Mike Wilson: Near-term Correction; Long-term Recovery?

Corporate credit continues to outperform other class assets, due in part to U.S. economic growth in the third quarter.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research 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, October 27, at 2 p.m. in London. Credit has a reputation of being the scouts of financial markets, sniffing out and detecting danger well ahead of others. In 2000, 2007 and 2011, to name a few, credit markets started to weaken well before other asset classes in flagging danger. The Federal Reserve used credit spreads as one of their most important measures of financial stress. While we’d like to think that this is because credit investors are smarter than their peers, a more realistic answer lies in the nature of the asset class. Because credit offers a generally limited premium if things go right, relative to larger losses if things go wrong, credit investors are often incentivized to price in a rising probability of danger early. And so it's notable that amidst the current market weakness, credit is pretty well behaved, with benchmark spreads on U.S. investment grade credit roughly unchanged since October 3rd. Credit is very much a passenger, not a driver, of the proverbial financial market bus that in recent weeks has been swaying back and forth. We think credit continues to be a relative outperformer across assets, and for that to be true, two things need to continue. First, credit is very sensitive to the likelihood of a deep recession. Recent data has been good, with the U.S. economy growing a whopping 4.9% in the third quarter. While our US economists expect slower growth in the fourth quarter, we think a generally stronger than expected U.S. economic story has, and should continue to be, helpful to corporate credit. Second, credit has managed to avoid some of the bigger headaches surrounding other asset classes. Credit valuations are less expensive and closer to average than U.S. equity markets. Credit is less sensitive to volatile interest rates and enjoys a more stable base of demand than U.S. mortgages. And the outlook for future supply in corporate bonds looks lower than, say, U.S. Treasury bonds, as companies are starting to react to higher rates by borrowing less. Credit has a well-deserved history as an early warning signal for markets. But for now, we think it is better to view it as a financial markets passenger. Government bond yields and earnings are in the driver's seat and are much more likely to be important for driving overall direction. For now, we think this can suit credit just fine and continue to expect it to be a relative outperformer. 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.

