US Elections: Weighing the Options

Our credit experts from Research and Investment Management give their overview of private and public credit markets, comparing their strengths and weaknesses following two years of rate hikes.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Chief Fixed Income Strategist in Morgan Stanley Research.David Miller: And I'm David Miller, Head of Global Private Credit and Equity for Morgan Stanley Investment Management.Vishy Tirupattur: And on this special edition of the podcast, we'll be taking a deep dive into the 2024 credit landscape, both from a private credit and public credit perspective.Vishy Tirupattur: So, David, you and I come at credit from two different avenues and roles. I cover credit, and other areas of fixed income, from a sell side research perspective. And you work for our investment management division, covering both private credit and private equity. Just to set the table for our listeners, maybe we could start off by you telling listeners how private credit investing differs from public credit.David Miller: Great. The main differences are: First, privately negotiated loans between lenders and borrowers. They're typically closely held versus widely distributed in public credit. The loans are typically held to maturity and those strategies are typically has that long duration, sort of look. Private credit -- really -- has three things of why their borrowers are valuing it. Certainty, that's committed capital; certainty of pricing. There's speed. There's no ratings -- fewer parties, working on deals. And then flexibility -- structures can be created to meet the needs of borrowers versus more highly standardized parts of the public credit spectrum. Lastly and importantly, you typically get an illiquidity premium in private credit for that holding to maturity and not being able to trade.Vishy Tirupattur: So, as we look forward to 2024, from your perspective, David, what would you say are some of the trends in private credit?David Miller: So private credit, broadly speaking, continues to grow -- because of bank regulations, volatility in capital markets. And it is taking some share over the past couple of years from the broadly syndicated markets. The deal structures are quite strong, with large equity contributions -- given rates have gone up and leverage has come down. Higher quality businesses typically are represented, simply as private equity is the main driver here and there tend to be selling their better businesses. And default rates remain reasonably low. Although we're clearly seeing some pressure, on interest coverage, overall. But volumes are starting to pick up and we're seeing pipelines grow into [20]24 here.Vishy Tirupattur: So obviously, it's interesting, David, that you brought up, interest rates. You know, it's a big conversation right now about the timing of the potential interest rate cuts. But then we also have to keep in mind that we have come through nearly two years of interest rate hikes. How have these 550 basis points of rate hikes impacted the private credit market?David Miller: The rate hikes have generally been positive. But there are some caveats to that. Obviously, the absolute return in the asset class has gone up significantly. So that's a strong positive, for the new deals. The flip side is -- transaction volumes have come down in the private credit market. Still okay but not at peak levels. Now older deals, right, particularly ones from 2021 when rates were very low -- you're seeing some pressure there, no doubt. The last thing I will say, what's noteworthy from the increase in rates is a much bigger demand for what I'll call capital solutions. And that's junior capital, any type of security that has pick or structure to alleviate some of that pressure. And we're quite excited about that opportunity.Vishy Tirupattur: David, what sectors and businesses do you particularly like for private credit? And conversely, what are the sectors and businesses you'd like to avoid?David Miller: Firstly, we really like recurring or re-occurring revenue businesses with stable and growing cash flows through the cycle, low capital intensity, and often in consolidating industries. That allows us to grow with our borrowers over time. You know, certain sectors we continue to like: insurance brokerage, residential services, high quality software businesses that have recurring contracts, and some parts of the healthcare spectrum that really focus on reducing costs and increasing efficiency. The flip side, cyclicals. Any type of retail, restaurants, energy, materials, that are deeply cyclical, capital intensive and have limited pricing power and high concentration of customers.So, now I get to ask some questions. So, Vishy, I'd love to turn it to you. How do returns, spreads, and yields in private credit compare to the public credit markets?Vishy Tirupattur: So, David, yields and spreads in private credit markets have been consistently higher relative to the broadly syndicated loan market for the last six or seven years -- for which we have decent data on. You know, likely reflecting, as you mentioned earlier, illiquidity premia and perhaps potentially investor perception of the underlying credit quality. The basis in yields and spreads between the two markets has narrowed somewhat over the last couple of years. Between 2014 and the first half of 2023, private credit, on average, generated higher returns and recorded less volatility relative to the broadly syndicated loan market. For example, since the third quarter of 2014, the private credit market realized negative total returns just in one quarter. And you compare that to eight quarters of negative returns on the broadly syndicated loan market.David Miller: Something we both encounter is the idea of covenants -- which simply put, are additional terms on lending agreements around cash flow, leverage, liquidity. How do covenants help investors of private credit?Vishy Tirupattur: Over the last several years, the one thing that stands out in the public credit markets -- especially in the leveraged loan market -- is the loosening of the covenant protection to lenders. Cov-Lite, which means, nearly no maintenance covenants, has effectively become the norm in the broadly syndicated loan market. This is one place that I think private credit markets really stand out. In our view, covenant quality is meaningfully better in private credit. This is mainly because given the much smaller number of lenders in typical private credit deals, private credit has demonstrably stronger loan documentation and creditor protections. Maintenance covenants are typically included. And to a great extent, these covenant breaches could act potentially as circuit breakers to better manage outcomes, you know, as credit gets weaker.David, we also hear a lot about the risk of defaults, in private credit markets. How much concern do you have around defaults?David Miller: We are watching, obviously stress on credits and the default rates overall, and they are at historically quite low levels. We do expect them to tick up over time. But there are some reasons why we clearly like private credit from that perspective. First, as mentioned, the covenant protections typically are a little better. If you look historically, depending on the data, private credit, default rates have been, somewhat lower than public leveraged credit and its been quite a resilient asset class, for a number of reasons. We like the amount of private equity dry powder that sits waiting to support some of the companies that are underperforming. And it's important to remember that private credit lenders typically have an easier time resolving some of these stresses and workouts given that they're quite bilateral or a very small group, to make decisions and reach those negotiated settlements. So overall, we feel like there will be a category of businesses that are underperforming and are in structural decline and that will default. But that number will be still very low relative to the universe of overall private credit.Vishy Tirupattur: So David, it’s been great speaking with you.David Miller: Thanks for having me on the podcast, Vishy.Vishy Tirupattur: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on Apple Podcasts app. It helps more people find the show.

