One Rate Cut, Many Effects

The housing market has seen record home price growth this year. But who does this boom benefit and who gets left behind?----- Transcript -----Jim Egan Welcome to Thoughts on the Market. I'm James Egan, co-head of U.S. Securitized Products Research from Morgan Stanley,Sarah Wolfe and I'm Sarah Wolfe from the US economics team, focused on the U.S. consumer.Jim Egan And on this edition of the podcast, we'll be talking about the impact of the housing boom on America's low-income households. It's Tuesday, November 16th, 10:00 a.m. in New York.Jim Egan Regular listeners of the podcast have probably heard me talking with my colleague Jay Bacow about the record level of home price growth that we've seen this year. And we've talked about it from a number of different angles: how high can home price appreciation actually climb? How sustainable is this current level of growth? What's the aftermath going to be? But today, Sarah, you and I are going to be approaching this from a slightly different angle, and we're going to talk about the impact of rising home values on low-income households. So, what were some of the big questions behind your recent research, Sarah?Sarah Wolfe So there's been a lot of discussion this year, as you mentioned, around rising home prices, rising rents and the extremely healthy housing environment. So, we wanted to look at what this meant for households all across the income distribution and, in particular, what it meant for low-income households. There's been a lot of focus on how low-income households are going to fare as we move off of fiscal stimulus - I'm talking about the unemployment insurance benefits, the economic impact payments - and so we wanted to explore real estate wealth as a potential source of equity for this group in order to make the transition away from government stimulus into a more recovery part of the economy easier or not. And so that's really the focus of this report.Jim Egan All right. Now you've spent a lot of time talking about the low-income consumer. We've got the kind of excess savings narrative across the consumer in aggregate. I know that that is appearing in the low-income consumer a little bit, but maybe not as much as further up the spectrum. Can you dig into that for us a little bit? How is the low-income consumer performing right now?Sarah Wolfe So overall, the low-income consumer over the last year and a half has performed very well, and that's because we've seen an unprecedent amount of fiscal stimulus. We've also seen strong job growth among low-income industries, including retail trade, leisure and hospitality. These are where the jobs are coming back. And we're also seeing pretty strong wage growth for low-income workers. And then at the same time, there was a pretty significant pullback in spending like dining out and other services. So together we got this buildup of excess savings and, low-income households had savings as well, and there was excess savings held all across the income distribution. While this is really significant, it's important to know that the dollar amount of excess savings held among lower income households is not that significant. And they also have a higher marginal propensity to consume out of their savings. So, while the savings is there, it likely will not last long. And so, it's not going to be a longer-term source of wealth, and that's why we decided to turn our attention to real estate wealth. Will this be a potential long-term source of wealth and significant for this group of consumers?Jim Egan OK. So, when you looked into housing wealth and particularly for low-income consumers, what did you find?Sarah Wolfe Well, low-income homeowners have actually seen their real estate wealth increased by roughly $18,000 per household. That's from the end of 2019 through mid-2021. Now, in dollar terms, that's less than the rise in real estate for higher income groups. But in percentage change, it's a 19% increase in real estate wealth among low-income homeowners. And that's the largest percentage increase across the entire income distribution when it comes to real estate wealth.Sarah Wolfe So, there's clearly been a substantial amount of real estate wealth for homeowners, but it leads me to ask the question, can they actually access that wealth?Jim Egan That is probably the question we get asked most frequently. The record rise we've seen in home prices has brought equity in the U.S. housing market to levels we haven't seen. We have data going back over 26 years. We've never had more equity in the housing market than we do right now. Part of that's because this rise in home prices just was not accompanied by the rise in mortgage debt that we saw in the early 2000s, the last time home price growth was really anywhere close to where it is right now. So, the question we get from investors pretty frequently is, well are borrowers going to access this? How can borrowers access this? Are we going to see that same sort of mortgage equity withdrawal, that sort of cash out activity that we saw during the last cycle. And look, the high-level answer is