27 Okt 20232min

With China at risk of falling into a debt deflation loop, lessons from Japan's deflation journey could provide some insight.----- Transcript -----Daniel Blake: Welcome to Thoughts on the Market. I'm Daniel Blake from the Morgan Stanley Asia and Emerging Market Equity Strategy Team. Laura Wang: And I'm Laura Wang, Chief China Equity Strategist. Daniel Blake: And on this special episode of the podcast, we'll discuss what lessons Japan's deflation journey can offer for China. It's Thursday, October 26th at 10 a.m. in Singapore and Hong Kong. Daniel Blake: So in the period from 1991 to 2001, known as Japan's lost decade, Japan suffered through a prolonged economic stagnation and price deflation. While the corporate sector stopped deleveraging in the early 2000’s. It wasn't until the Abenomics program, introduced under Prime Minister Shinzo Abe in 2013, that Japan emerged from deflation and started the process of a gradual recovery in corporate profitability. China's economic trajectory has been very different from Japan's over the last 30 years, but we now see some parallels emerging. Indeed, the risk of falling into a Japanese style stagnation is becoming more acute over the past year as a deep cyclical downturn in the property sector combines with the structural challenge that our economists call the 3D journey of debt, demographics and deflation. So, Laura, before we dig into the comparison between China and Japan's respective journeys to set the stage, can you give us a quick snapshot of where China's equity market is right now and what you expect for the rest of the year? Laura Wang: Sure, Daniel. China market has been through a quite volatile ten months so far this year with a very exciting start given the post COVID reopening. However, the strong macro momentum didn't sustain. Property sales is still falling somewhere between 30 to 50% each month on a year over year basis. And challenges from local government debt issue and early signs of deflationary pressure suggest that turn around for corporate earnings growth could still take longer to happen. We had downgraded China within the global emerging market context at the beginning of August, mainly out of these concerns, and we think more patience is needed at this point. We would like to see more meaningful easing measures to stimulate the demand and help reflate the economy, as well as clear a road map to address some of the structural issues, particularly around the local government debt problem. In contrast to China, Japan's equity market is very strong right now, and Morgan Stanley's outlook continues to be bullish from here. So, Daniel, why is it valuable to compare Japan's deflationary journey since the 1990s and China's recent challenges? What are some of the bigger similarities? Daniel Blake: I think we'll come back to the 3D's. So on the first to them, on debt we do have China's aggregate total debt around 290% of GDP. So that compares with Japan, which was about 265% of GDP back in 1990. So this is similar in the sense that we do have this aggregate debt burden sitting and needs to be managed. Secondly, on demographics, we've got a long expected but now very evident downturn in the share of the labor force that is in working age and an outright decline in working age population in China. And this is going to be a factor for many years ahead. China's birth rate or total number of births is looking to come down to around 8 million this year, compared with 28 million in 1990. And then a third would be deflation. And so we are seeing this broaden out in China, particularly the aggregate GDP level. So in Japan's case, that deflation was mainly around asset price bubbles. In China's case, we're seeing this more broadly with excess capacity in a number of industrial sectors, including new economy sectors. And then this one 4th D which is similar in both Japan's case and China now, and that's the globalization or de-risking of supply chains, as you prefer. When we're looking at this in Japan's case, Japan did face a more hostile trade environment in the late 1980s, particularly with protectionism coming through from the US. And we've seen that play out in the multipolar world for China. So a number of similarities which we can group under 4D's here. Laura Wang: And what are some of the key differences between Japan/China? Daniel Blake: So the first key difference is we think the asset price bubble was more extreme in Japan. Secondly, in China, most of the debt is held by local governments and state owned enterprises rather than the private corporate sector. And thirdly, China is at a lower stage of development than Japan in terms of per capita incomes and the potential for underlying growth. So, Laura, when you're looking ahead, what would you like to see from Chinese policymakers here, both in the near term as well as the longer term? Laura Wang: As far as what we can observe, Chinese policymakers has already started to roll out a suite of measures on the fronts of capital markets, monetary and fiscal policy side over the past 12 months. And we do expect more to come. Particularly on the capital market reform side, there are additional efforts that we think policymakers can help enforce. In our view, those actions could include capital market restructuring, funds flow and liquidity support, as well as further efforts encouraging enhancement of shareholder returns. To be more specific, for example, introducing more benchmark indices with a focus on corporate governance and shareholder returns, further tightening and enforcing the listing rules for public companies, m ore incentives for long term institutional participation, improving capital flow management for foreign investors, and implementing incentives to encourage dividend payouts and share buybacks. Those could all work quite well. Regulatory and even legislative support to help implement these measures would be extremely crucial. Daniel Blake: And what is your outlook for China's medium to long term return on equity path from here? And what are the key catalysts you're watching for that? Laura Wang: Given some of the structure challenges we discussed earlier, we do see a much wider forked path for China's long term growth ROE trajectory. We see MSCI China's long term ROE stabilizing at around 11% in the next 5 to 7 years in our base case. This means there should still be up to around two percentage point of recovery upside from the current levels, thanks to a combination of corporate self-help, the product cycle, policy support from the top and the low base effect. However, further upside above 11% will require a significant reflationary effort from the policymakers, both short term cyclical and long term structural, in combination with a more favorable geopolitical environment. Therefore, we believe prompt and forceful actions from policymakers to stabilize the economy to avoid more permanent negative impact on corporate and consumer behaviors are absolutely needed at this point. Now, let me turn this back to you, Daniel. What is your outlook for Japan's return on equity journey from here, and are there any risks to your bullish view? Daniel Blake: So we have seen Japan looking back from 2013 to now move from below book value in terms of aggregate valuations and a return on equity of just 4%, so much lower than even your bear case. So it's moved up from that level to 9% currently and we're seeing valuations moving up accordingly. We think that's further to go and we think Japan can actually reach 12% sustainable return on equity by 2025 and that's helped by return of nominal GDP growth in Japan and further implementation of governance improvements at the corporate level. So in terms of the risks, I think they are primarily external. We do see Japan's domestic economy in a pretty good place. We think BOJ can exit yield curve control and negative rates without a major shock. So externally we are watching China's risks of moving into a debt deflation loop, as we're discussing here, but also the potential impacts if the US or a global recession were to play out. So clearly we're watching very closely the Fed's efforts and global central bank efforts to achieve a soft landing here. Daniel Blake: So, Laura, thanks for taking the time to talk. Laura Wang: Sure. It's been great speaking with you, Daniel. Daniel Blake: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