8 Feb 20248min

With multiple, ongoing geopolitical conflicts, our analyst says investors should separate signals from noise in how these events can impact markets.Important note regarding economic sanctions. This research may reference jurisdiction(s) or person(s) which are the subject of sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the United Kingdom, the European Union and/or by other countries and multi-national bodies. Any references in this report to jurisdictions, persons (individuals or entities), debt or equity instruments, or projects that may be covered by such sanctions are strictly incidental to general coverage of the relevant economic sector as germane to its overall financial outlook, and should not be read as recommending or advising as to any investment activities in relation to such jurisdictions, persons, instruments, or projects. Users of this report are solely responsible for ensuring that their investment activities are carried out in compliance with applicable sanctions. ----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of geopolitical events on markets. It's Wednesday, February 7 at 5 pm in London.Geopolitical conflicts around the globe seem to be escalating in recent weeks. Increased US military involvement in the Middle East, fresh uncertainty about Ukraine’s resources in its conflict with Russia, and lingering concerns about the US-China relationship are in focus. And since financial markets and economies around the world have become more interconnected, it's more important than ever for investors to separate signals from noise in how these events can impact markets. So here’s a few key takeaways that, in our view, do just that.First, fighting in the red sea may influence the supply chain, but the results are probably smaller than you’d think. Yes, there’s been a more than 200 per cent increase in the cost of freight containers moving through a channel that accounts for 12 per cent of global trade. But, the diversion of the freight traffic to longer routes around Africa really just represents a one-time lengthening of the delivery of goods to port. That’s because there’s an oversupply of containers that were built in response to bottlenecks created by increased demand for goods during the pandemic. So now that there’s a steady flow of containers with goods in them, even if they are avoiding the Red Sea, the impact on availability of goods to consumers is manageable, with only a modest effect on inflation expected by our economists.Second, ramifications on oil prices from the Middle East conflict should continue to be modest. While it might seem nonsensical that fighting in the Middle East hasn’t led to higher oil prices, that’s more or less what’s happened. But that’s because disruptions to the flow of oil don’t appear to be in the interest of any of the actors involved, as it would create political and economic risk on all sides. So, if you’re concerned about movements in the price of oil as a catalyst for growth or inflation, then our team recommends looking at the traditional supply and demand drivers for oil, which appear balanced around current prices.Finally, as the US election campaigns gear up, so does rhetoric around the US-China economic relationship. And here we see some things worth paying attention to. Simply put, higher tariffs imposed by the US are a real risk in the event that party control of the White House changes. That’s the stated position of Republicans’ likely candidate – former President Trump – and we see no reason to doubt that, based on how the former President levied tariffs last time he was in office. As our chief Asia economist Chetan Ahya recently noted, such an outcome creates downside risk for the China economy, at a time when downside risk is accumulating for other structural reasons. It's one reason our Asia equity strategy team continues to prefer other markets in Asia, in particular Japan.Of course, these situations and their market implications can obviously evolve quickly. We'll be paying close attention, and keeping you in the loop.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.