it's difficult to say, given the lack of comprehensive data that we see there. Now, we do have some form of data from the GSEs, we have it from Ginnie Mae, that can show us how cash out activity is evolving, and we are seeing cash out activity really pick up in 2021. It wasn't the case in 2020. Falling rates in 2020 meant that a larger percentage of refinancings were more just straight rate-and-term refinances. They didn't have a cash out component. But we are starting to see cash out refinance activity pick up in 2021 from where it was in 2020. Sarah Wolfe And how does mortgage credit availability play into all of this?Jim Egan We do think that's playing a pretty big role. Now we've talked about how mortgage credit availability is running at pretty tight levels. We actually undid six years’ worth of easing lending standards in the six months following COVID, but we have started to see lending standards plateau and they've started to ease from here. Now, how of those tight lending standards manifested themselves in terms of cash out activity? We're actually seeing the dollar amount that is being cashed out, it's lower today than it was in 2019 in terms of absolute dollar amount. If we talk about the amount of equity, the rising home prices we've seen, that means as a percentage of the property value, in 2019, we were seeing cash out refi’s remove roughly about 18% of value from the house. That's down to just 13% today. So people are able to access that equity, but tighter credit standards might be contributing to that dollar amount being lower. And it certainly means that the borrowers who are more likely to be able to access that are probably borrowers that are further up the credit quality spectrum, higher credit scores, for instance, perhaps higher income levels as well. So we do think that tight credit availability plays a role. But Sarah, turning this back to you.Jim Egan Once we get past the borrower's ability to actually remove cash from their home or the borrower's ability to tap that equity in their home. What are you seeing households use that money for?Sarah Wolfe Well, a bulk of the equity goes back into the home in the form of home improvement and repairs. There is a smaller amount that goes towards non-housing expenditures like education and apparel. Also, some of it goes towards paying down debt. But the large majority is back into the house in terms of home repairs and improvements.Jim Egan OK, I want to switch gears from homeowners to renters. Rents have been racing higher in recent months. That doesn't seem great for low-income consumers who don't own their homes. But what are you seeing there?Sarah Wolfe That's true. Home price appreciation is great for those who own a home, but only half of the bottom 20% are homeowners. This compares to 80% homeownership among the top 20%. And so while we've seen a rise in home price appreciation, it's coincided with escalating rents for non-homeowners. To put some numbers around it, CPI inflation-- this is consumer price index-- showed that rents rose 0.4% in October and 0.5% in September. And while that might not seem like a big number, that's the largest two month increase in rent inflation since 1992. We also find that low-income renters spend 63% of their income paying rent nationally, which is quite elevated. And we're forecasting that rent prices are just going to keep going up and up in the coming years, making it harder for Low-Income non-homeowners to afford having a home and leaving them at the mercy of rising rents.Jim Egan Now we've done a lot of work on inequal access to homeownership among minorities. How does this factor into the rising burden of rent?Sarah Wolfe Well, on top of the income disparity in homeownership, the racial disparity adds another dimension to the divide between low-income homeowners and renters. Our ESG strategies find that on average, the gap in homeownership between White and Black and Hispanic households is widest for low to moderate income families. This really limits the benefits of home price appreciation for minorities and further exacerbates racial inequalities.Jim Egan All right, so the record level of home price growth, which has led to a record level of equity in U.S. households, does appear to have increased wealth across the income spectrum. But when we look a little bit closer, that's not necessarily the case for lower income households the same way it is for higher income households. And, across the board, the ability of these different households to tap that equity is still a question.Sarah Wolfe That's correct. But I think that it's important to keep in mind that the picture is not all bad. The low-income household is still healthy, and we have the substantial amount of labor market income coming from lower wage jobs like retail trade, leisure and hospitality, transportation, combined with strong wage growth, all helping and supporting income growth longer term for this group.Jim Egan Sarah, always great speaking with you.Sarah Wolfe Great talking with you, Jim.Jim Egan 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 to find the show.

