effective exchange rates has begun to slide lower as foreign direct investment flows have turned negative for the first time and domestic capital flight begins to pick up. Push backs we get on continuing to prefer India to China in 2024, are firstly around potential volatility of the Indian markets in an election year. But secondly, a bigger concern is relative valuations. Now, as always, we feel it's important to contextualize valuations versus return on equity and return on equity trajectory. Currently, India is trading a little over 3.7x price to book for around 15% ROE. This means it has one of the highest ROE's in emerging markets, but is the most expensive market. And in price to book terms, second only to the US globally. China is trading on a much lower price to book of 1.3x, but its ROE is 10% and indeed on an ROE adjusted basis, it's not particularly cheap versus other emerging markets such as Korea or South Africa. Importantly for India, we expect ROE to remain high as earnings compound going forward, and corporate leverage can build from current levels as nominal and real interest rates remain low to history. So the outlook is positive. But for China, the outlook is very different. And in a recent detailed piece, drawing on sector inputs from our bottom up colleagues, we concluded that whilst the base case would be for ROE stabilization, if reflation is successful, there's also a bear case for ROE to fall further to around 7% over the medium term, or less than half that of India today. Finally, within the two markets we’re overweight India, financials, consumer discretionary and industrials. And these are sectors which typically do best in a strong underlying growth environment. They're the same sectors on which we're cautious in China. There our focus is on A-shares rather than large cap index names, and we like niche technology, hardware and clean energy plays which benefit from China's policy objectives. 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.

27 Des 20234min

Original Release on December 6th, 2023: Although much will change before the elections, investors should watch for potential impacts on issues such as AI regulation, energy permitting, trade and tax policy.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Ariana Salvatore: And I'm Ariana Salvatore, from the U.S. Public Policy Research Team. Michael Zezas: On this special episode of Thoughts on the Market, we'll discuss our early views around the 2024 U.S. presidential election. It's Wednesday, December 6th at 10 a.m. in New York. Michael Zezas: With U.S. elections less than a year away now, it's likely much will change in terms of the drivers of the outcome and its market impact. Still, we believe early preparation will help investors navigate the campaign. And so starting now, we'll bring your updated views and forecasts until the U.S. elects its next president in November of 2024. Arianna, we've noted that this upcoming election will affect particular sectors rather than the broader macro market. What's driving this view? Ariana Salvatore: There are really two reasons that we've been pointing to. First, lawmakers have achieved a lot of their policy priorities that impact the deficit over the past few election cycles. If you think about the 2017 Tax Cuts and Jobs Act or the infrastructure bill back in 2021, for example. Now they're turning to policy that holds more sectoral impacts than macro. The second reason is that inflation is still a very high priority issue for voters. As we've noted, an elevated level of concern around inflation really disincentivizes politicians from pushing for legislation that could expand the deficit because it's seen as contrary to that mandate of fiscal austerity that comes in a high inflation environment. There is one exception to this. As we've noted before, lawmakers will have to deal with the expiring Tax Cuts and Jobs Act. We think the different configurations post 2024 each produce a unique outcome, but we expect in any scenario, that will only add modestly to the deficit. Michael Zezas: And digging into specific sectors. What policies are you watching and which sectors should investors keep an eye out for in the event these policies pass? Ariana Salvatore: Following the election, we think Congress will turn to legislative items like AI regulation, energy permitting, trade and tax policy. Obviously, each unique election outcome will facilitate its own level and type of policy transformation. But we think you could possibly see the biggest divergence from the status quo in a Republican sweep. In particular, in that case, we'd expect lawmakers to launch an effort to roll back, at least partially, the Inflation Reduction Act or the IRA, though we ultimately don't think a full scale repeal will be likely. We also expect to see something on AI regulation based on what's currently in party consensus, easing energy permitting requirements and probably extending the bulk of the expiring Tax Cuts and Jobs Act. That means sectors to watch out for would be clean tech, AI exposed stocks and sectors most sensitive to tax changes like tech and health care. Mike, as we mentioned, with this focus on legislation that impacts certain sectors, we don't expect this to be a macro election. So is there anything that would shift the balance toward greater macro concerns? Michael Zezas: Well, if it looks like a recession is getting more likely as the election gets close, it's going to be natural for investors to start thinking about whether or not the election outcome might catalyze a fiscal response to economic weakness. And in that situation, you'd expect that outcomes where one party doesn't control both Congress and the White House would lead to smaller and somewhat delayed responses. Whereas an outcome where one party controls both the White House and Congress, you would probably get a bigger fiscal response that comes faster. Those are two outcomes that would mean very different things to the interest rates market, for example, which would have to reflect differences in new bond supply to finance any fiscal response, and of course, the resulting difference in the growth trajectory. Ariana Salvatore: All right so, keeping with the macro theme for a moment. How do our expectations for geopolitics and foreign policy play into our assessment of the election outcomes? Michael Zezas: Yeah, this is a difficult one to answer, mostly because it's unclear how different election outcomes would net impact different geopolitical situations. So, for example, investors often ask us about what outcomes would matter for a place like Mexico, where they're concerned that some election outcomes might create economic challenges for Mexico around the US-Mexico border. However, those outcomes could also improve the prospects for near shoring, which improves foreign direct investment into Mexico. It's really unclear whether those cross-currents would be a net positive or a net negative. So we don't really think there's much specific to guide investors on, at least at the moment. Finally, Arianna, to sum up, how is the team tracking the presidential race and which indicators are particularly key, the focus on? Ariana Salvatore: Well, recent history suggests that it will be a close race. For context, the 2022 midterms marked the fourth time in four years that less than 1% of votes effectively determined which side would control the House, the Senate or the White House. That means that elections are nearly impossible to predict. But we think there are certain indicators that can tell us which outcomes are becoming more or less likely with time. For example, we think inflation could influence voters. As a top voter issue and a topic that the GOP is better perceived as equipped to handle, persistent concerns around inflation could signal potential upside for Republicans. Inflation also tracks very closely with the president's approval rating. So on the other hand, if you see decelerating inflation in conjunction with overall improving economic data, that might indicate some tailwinds for Democrats across the board. We're going to be tracking other indicators as well, like the generic ballot, President Biden's approval rating and prediction markets, which could signal that different outcomes are becoming more or less likely with time. Michael Zezas: Ariana, thanks for taking the time to talk. Ariana Salvatore: 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.