7 Feb 20243min

Japan’s experience as one of the first countries to have an aging population offers a glimpse of what’s to come for other countries on the same path. See what an older population could mean in terms of social policy, productivity, immigration reform, medical costs and more.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Robert Feldman: And I'm Robert Feldman, Senior Advisor at Morgan Stanley MUFG Securities.Seth Carpenter: And on this special episode of the podcast, we will talk about longevity, and what the rest of the world can learn from Japan. It’s Tuesday, February 6th, at 8 a. m. in New York.Robert Feldman: And it's 10 p. m. in Tokyo.Seth Carpenter: Over the past year, I am guessing that lots of listeners to this podcast have heard many, many stories about new anti obesity drugs, cutting edge cancer treatments. And so today, we're going to address what is perhaps a bigger theme at play here.Now, the micro human side of things is clearly huge, clearly important. But Robert and I are macroeconomists, and so we're going to think about what the potential for longer human lifespans is. For the economics. So as life spans increase, we're probably going to see micro and macro ramifications for demographics, consumer habits, the healthcare system, government spending, and long-term financial planning.And so, it follows that investors may want to consider these ramifications across a wide range of sectors. So, Robert, I wanted to talk to you in particular because you've been following this theme in your research on Japan -- which is perhaps at the earliest stage of this with the fastest aging population across developed economies.So, start us off. Perhaps share some more about the demographic challenges that Japan is facing and what's unique about their experience.Robert Feldman: Thanks, Seth. First, let me start by saying that Japan is not so much unique as it is early. For example, in the 1960s, Japan's total fertility rate averaged about two children per woman. But it hasn't been above two since 1975. Now it's about 1.34. Population as a whole peaked in 2010 and now is down by about 2.4 per cent.What about government spending on pensions and healthcare? Well, those went from about 16 per cent of GDP in 1994 to about 27 per cent now. So the speed of these increases is extremely fast. That said, Japan has one very unusual feature. Labor force participation rates have climbed quite sharply, especially for women. So, more people are working and they're working longer.But at the same time, Japan has actually been pretty successful in holding down costs of many longevity related spending categories. Japan has a nationalized healthcare system. So, the government has lots of power over drug prices, which it has held down. It’s shortened hospital stays. They're still too long -- but it has shortened them. It has also raised retirement ages and has a very clever pension indexing system.Seth Carpenter: All right, so if I can sum this up then, Robert. Japanese workers are working longer, the Japan economy is spending less on health care. So, does this mean that we can just say Japan has solved most or all of the challenges associated with longer lifespans?Robert Feldman: Well, it’s not exactly reduced spending on healthcare. It just hasn't gone up as much as it might have.Seth Carpenter: Okay, that's a good distinction.Robert Feldman: Yes. Anyway, Japan has not solved all the problems, not by a long shot. So, for example, productivity growth is very important for holding debt costs down. But productivity growth -- and I like the simplest measure, just real output per worker -- has been anemic in Japan.So, when productivity growth is low and aging is fast, it's kind of hard to pay the cost of longevity; even if labor force growth is high and Japan has been able to suppress ageing costs. That's the wrinkle here.Seth Carpenter: Okay. So then, if we shifted to think about the fiscal perspective on things. The debt side of things. Is the longer-lived nature of the population; is that going to end up being something like a debt time bomb?Robert Feldman: Well, I don’t think so. At least not yet. And there are two factors behind my view. One is the potential for productivity growth to accelerate a lot. And the other is some special things about Japan's debt dynamics. Let me start with growth. There is huge room here for productivity growth here in Japan. We still has a lot of labor that's underused. The labor force is very well educated, and it's very disciplined. Therefore, it can be re-skilled for more productive jobs. There's also a lot more room for cost reduction in social spending categories, especially by using IT and AI. In addition, healthier people are more productive workers.On the debt dynamic side, the national debt is about 250 percent of GDP. Very high. But Japan owns 1.23 trillion dollars of foreign exchange reserves. So, Japan is borrowing a lot at very, very low short-term rates, and very low long-term rates as well. They're below one per cent. That said it’s earning high foreign interest rates on its external assets. In addition, about half the national debt is owned by the central bank. And so when the central bank, the Bank of Japan, collects coupons from the government, it pays them right back to the government in its year end profit.Seth Carpenter: Okay, so that helps put things into perspective. So, if we're looking forward, do you have any concrete measures that you think Japan as a society, the Japanese government might undertake? And what some of those potential outcomes might be?Robert Feldman: Well, I'm expecting incremental change that Japan is very good at. Social policy is hard to make. There's a lot of politics involved. Even in the prime minister's policy speech the other day, he mentioned a number of things. There will be changes. For example, ways to keep costs down but also to improve productivity. There will some changes in retirement ages. There will be some flexible labor market rules. This is important because ideas move with people; and when people move more, then productivity should go up. There will be continued easing of the immigration rules for highly skilled workers. Japan now has about 2 million foreign workers and the number will probably keep going up. Medical costs reforms are also very important. For example, it’s important for Japan to allow non doctors to do some things that heretofore only doctors have been permitted to do. Faster deployment of new technologies in high import sectors like energy and agriculture -- this should save us a lot of money in terms of not buying imports that we don't need once technology is deployed domestically. Now, can I ask you some questions?Seth Carpenter: Of course.Robert Feldman: Okay. So. From where you sit as a global economist, what aspects of Japan's experience do you think are particularly relevant to other economies?Seth Carpenter: I would say the part where you were touching on the debt dynamics is particularly salient, right? We know that in the COVID era, lots of countries sort of ran up a really large increase in their national debt. And so, trying to figure out what sort of debt dynamics are sustainable over the long run I think are critical. And I think the factors that you point out in terms of an aging population, sort of, have to be considered in that context.I think more broadly, the idea of an aging population is pretty widespread. It is not universal, obviously. But we know, for example, that in China, the population growth is coming down. We know that for a long time in Europe, there has been this aging of the population and a fall in fertility rates. So, I think a lot of the same phenomena are relevant. And like you said at the beginning: it's not that Japan is unique, it's that Japan is early.Robert Feldman: I have another question for you is, and also on this longevity theme -- about the difference between developed and emerging markets. What are the notable differences between those two groups of countries?Seth Carpenter: Yeah, I mean, I think we can make some generalizations. It is more often the case that slowing population growth, falling fertility rates, aging population is more of a developed market economy than an emerging market economy phenomenon. So, I think in that regard, it's important. I will say, however, that there are some exceptions to every rule.And I mentioned China that, you know, maybe straddles those two worlds -- developed versus emerging market. And they’re also seeing this slowing in their population growth. But I think within that, what's also interesting is we are seeing more and more pressures on migration. Immigration could be part of the solution. I think you highlighted this about Japan. And therein lies, at times, some of the geopolitical tensions between developed market economies and emerging market economies. But I think, at the same time, it could be part of the solution to any of the challenges posed by longevity.Seth Carpenter: But, I have to say, we probably need to wrap it up there.Robert, for me, it is always a pleasure to get to talk to you and hear some of your wisdom.Robert Feldman: Thank you, Seth. This is great. Always happy to talk with you. And if you want to have me back, I'll be there.Seth Carpenter: That's fantastic. And for the listeners, thank you 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.