26 Okt 20237min

The rise in Treasury yields, among other factors, has caused significantly tighter financial conditions. If these conditions slow growth in the fourth quarter, another rate hike this year seems unlikely.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I will be talking about the implications of the continued selloff in the Treasury market. It's Wednesday, October 25th at 10 a.m. in New York. The grueling selloff in U.S. treasuries that began in the summer continues, most notably in the longer end of the yield curve. The ten year Treasury yield breached 5% on Monday, a level not seen since 2007 and an increase of about 125 basis points since the trough in July. Almost all of this move higher in the ten year yield has occurred in real yields. In our view, the Treasury market has honed its reaction to incoming data on the hawkish reaction function that the FOMC communicated in its September meeting, which was subsequently reiterated by multiple Fed speakers. Over the last several weeks, the asymmetry in the market's reaction to incoming data has been noteworthy. Upside surprises growth have brought up sharp increases in long end yields, while downside surprises inflation have met with muted rallies. To us, this means that for market participants, upside surprises to growth fuel doubts whether the pace of deceleration inflation is sustainable. In this context, it is no surprise that upside growth surprises have mattered more to long in yields than downside inflation surprises. We've indeed seen a spate of upside surprises. The 336,000 new jobs in the September employment report were nearly double the Bloomberg survey of economists. Month over month changes in retail sales at 0.7% were more than double the consensus expectation of about 0.3%, and triple if you exclude auto sales. We saw similar upside surprises in industrial production, factory orders, building permits as well. The rise in Treasury yields has further implications. The spike has contributed significantly to tighter financial conditions. As measured by Morgan Stanley Financial Conditions Index, conditions have tightened by the equivalent of about three 25 basis point hikes in the policy rate since the September FOMC meeting. As Morgan Stanley's Chief Global Economist Seth Carpenter highlighted, the implications of tighter financial conditions for growth and inflation depend critically on whether the tightening is caused by exogenous or endogenous factors. A persistent exogenous rise in rates should slow the economy, requiring the Fed to adjust the path of policy rates lower over time to offset the drag from higher rates. If instead, the higher rates on an endogenous reaction, reflecting a persistently stronger economy driven by more fiscal support, higher productivity or both, the Fed may not see the need to adjust its policy path lower. We lean towards the formal explanation, than the latter. In our view, it is unlikely that the third quarter strength in growth will persist. In fact, third quarter consumer spending benefited from large one off expenditures. Combine that with the expiration of student loan moratorium, we think will weigh heavily on real personal consumption in the fourth quarter and by extension, on economic growth. Tighter financial conditions driven by higher long end yields will only add to this drag. Therefore, we expect incoming data in the fourth quarter to show decelerating growth, which we expect will lead to a reversal of the recent yield spikes driven by term premiums moving lower. The subtle shift in the tone of Fed speak over the past two weeks suggests a similar interpretation, indicating a waning appetite for an additional hike this year in the wake of tighter financial conditions while retaining the optionality for future hikes. They think that the yield curve is doing the job of the Fed. This jibes with our view that there will be no further rate hikes this year. While our conviction on fourth quarter growth slowdown is strong, it will take time to become evident in the incoming data. 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.