26 Des 20236min

How has corporate credit fared through slow growth and high inflation? Here’s our view on what comes next for this market.----- Transcript -----[00:00:02] Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of 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, December 22nd at 4 p.m. in London. [00:00:18] Sometimes it's hard to explain why a market is moving. This is not one of them. U.S. economic data has been unquestionably good over the last two months, delivering an unusual combination of better than expected growth with lower than expected inflation. In the U.K. and Euro area, inflation has been declining even faster. [00:00:35] Central banks, seeing this encouraging decline in inflationary pressure, have signaled an end to their recent rate hiking campaigns and hinted that next year will bring cuts. These shifts have been significant. The market's expectation of one year interest rates in the eurozone in one year's time have fallen almost 1% in the last month alone. In the U.S., they've fallen about 1.25% over the last two. [00:00:56] As you've heard us discuss on this program throughout the year, inflation is incredibly important to the current macroeconomic story. Much of the concerns this year, especially at the beginning, were based on a widespread view that in an economy near full employment, high inflation could only be brought down with much weaker growth, leaving investors with the unappetizing choice of either a recession or permanently higher inflation. [00:01:17] But the last two months have presented a notable glass half full, more optimistic challenge to that story. In the U.S., there are signs the economy is increasing capacity, which in economic terms allows for more output without higher prices. U.S. energy production has hit record levels, with the U.S. currently producing 40% more oil than Saudi Arabia. More workers are joining the labor force. New business formations are high and supply chain stresses are improving. All of that has helped reduce inflationary pressure and reinforce the idea that policy shifts in the Federal Reserve towards easier monetary policy can be credible over the next several years. [00:01:52] In Europe, growth has been weaker, but this has meant inflation is coming down even faster, bolstering the view that the European Central Bank has taken interest rates much higher than it needs to, and could also reverse these significantly over the next 12 months. [00:02:04] For a market that spent much of the last two years worried about being stuck between this rock and a hard place with growth and inflation, the data over the last two months is welcome news and we remain positive on corporate credit. While levels have rallied more than we expected, we think this is balanced, for now, with these better than expected economic developments. [00:02:22] Within the credit rally, however, we see dispersion. Long term U.S. investment grade bonds, a highly volatile sector, have done so well that spreads are now near the tightest levels in 20 years. We think this looks overdone. In contrast, performance in the lowest rated and also volatile cohort of triple C issuers has lagged significantly. While we've previously had a higher quality bias within credit, we think U.S. and European triple C's can now start to catch up, given some of the better macroeconomic developments we've been seeing in the recent months. [00:02:51] 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.