17 Nov 20219min

Coming out of a year marked by greater uncertainty and volatility, 2022 is poised to be a year which favors single stock investing over a focus on style and sector.----- 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, November 15th at 11:30 a.m. in New York. So let's get after it. 2021 has been another very good year for U.S. equity indices. What's been different in 2021 is the higher volatility under the surface with greater dispersion of returns between individual stocks. This fits very nicely with our overall mid-cycle transition narrative, with one major exception - valuations. Typically, by this stage of an economic recovery from recession equity valuations would have normalized, particularly with the earnings recovery being even more dramatic than usual. In short, while our sector and style preferences in stock picking was strong in 2021, our S&P 500 price target proved to be too low - in other words, wrong. We think this is more about timing rather than an outright rejection of our fundamental framework or narrative. With financial conditions now tightening and earnings growth slowing, the 12-month risk/reward for the broad indices looks unattractive at current prices. More specifically, we expect solid earnings growth again in 2022 offset by lower valuations. However, strong nominal GDP growth should continue to provide plenty of good investment opportunities at the stock level. In our view, the economic and political environment has been permanently altered from its pre-COVID days, although the changes are not necessarily due to the pandemic itself. What that means from an investment standpoint is higher nominal GDP growth led by higher inflation, which is the only way out from our over indebtedness in the longer term. Such an outcome should lead to greater investment and higher productivity, but it will take years for that to play out. In the meantime, we will have to deal with the excesses created by the extreme nature of this recession and recovery. That breeds higher uncertainty and dispersion, making stock picking more important than ever in the year ahead. While our primary theme for 2022 is to focus more on stocks than sectors and styles, one can't ignore them either. We go into the year-end favoring earnings stability and stocks with undemanding valuations, given our view for a tougher operating environment and higher long term interest rates. This puts us overweight Healthcare, Real Estate, Financials and reasonably priced Software stocks. We are also more constructive on Consumer and Business Services. With our expectation for payback in demand from this year's overconsumption, we are underweight Consumer Discretionary Goods, Tech Hardware and commodity-oriented Semiconductors that are prone to double ordering and cancelations. Small cap stocks have done better recently on the back of newly proposed tax legislation that is much less onerous to smaller domestic companies. However, that is simply the removal of a negative rather than an additional positive for earnings and cash flow. It does nothing to ease the burden of what may be one of the most difficult operating environments for small businesses in decades. In short, we favor large caps over small, especially after the nice seasonal run in a smaller cohort. Finally, the obsession over value versus growth should fade as there is no clear winner, in our view, over the next year, but rather trading opportunities like during 2021. Value and growth have each had periods during which they have done considerably better than the other over the past year. But year-to-date they are neck and neck. We do have a slight bias for value over growth for the rest of the year as interest rates move higher, but this is more of a trading position rather than an aggressive investment view we had coming out of the recession in 2020. Expect our bias to flip flop in 2022 like this year, as macro uncertainty reigns. Although strategy is a macro endeavor, with stock dispersion remaining high due to uncertainty around inflation, supply chains and policy, we will focus even more on specific relative value ideas, rather than the index, over the next year. We wish you all good fortune in 2022. 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.

15 Nov 20214min

Over the last decade, bonds have been a source of stability. But, with surprising moves this past month, they’ve now become a risk-management challenge that stands out amongst other asset classes.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bring 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, November 12th at 2:00 p.m. in London.For much of the last decade, an important cross asset story has been how stable bond markets were relative to, well, everything else. A big part of this story was the action taken by central banks. They bought government bonds directly, but also set short-term interest rates at very low levels, which acted as a magnet, holding down other interest rates around the world.There were some big moves, especially when the pandemic hit. But for the most part, bond markets have been a pretty stable place relative to stocks, commodities and other asset classes. This was a global trend, with interest rates unusually placid from Australia to Poland to the United States.But recently, that's reversed. It's been the bond market that's been hit by a wide number of extreme moves, while other asset classes have been pretty calm. The overall market right now is a little like a duck: calm on the surface, but with some really furious churning below.We track a wide variety of cross market relationships at Morgan Stanley research. These represent different ways an investor might express a different view on the market. For example, smaller versus larger capitalization stocks, the US dollar relative to the Japanese yen in currency markets, or 2-year yields relative to 30-year government bond yields in the United Kingdom. While investors are often exposed to the big picture direction of stocks, bonds and currencies in their portfolio, many also take views on these smaller, more 'micro' relationships as a key way to exploit mispricing and generate return.In equities and commodities, these relationships are pretty well behaved. In government bonds, they're not. Excluding the depths of the pandemic, the last month has seen some of the most extreme moves in global bond markets in a decade.There are a few things going on here, much of which ties back to those central banks. The Federal Reserve has signaled it's going to be rolling back its bond buying, reducing one support to the market. The Bank of England surprised markets by not raising interest rates as expected. While on the other hand, Poland's central bank surprised markets by increasing rates much, much more.All of this is happening at a time when bond performance wasn't great to begin with. The U.S. Aggregate Bond Index, a good proxy for the high-quality bonds that most investors hold, is down 1.7% this year, underperforming cash. Rising bond yields in the UK and Australia have created a similar dilemma. And many investors who would normally take advantage of these large moves and potential dislocations have been caught up in them, making it harder for some of these relationships to normalize.What does all that mean for markets? Investors focused on stocks, commodities or foreign exchange should be mindful that their friends over in the bond market are facing a very, very different risk management challenge as we move into the end of the year. And continued bond market volatility could challenge broader market liquidity. More broadly, less central bank support is consistent with our longer run expectations that interest rates are set to move higher. Stay tuned.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.