25 Okt 20234min

As the U.S. Federal Reserve keeps rates elevated, investors are selling off bonds in anticipation of new issues with higher yields, triggering a historic rout in the world's biggest bond markets.----- 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 discuss the ongoing U.S. Treasury bond market route. It's Tuesday, October 24th, at 10 a.m. in New York. The world's biggest bond markets are in the midst of a historic route, and an increasing number of experts are referring to this as the deepest bond bear market of all time. Simply put, it works like this. When the central bank policy rate increases, investors' expectations for yields on bonds go up. This prompts investors to sell the bonds they currently own in order to buy newly issued ones that promise higher yields. So in this higher for longer interest rate environment, investors have been selling bonds, resulting in serious declines in bond prices and simultaneous surges in bond yields. In the U.S. Treasury market, which is considered the bedrock of the global financial system, the yield on the 30 year U.S. government bond recently hit 5% for the first time since 2007. German and Japanese bond yields are also reaching significantly elevated levels. Why does the turmoil in the bond market matter so much for consumers? For one thing, the yields on local government bonds impacts how banks priced mortgages. In the U.S. Specifically, mortgage rates tend to track the yield on ten year treasuries. Government backed mortgage provider Freddie Mac recently announced that the average interest rate on the 30 year fixed rate mortgage hit 7.3% in the week ending September 28th. That's the highest level since 2000. The ripple effects from the bond market route stretch further than mortgages. For instance, higher U.S. yields also means an even stronger U.S. dollar, which puts downward pressure on other currencies. The equity markets also can't escape the impact of higher bond yields. Those higher yields compete for money that might otherwise get invested in the stock market. As yields surged in September, the S&P 500 fell about 4.5%, despite relatively positive economic data. Against this backdrop, consensus explanations for the bond market sell off have been focusing on technical drivers, like U.S. Treasury market supply and investor positioning adjustments, as well as fundamental drivers, like fiscal sustainability concerns, Bank of Japan policy changes and stronger than expected growth. What surprises us is that the Fed rarely enters the discussion, specifically its reactions to data and its subsequent forward guidance. But we do believe the Fed's involvement is one of the major drivers behind the current bond market rout. Without the Fed's more hawkish reaction to recent growth and inflation data, other technical and fundamental drivers would not have contributed as much to higher Treasury yields, in our view. As things stand, markets will need to continue to come to grips with interest rates staying high. The U.S. economy remains resilient, despite still elevated inflation. Our U.S. economist now thinks the Fed's December Federal Open Market Committee meeting is a live meeting. The September U.S. Consumer Price Index and payrolls data met our economists' bar for a potential additional hike later this year. And so these most recent data releases make the next round of monthly data even more important, as policymakers deliberate what to do in December. And these decisions by the Fed will continue to have a significant impact on the bond market. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people find the show.

24 Okt 20233min

As investor sentiment recovers this month in anticipation of a strong year end, it’s important to acknowledge the factors that make this year’s fundamentals different.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, October 23rd at 10 a.m. in New York. So let's get after it. In our recent research, we’ve been arguing that the odds of a fourth quarter rally have fallen considerably. Our observations on narrowing breadth, cautious factor leadership, falling earnings revisions and fading consumer confidence tell a different story than the consensus view for a rally in the year end that's more centered on sentiment and seasonal tendencies. While we acknowledge that sentiment deteriorated in September, it's recovered this month on the expectation of seasonal strength in the year-end. In our view, the fundamental setup is different this year than normal, with earnings expectations likely too high for the fourth quarter and 2024. Meanwhile, both monetary and fiscal policy are unlikely to provide any relief and could tighten further. More specifically, while the Federal Reserve has not raised rates any further, it is likely far from cutting. Furthermore, the tightening the Fed has done over the past 18 months is just now starting to be felt across the economy. To that end, the stock market has taken notice with some of the more economic and interest rate sensitive sectors like autos, banks, transportation stocks, semiconductors, real estate and consumer durables significantly underperforming over the past three months. More recently, many defensive sectors and stocks have started to outperform with energy, which supports our late cycle view that the barbell of defensive growth plus late cycle cyclicals we've been recommending. In our view, this performance backdrop reflects a market that is incrementally more concerned about growth than higher interest rates. Even though the Fed has tightened monetary policy at the fastest rate in 40 years, it's confronted with sticky labor and inflation data that has prevented it from signaling a definitive end to the tightening cycle or when they will begin to ease policy. At the same time, the fiscal deficit has expanded to levels rarely seen with full employment. This is precisely why the Fed has indicated a higher for longer stance. In our view, the strength in the headline labor data masks the headwinds faced by the average company and household that the Fed can't proactively address. In addition to the performance deterioration and interest rate sensitive sectors, the breadth of the market continues to exhibit notable weakness. While some may interpret this as a bullish signal, meaning oversold conditions, we believe it's more a reflection of our longstanding view that we remain in a late cycle backdrop where earnings risk remain high. Further support for that view can be seen in earnings revision breadth, which is breaking lower again into negative territory. As another sign this negative revision breadth is an early warning for fourth quarter and 2024 earnings, stocks are trading very poorly post earnings reports whether they are good or bad. Third quarter earnings season is eliciting even weaker performance reactions than the 'sell the news' reaction during the second quarter earnings season. More specifically, the median next day price reaction is -1.6% thus far, versus -0.5% last quarter. We also note that the percentage of positive reactions is notably lower as well, at 38% versus 47% last quarter. With several of the megacap leaders reporting this week, this trend will need to reverse if the broader index is going to hold key tactical levels and rally in the year end as the consensus is now expecting. Instead, we think the S&P 500 price action into year end is more likely to mirror the average stock's performance rather than the average stock catching up to the market cap weighted index. Based on our fundamental and technical analysis, we remain comfortable with our 3900 year end price target for the S&P 500, which implies a very generous 17x multiple on our 2024 earnings per share forecast of approximately $230. 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 to find the show.