22 Des 20233min

As mortgage rates come down from 8% closer to 6.5%, the 2024 housing market will see changes in inventory, home prices and sales.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of Securitized Products Research at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of Securitized Products Research. Jay Bacow: And on this episode of the podcast we'll be discussing what the recent rally in mortgage rates means to the mortgage and housing Markets. It's Thursday, December 21st at 11 a.m. in New York. Jim Egan: Now, Jay, the last time that we were on this podcast, we talked about what an 8% mortgage rate can mean to the homeowner. Now, mortgage rates have come down. They're getting quoted with a 6% handle. What happened? And where do we see mortgage rates going from here? Jay Bacow: The combination of data and Fed speak made the markets expect a lot more cuts from the Fed in 2024. Markets are pricing in close to 150 basis points of cuts, and that's caused a pretty large rally in rates. Primary mortgage rates to the homeowner are generally based off of secondary mortgage rate execution in the market, along with treasury rates. And you've seen a little over a hundred basis point rally in Treasury rates and a little over 150 basis point rally and secondary market execution. Jim Egan: Okay, So mortgage rates are down 150 basis points. Jay Bacow: Not quite. Lenders don't really drop the primary rate as fast as a secondary rate goes down because they're not going to be able to deal with the added volume of inquiries until they add staffing. So we don't think primary rates are going to come down quite as much as secondary market rates have come down right now. But if rates stay here for some time, then we'd expect mortgage rates to settle in, in the context of about 6.5% or so. Jim Egan: Basically, what you're saying is when originators can hire enough officers to deal with the refinance and purchase inquiries, then they'll drop rates, effectively, don't cut profits if you can't make it up in volume. Jay Bacow: Exactly right. Now, what we would point out is there's only about 5% of the market that has a mortgage rate above 6.5%. So we wouldn't really expect a huge wave of refi activity. But what we would expect is that as market is pricing in more cuts, is that investors are going to feel more comfortable buying mortgages. For instance, right now the yields on mortgages that investors earn is similar to the yield that they can earn with Fed funds. However, the market is expecting that 150 basis point move lower in Fed funds next year, but they're not really expecting the back end of the yield curve to move that much. And so we think that investors like domestic banks, will be looking to move their cash out of the Fed's interest on reserves and into securities, and the probability of that happening is higher now than it was before all these cuts got priced in. But that's sort of investor behavior. What does this rally mean for the housing market writ large, in particular I guess I'm thinking like housing activity. You know, you put out a forecast a month ago. Do we think it's going to pick up now given the rally? Jim Egan: So when we published our year ahead forecast, we were expecting affordability to improve and to improve in line with the decreases in mortgage rates that you were discussing a little bit earlier in this podcast. But if interest rates were to stay here, that improvement would obviously be occurring far more quickly than we had originally anticipated. Jay Bacow: Now, I guess I would think that more affordable housing would equal a higher volume of home sales. But we moved up to that almost 8% mortgage rate so fast and then we've rallied so quickly, and a lot of this happened during this slower seasonal period. So what are you thinking about the implication for home sales in general? Jim Egan: As you're pointing out, it's not really that straightforward here. The affordability improvement that we were expecting to see over the entire course of 2024 is something that we've only seen seven or eight other times in the course of the past 40 years. In most of those instances, sales volumes actually fell during that first year of affordability improvement, and that is before they climbed significantly in the 12 to 24 months after, that affordability improved. When you combine that historical experience with the fact that, look, despite this improvement in affordability, it's still very stretched and inventories, for sale inventories, are still very low. Jay, As you just mentioned, 95% of mortgaged homeowners have a rate below 6.5%. We just don't think that that spells material increases in home sales from here. Jay Bacow: Okay. But there's a lot of room between no change and material increase, so what are you forecasting? Jim Egan: Despite the comments that I just made, an additional factor that we do need to consider is honestly, how much further can sales volumes really fall from here? There is some non-economic level of transaction volumes that has to occur. Think about people that need to move for jobs, in situations like that, and we think we're roughly there. Through the first three quarters of 2023, total sales volumes are at their lowest levels since 2011. But this is a much larger housing market than 2011. When we look at sales as a percentage of the total owned stock of housing, we're at the lows from the great financial crisis. That isn't to say that sales can't fall from these levels, but we think it's much more likely that they climb, especially considering this rate move and the affordability improvement that comes along with it. Our original forecast was for existing home sales to climb 2.5% in 2024 and for new home sales to climb 7.5%. If this affordability improvement were to really solidify here, we would expect sales volumes to be stronger than those forecasts. Jay Bacow: All right. More activity means more supply and I learned in Economics 101 that more supply generally means lower prices. But housing is more affordable, and I guess that means more demand. I learned in Jim Egan housing 101 that you have a four pillar framework. So how do you balance these four pillars and what does this mean for home prices next year? Jim Egan: For our listeners, our four pillar framework for the U.S. housing market is one, the demand for shelter. So we're looking at household formations as the marginal demand for both ownership and rentership shelter. Two, supply in the U.S. housing market. That's three fold; it's the listing of existing homes for sale, it's the building of new homes and it's distressed, so think of defaults and foreclosures in the housing market. The third pillar is the affordability of the U.S. housing market, which we've been discussing. And the fourth is the availability of mortgage credit. And Jay you're right, these factors influence home prices in different ways. While we do expect sales to increase, we're also expecting for sale inventory to increase next year, even if only at the margins. What our models are telling us is that increasing off of multi-decade lows from an inventory perspective is enough to push home prices down a little bit in 2024, despite the increase in demand that we're forecasting. We're calling for home prices to fall by about 3% year-over-year by the end of next year. Jay Bacow: That doesn't seem like a lot given that home prices are up about 45% since the start of the pandemic. Jim Egan: Right. And I would stress that we think this is a moderation, not a correction in home prices. We also don't think that there's a lot of downside below that 3% number, as homeowners do remain strong hands in this cycle. And by that, we mean we don't think that they're going to be forced to sell into materially weaker bids. That has and will continue to provide a lot of support to home prices in the cycle. We just don't think that that support means that home prices can't decline marginally on a year-over-year basis in 2024. Jay Bacow: All right, Jim, it's always great talking to you about the mortgage and housing market. Jim Egan: Great talking to you, too, Jay. Jay Bacow: And thank you all for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcast app and share the podcast with a friend or colleague today.