12 Nov 20213min

Coming out of last week’s FOMC meeting, the Fed’s wants are becoming clearer but the implications into 2022 for asset prices, interest rates and exchange rates remain to be seen.----- Transcript -----Welcome to Thoughts on the Market. I’m Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I’ll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, November 11th at noon in New York."Don't fight the Fed." It's an oft-repeated investment principle that could be restated as "What the Fed wants, the Fed gets." Coming out of last week’s FOMC meeting, let’s take a moment to consider what the Fed really wants, and how markets may provide it.So, the Fed wants one of three things from a financial conditions perspective. It either wants financial conditions to loosen with greater availability of money and credit in the marketplace or it may want financial conditions to tighten to cool down an overheated economy. Finally, it may want to keep the status quo with financial conditions in a certain range.Currently, the Fed is easing monetary policy by purchasing bonds from the market. So, it wants to loosen financial conditions. But over the next 6 months, it will be tapering its asset purchases and, therefore, it will be easing policy by less and less. This implies that it wants financial conditions to keep easing starting this month and lasting into the middle of next year, but more gradually than they have been.Coming into this year, we knew the Fed and European Central Bank would deliver monetary policies consistent with an aggressive easing of financial conditions. If we included only 3 prices in our financial conditions framework, a vast oversimplification to be sure, then our calls at Morgan Stanley for higher real yields and a stronger dollar would have implicitly suggested much higher prices for riskier assets. So, what has happened thus far in 2021? Well, risky asset prices have risen tremendously, but the U.S. dollar has only strengthened somewhat, and real yields remained at low levels. So, what about next year? We know the Fed wants financial conditions to loosen further. After all, it will still ease policy through asset purchases over the next 6 months. But it will be easing by less and less until, starting in the middle of 2022, it will no longer ease policy at all. At that point, it will maintain – for a period, short as though it may be – extremely easy financial conditions.Does that mean U.S. real yields will struggle to rise, the U.S. dollar will struggle to rally, and risky asset prices will rise? The first two are certainly possible outcomes. But even if financial conditions loosen in aggregate for a time, and then remain loose for a time thereafter, not every market is guaranteed to move in a direction associated with looser financial conditions.For example, take equities, which is a type of risky asset. A rise in equity prices - which would loosen financial conditions - might be offset somewhat by higher real yields and a stronger U.S. dollar – both of which would tighten them. As long as the final result is an overall set of financial conditions that are looser than before, the circle is squared for the Fed.So, what determines which drivers of financial conditions do the heavy lifting? The answer is changing investor expectations and risk premiums for growth and inflation, both on an absolute basis for equities and real yields, and on a relative basis for the U.S. dollar.Ultimately, we believe the easy monetary policies in place today—and policies that will be in place through most of next year—will keep expectations for real economic growth improving. This should support investor willingness to own riskier assets while placing upward pressure on real rates.Expectations for inflation should remain buoyed by expectations for strong growth, but inflation risk premiums will be influenced by factors in the supply side of the economy, like supply chains and labor force participation. We see downside risks to inflation risk premiums next year, which would place further upward pressure on real interest rates.Finally, in terms of the relative growth outlook, progress in the U.S. on COVID-19, as well as fiscal developments such as infrastructure spending, favor the U.S. over the rest of the world. This should place upward pressure on the U.S. dollar through the first half of next year.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.

11 Nov 20214min

The bipartisan infrastructure bill has passed, and while investors will see some short term impacts, the bigger question is how long will it take for markets to see a return on these investments?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, November 10th at 11 a.m. in New York. While Congress continues to negotiate the 'Build Back Better' plan, the package of expanded social programs paid for by fresh taxes on companies and wealthier households, it managed to get a key companion piece of legislation over the finish line last week: the bipartisan infrastructure framework. Many investors may have overlooked this event given the framework's smaller relative price tag and lack of tangible tax increases. But don't be fooled. This is a watershed event, and investors should pay attention.In short, the infrastructure framework adds about $550 billion to the existing budget baseline for infrastructure spending in the U.S. That's a nearly doubling of spending over the next 10 years on infrastructure. And that means fresh market and economic impacts to consider. For the broader economy, the story is nuanced. Increased infrastructure spending is generally a good return on investment. However, that impact usually isn't visible right away. In the short term, the money put into the economy to build a new road or train line is funded by money taken out of the economy by taxes. A few years out, that new road leads to more economic activity than there was before. But that might not be tangible enough to move markets in the near term.Something more tangible is the obvious impact to the industries directly involved in infrastructure construction. For example, my colleague Nik Lippman sees material upside to cement companies, who will see major improvements in demand for their product.Bottom line, the infrastructure supercycle is here. We'll track it and all the market impacts for you as they take shape.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.