23 Okt 20233min

Demographic changes are making women in the U.S. more powerful economic agents, driving spending and GDP.----- Transcript -----Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues bringing you a variety of perspectives, today, I'll take a closer look at women's role in the economy and the impact they could have over the next decade. It's Friday, October 20th, at 10 a.m. in New York. Last week, Harvard economist Claudia Goldin won the Nobel Prize for her work identifying the causes of wage and labor market inequality. Not only is her work notable for its subject matter, it is also because Claudia is the first woman to win the Nobel in economics by herself. In other words, all of the credit goes to her. Golden's body of work has included the role of contraception in helping women with family and career planning, something we studied as well. The rise of what we have dubbed the "SHEconomy" is a topic we at Morgan Stanley Research first covered in 2019 and continue to follow closely. For some context. Today, women are having fewer children and earning more bachelor's degrees than men. The median marriage age for women has increased, as has the age at which we first start bearing children. These shifting lifestyle norms are enabling more women to work full time, which should continue to increase participation in the labor force among single females. In 2019, we estimated that the number of single women in the U.S. would grow 1.2% annually through 2030, and that compares with 0.8% for the overall population. Based on these calculations, by 2030, 45% of prime working age women will be single, the largest share in history. Now, data show that women outspend the average household and are the principal shoppers and more than 70% of households. So women are very powerful economic agents. They contribute an estimated $7 trillion to U.S. GDP per year. They are the breadwinners in nearly 30% of married households and nearly 40% of total U.S. households. In the last decade, single prime working age women from 30 to 34 years old have seen the most pronounced rise in female headship rates, and that's followed by 25 to 29 year olds. Now, if we look back as far as 1985, female homeownership as a share of total homeownership has risen from 25% to 50%. And our projection suggests that with rising female labor force participation and further closing of the wage gap, female homeownership should rise as well. So the profile of the average American woman is also changing, whereas the average American woman in 2017 was white, married and in her 50's, holding a bachelor's degree and employed in education or health services. We think that by 2030 she is more likely to be younger, single and a racial minority, holding a bachelor's degree and employed in business and professional services. Indeed, over the last several years, gender diversity, the male-female wage gap and women's role in the workplace have rightly been a key media and social topic and something that we at Morgan Stanley are very passionate about. And for women, these public discussions have set the stage for equality in areas like education, professional advancement, income growth and consumer buying power. We've come a long way, but it's important to underscore that more work remains to be done. Looking ahead, women are in a position to drive the economic conversation from both the inside as a workforce propelling company performance, and the outside as consumers powering discretionary spending and GDP. 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.