21 Des 20237min

While the U.S. debt ceiling challenge and the conflict in the Middle East left markets largely undisturbed this year, 2024 could tell a different story.----- 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 looking ahead to geopolitical catalysts for markets in 2024. It's Wednesday, December 20th at 11 a.m. in New York. 2023 was a year that, in our view, stood out as one where geopolitics surprisingly impacted markets far less than in recent years. But investors shouldn't get complacent because 2024 is full of potential geopolitical catalysts for markets. Let's start by looking back. The year that was had plenty of potential catalysts that could have arisen from the political economy. The U.S. flirted again with default by taking a painfully long time to raise the debt ceiling. Its credit rating suffered a downgrade along the way, but the volatility was barely noticeable in the equity and bond markets. Later in the year, a major military conflict broke out in the Middle East, creating a threat of major escalation and confrontation among nations both inside and outside the region, as well as disruptions to the global supply of oil. Still, markets shrugged with the price of oil mostly keeping steady and major global equity indices continuing on their prior trend. How were markets immune to these events? There's explanations specific to each event. For the debt ceiling, despite the brinkmanship, the probability that Congress wouldn't actually lift the debt ceiling was always quite small. For the Middle East, disruptions of the supply of global oil was not in anyone's interest. But there was also a bigger explanation for investors who look past this. The more important debate all year was whether central banks could turn the tide on inflation, and if so, could they avoid recession along the way. 2024 should be a different story. The debate about inflation in developed markets looks increasingly settled, but the growth debate lingers. While our economists see the U.S. avoiding a recession or having a soft landing, recession remains a key risk. Meaning even small impacts from geopolitical events could meaningfully shift investors perceptions about whether positive or negative economic growth is the base case next year, with asset valuations shifting at the same time. And there will be plenty of events to watch. U.S. elections are clearly one area of focus with implications for Fed policy, global trade and ongoing assistance to Ukraine, whose conflict with Russia continues to carry risks to the European outlook. But it's not just the U.S. There are as many as 40 elections in key countries next year, including in India and Mexico, two secular growth stories our strategist favor. So stay tuned to geopolitics in 2024, we certainly will and we'll continue to share our insight into what it all means for markets. 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.

20 Des 20232min