11 Nov 20212min

Third quarter earnings are heading into the home stretch in Europe and the UK, but while a solid number of companies have beat earnings estimates, market reaction has been a bit curious.----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European and UK Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the emerging read on third quarter earnings for the region. It's Tuesday, November the 9th at 3pm in London.Europe and the UK are now more than halfway through third quarter earnings season, and so we're far enough along to form a view on how this quarter's earnings are playing out. And while earnings have been largely solid, price movements on the day of earnings announcements, and in the days following, have been a bit curious. But I'll get into that in a moment.As it stands, third quarter earnings appear on track to deliver a solid number of companies beating earnings per share estimates. As of yesterday, 55% of European companies have beaten earnings estimates, while 23% have missed, leaving a 'net beat' of 32%, which is twice the historic average. If this holds, it would put third quarter results on track to deliver another strong upside surprise, albeit slightly below the pace seen over the last few quarters. Taking it to the sector level, we find that the strongest breadth of earnings beats are coming from Financials and Energy. On the flip side, Communication Services, Healthcare and Industrials have delivered the smallest breadth of beats so far.In addition to a healthy number of companies exceeding estimates, we are also seeing a beat in terms of the aggregate amount of European earnings overall, with weighted earnings per share currently beating consensus by about 10% for this quarter. This good news on earnings has driven a fresh bout of upgrades, which should reduce investor concerns around the risk to corporate profitability from ongoing supply chain issues and high input cost inflation.All that said, earlier, I mentioned a bit of curiosity about price reaction. Typically, if a company beats earnings per share estimates, you might expect to see better stock performance that day or in the days that follow. And of course, the opposite is true for companies who miss estimates. However, a key talking point during this results season has been the surprisingly disappointing price action, even for companies who beat expectations.Currently, the gap between the outperformance of earnings beats on the day of results relative to the underperformance from earnings misses has been very negatively skewed in a historic context. In fact, this negative skew to price action is close to a record low going back to 2007. On our data, we calculate that EPS misses have, on average, underperformed by 1.6% on the day of results, whereas companies that beat estimates have been broadly flat in relative terms. Hence, while the third quarter has been a solid earnings season overall, the hurdle rate to positively surprise the market is currently quite high.In our opinion, this reflects investors' uncertainty about the future earnings outlook and whether company margins will face a delayed hit in the quarters ahead. While understandable, we think this caution is overdone. Rather, we expect Europe's earnings dynamic to remain positive into 2022, with companies benefiting from a strong external demand environment and a record level of pricing power.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.