20 Okt 20233min

The automotive industry’s steady transition to “software-defined vehicles” could offer new entrants advantages against established incumbents.----- Transcript -----Lee Simpson: Welcome to Thoughts on the Market. I'm Lee Simpson, Head of Morgan Stanley's European Technology Hardware Team. Shaqeal Kirunda: And I'm Shaqeal Kirunda, from Morgan Stanley's European Autos Team. Lee Simpson: On this special episode of the podcast, we will discuss the evolution of autos in the direction of software defined vehicles. It's Thursday, 19th October at 10 a.m. in London. Lee Simpson: Cars are in the process of transforming from electromechanical terminals to intelligent mobile devices, and we think the emergence of software defined vehicles or SDVs, is a sign we're approaching the car smartphone moment. The migration to SDVs is part of a broader transformation in autos that could even redefine the economics of the car itself. The implications for this are deep and far reaching. So Shaqeal, what is an SDV and how is it different from most cars on the road today? Shaqeal Kirunda: Thanks Lee, so most people are aware of one of the global megatrends in autos to transition to electric vehicles, was less well understood as a transition to the software defined vehicle. An SDV can be defined as any vehicle that manages its operations or adds new functionality, mainly through software. What that actually means to the consumer is a car that features an operating system which is upgradable over the air, not just for apps and infotainment of a whole software upgrades, safety improvements and new functions such as autonomous driving. So for a future SDV, the functions will be defined by the software and not the hardware. This dynamic mirrors how we use apps and software in phones today. Lee, how does this change the whole architecture of the car? Lee Simpson: Yeah, I think computing needs to change. We've seen that in other devices before and here for the car, it's transitioning really from this distributed area of lots of independent microcontrollers or simple chips in the car,ix notes towards something a little more orchestrated or a centralized compute is perhaps the best way to think of this. Now, there will not be a set path. Different OEMs and different platforms will be built along different lines, a logical path, a physical rewiring path. Some will move through domain clusters, others will move to zonal compute. But in the end, the journey will be the same. We'll move to this sort of server on wheels type of architecture, at least from the point of view of compute. And along the way will introduce new players to the automotive space, those larger chip makers who are champions in the systems on CHIP or SOC environment today. And perhaps for them they'll be attracted to this perhaps large silicon TAM that we'll see in the car. We think perhaps $15 billion of extra semiconductor building materials by the end of the decade. So with that in mind, in essence, we think the evolution towards SDVs involves a decoupling of the hardware and software in a vehicle. So, Shaqeal, where are we in this complicated process right now? And what are some of the paths to the future? Shaqeal Kirunda: Interesting question. We're certainly seeing different rates of progress. The key distinction here is between legacy players and new market entrants. New market entrants have embraced the transition to both EVs and SDVs. Through this they can offer over the air upgrades and safety features as well as new functions, creating new software based revenue streams. Legacy manufacturers have taken note of the major transition they're facing, but as incumbents have taken slightly longer to put this into action. Whereas the new market entrants started from scratch, the incumbents are redesigning manufacturing processes they've been executing on for years. They are making progress however, the first newly designed software defined vehicles are scheduled to be released between 2024 and 2026. But if we take a step back for a moment, pandemic caused a major disruption to the semiconductor supply chains that are so central to the auto industry. How will the migrations to SDVs change the use of and reliance on auto related semiconductors? Lee Simpson: Well, I think from a reliance perspective, we've already seen that in cars. There's quite a considerable reliance on those microcontrollers we've mentioned already. But if anything, this will increase. And I think you'll see that a lot of the main consideration of how a car works running through this myriad of new semiconductor chips. I think the key consideration here, however, is this is a safety critical environment and this is not something that compute is normally structured for. If you take, for instance, the cloud or even your mobile phone, the consideration here is far different. Sometimes it's about performance as in the cloud. Sometimes it's about low power or power efficiency as in your smartphone. Here the paramount feature is safety criticality. And so I think silicon here will need to have real time compute. So zero latency in its and its ability to deliver a decision maker to the decision to the driver and will also have to be secure. So I have to ensure that no new threat surface is introduced to the safety critical vehicle. So with that all in mind, what are some of the benefits of SDVs for both the auto industry and the consumer? Shaqeal Kirunda: Thanks Lee, the benefits for the auto industry are clear. Legacy OEMs face competitive threats from new entrants focused on SDVs. If legacy players don't transition towards SDVs on time, they will continue to lose global and local market share. Of course, the opportunity for OEMs is that the new software features could come with new software margins. Potential benefits for customers centered more towards new features and residual value. New features could be anything from safety improvements based on driver data to completely new apps from third party developers, downloaded straight to the car. Also with much better software comes much better data collection. This opens the door to predictive maintenance and improved reliability, which reduces repair costs and supports residual values. The question with all these benefits is whether customers will really value them. It will take a change in consumer behavior to shift from buying a car with all functions upfront to buying new functions later down the road. So clearly there are also a number of challenges on the road to adoption. Lee, what are some of the hurdles and downside risks of right now and looking towards the future? Lee Simpson: Well, I think the key thing here is software testing. This is something that, again, really leans on that safety, criticality environment of the vehicle. So before you can introduce software into a car, probably needs to be certified as safe for this environment. Now, that's a non-trivial task to overcome. Creating a certification process needs a Cross-Industry agreement and needs someone to drive this through, and probably someone also to drive some standards that will impact in the hardware space equally as well. This will all have to be done with commercial considerations as well, so you'll have to ensure that this is consistently delivered so that the user experiences is the same car after car. This will ensure that the OEMs can deliver on their specs and the SDVs themself will start to grow as a possible value proposition for them. So finally, Shaqeal, what are some of the key milestones that investors should watch for in the migration to SDVs? Shaqeal Kirunda: Absolutely. Over the next few years, we'll start to see legacy players release their own version of newly updated, fully software defined vehicles. We're still at the early stages and it may take some time, but I expect we'll see further partnerships with start up automotive software players as legacy manufacturers recognize they are the best app developers. OEMs may also open their app stores to third party developers and invite them to create new applications for consumers. We've seen this with everything from smartphones to blockchain, and this could also be important for SDVs. Now, once things really take off, OEMs are sharing data and software based revenues. The key focus here will be the split between embedded and standalone revenues, i.e. those software features sold at the point of sale versus those sold during the life of the car. Lee Simpson: Thank you, Shaqeal. Thanks for taking the time to talk to me today. Shaqeal Kirunda: Great speaking with you Lee. Lee Simpson: And thanks for listening, everyone. 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.