9 Nov 20213min

As we head towards year end, stock and bond markets appear to be sending mixed signals for the year ahead. For investors, the truth could lie somewhere in the middle.----- 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, November 8th at 2:00PM in New York. So, let's get after it. As we enter the final stretch of the year, various markets appear to be sending very different signals about what to expect over the next year. Let’s start with Bonds where the longer-term yields have fallen sharply over the past few weeks. In fact, the moves have been so dramatic, several leading macro funds had their worst month on record in October. Some of this move is due to the fact that these same investors were all short bonds as central banks were expected to begin the long process of tightening monetary policy, perhaps faster than what was priced a few months ago. The reason for this view was very simple: inflation has proven to be much higher than the central banks expected, and they would be forced to respond to that development by raising rates sooner than what they might prefer to do. Indeed, over the past few months, many central banks around the world have raised rates while others have begun to taper asset purchases and even end them altogether. In other words, these traders were correct in their fundamental assessment of what was about to happen, but long-term rates went down instead of up. While the extreme positioning clearly played a role in the magnitude of the move in longer term rates, the fundamental question is why did they fall at all? One possible reason is the bond market may be discounting what we have been talking about on this podcast for weeks—that the first half of next year is likely to see a material slowing in both economic and earnings growth as fiscal stimulus from this year wears off. Furthermore, with the legislative process breaking down on the Build Back Better program, that risk has only increased. It also means less issuance of Treasury securities which directly helps the supply and demand imbalance many macro and bond traders were expecting as the Fed begins to taper asset purchases this month. On the other side of the spectrum has been stocks. Here, we have seen higher prices for the major indices almost every day for the past 5 weeks, suggesting growth next year is not only going to be fine but may be understated by analysts. Stocks may also be taking the lower interest rates as good news for valuations. After all, much of the correction in September was due to lower valuations as the markets started to worry about central banks tightening and rates moving higher. On that score, price/earnings multiples in the US have risen by 7.5% over the past 5 weeks, one of the largest rises we’ve ever witnessed in such a short period of time. Such a rise in P/Es like this usually happen for one of two reasons: either the market thinks earnings estimates are about to go up a lot or interest rates are going to fall. The conflict here is that better growth is not compatible with lower rates. A valid explanation for the divergence could be that the potential failure of Build Back Better means no new corporate taxes. So, while the economy may be hurt by this legislative delay it could be friendly to earnings. In keeping with our narrative over the past month, we think the main reason for the divergence in messaging between stock and bond markets can be explained by the fact that retail and other passive inflows to equity markets continue at a record pace. It’s also the seasonal time of the year when institutional investors are loathe to leave the party early for fear of missing out and falling behind their benchmarks, something that they have had a harder time keeping up with this year. On that score specifically, the S&P 500, the key benchmark in the US market, has once again outperformed the average stock. This is a very different outcome from 2020 when the average stock did better than the index. What this really means is that the index can diverge from its fundamental value for a while longer. Bottom line is that major indices can grind higher into the holidays. However, it will get more difficult after that if we’re right about growth disappointing next year as rates eventually stabilize at higher levels from central banks tightening. In that environment, we continue to favor companies with reasonable expectations and valuations. We think healthcare, banks and some of the more non-cyclical technology companies in the software and services subsectors offer the best risk-reward. On the other side of the ledger, we would avoid consumer goods and cyclical technology companies that will see the biggest payback in demand next year. 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.

8 Nov 20214min

Global moves in elections, COVID restrictions and energy prices are having ripple effects across markets. How should investors think about these dynamics for Asia and EM equities?----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, chief Asia and Emerging Markets Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you their perspectives, today I'll be talking about our latest view on Asia and EM equities. It's Friday, November the 5th at 2pm in London.Overall, in our coverage, we continue to prefer Japan to Non-Japan Asia and Emerging Markets. Japan has outperformed Emerging Markets by 500 basis points year to date but remains cheaper to its own recent valuation history than Emerging Markets and with stronger upward earnings revisions. New Liberal Democratic Party leader Kishida-san has recently fought and won a snap election in the lower house of the Japanese parliament. The governing Center-Right coalition, which he now leads, did considerably better than polling had suggested prior to the election outcome. Although there may be some changes in policy emphasis compared with the Abe and Suga premierships, the broad contours of market-friendly macro and micro policy in Japan are likely to continue.Elsewhere within Emerging Markets, we're most constructive on Eastern Europe, Middle East and Africa and in particular Russia, Saudi Arabia and UAE, which are positively leveraged to rising energy prices. We're also warming up to ASEAN, having upgraded Indonesia to overweight alongside our existing overweight on Singapore. ASEAN economies are finally beginning to reopen post-COVID, which is stimulating domestic consumption.However, we have recommended taking profits on Indian equities after a year of exceptionally strong performance. We remain structurally bullish on a cyclical recovery in earnings growth in India, but with forward price earnings valuations now very high to history and peers, and with rising energy prices a headwind for India, we think it's time to move to the sidelines. Within Latin America, we've also established a clear preference for Chile versus Brazil on relative economic momentum and export price dynamics.Finally, we remain underweight Taiwan and equal weight China. For Taiwan, our contrarian negative view relates to our expectation of a semiconductor downcycle in 2022 and a slowing retail investor boom. Meanwhile, China equities continue to face numerous headwinds, including Delta variant COVID outbreaks, property developer deleveraging and the medium to long term impact on private sector growth stocks from the recent regulatory reset. Although valuations have improved in pockets, we expect further earnings downgrades for China and await a clearer pickup in growth and liquidity before turning more constructive.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.

5 Nov 20212min