19 Okt 20237min

In the continuing transition to a multipolar world, geopolitical uncertainty is on the rise and new government policies could rewire global commerce.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas, Global head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of recent geopolitical tensions. It's Wednesday at 8 a.m. in New York. As tragedy continues to unfold in the Middle East, we continue, along with our clients, to care greatly about these events. And there's been no shortage of prognostication in the media about if the conflict escalates, how other countries might get involved, and what the effects would be on the global economy and markets. Not surprisingly, this has been the most common topic of discussion for me with clients this week. And as a strategist, who's practice relies on unraveling geopolitical complexities, what I can say with confidence is this: there's no obvious path from here, and so we need to be humble and flexible in our thinking. While that might not be the clear guidance you're hoping for, let me suggest that accepting this uncertainty can itself be clarifying. As we've discussed many times in our work on the transition to a multipolar world, geopolitical uncertainty has been on the rise for some time. Governments are implementing policies that support economic and political security and in the process, rewiring global commerce to avoid empowering geopolitical rivals. The situation is obviously complicated, but here's a couple conclusions we feel confident in today. First, security spending is rising as an investment theme. We believe that U.S. and EU companies will spend up to one and a half trillion dollars to de-risk supply chains. Critical infrastructure stocks could be at the center of this. Additionally, oil prices may rise, but investors should resist the assumption that this alone would lead rates higher. An oil supply shock from security disruptions in the region could be possible after several more steps of escalation. But as our economists have noted, higher oil prices, while they clearly mean higher gasoline prices, the effects may be more muted and temporary across goods and services broadly. In prior oil supply shocks, a 10% jump in price on average added 0.35% to headline U.S. CPI for three months, but just 0.03% to core CPI. Further, higher gasoline prices can meaningfully crimp lower income consumers behavior, weakening demand in the economy and mitigating overall inflationary pressures. Then one shouldn't assume higher oil prices translate to a more hawkish central bank posture. So the situation overall is obviously evolving and complex. We'll keep tracking it and keep you informed. 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.

18 Okt 20232min