7 Feb 20249min

As positive economic data makes it less likely that the Fed will cut rates in March, our Chief US Equity Strategist explains what this could mean for small-cap stocks. ----- 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 a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, February 5th at 11 am in New York.So let's get after it. Going into the last week, investors had a number of factors to consider. The busiest week of earnings season that included several mega cap tech stocks, a Fed meeting, and some of the most relevant monthly economic data for markets. Around these data releases, we saw significant moves in many macro markets, as well as individual securities.We started the week with a soft Dallas Fed Manufacturing Index reading, which followed the weak New York Manufacturing Survey two weeks earlier. Meanwhile, the Conference Board Consumer Confidence Index and the University of Michigan Consumer Sentiment Survey both pushed higher.As the week progressed, we got more data that supported the view that the economy may not be slowing as much as many had started to believe, including perhaps the Fed. In contrast to the Dallas and New York Fed Manufacturing Surveys, The ISM manufacturing PMI ticked higher, and surprised to the upside by a few points.More importantly, the orders component ticked above 50 to 52, which tends to lead the headline index. The fact that the overall equity market responded favorably to these data makes sense in the context of still present growth uncertainty. However, the fact that cyclical stocks that are levered to manufacturing continue to underperform tells me the market is still very undecided about the macro outcome this year -- as am I.Finally, the headline non-farm payrolls number on Friday was extremely strong at 353, 000. Manufacturing jobs surprised to the upside, giving credence to the uptick in the ISM Manufacturing PMI cited earlier. However, the release also incorporated the annual revisions, which may be overstating the strength in labor markets.Employment trends from the Household Survey remain much softer, as do hours worked, quit rates, and layoff announcements. In short, the labor market is fine, but still weakening, as desired by the Fed. The one area of unequivocal strength remains government spending and hiring, which could be working against the Fed's goals.The bond market went with the stronger read of the data and traded sharply lower on Friday, as so this morning. It has also pushed out the timing of the first Fed interest rate cut, taking the odds of a March cut all the way down to just 20 per cent. Recall this probability was as high as 90 per cent around the end of last year.Perhaps the market is starting to take the Fed at its word. They aren't planning to cut rates in March. The equity market tried to look through this rate move on Friday driven by a historically narrow move in large cap quality growth stocks. This is very much in line with our recommendation since the beginning of the year to stick with large cap quality growth.For now, the internals of the stock market appear to agree with our view that a stickier rate backdrop is a disproportionate headwind for stocks with poor balance sheets and a lack of pricing power. In other words, lower quality cyclicals and many areas of small caps. Perhaps the most important data to support this conclusion is that earnings results and prospects for 2024 remain weak for these kinds of companies.On this front, we continue to get questions from investors on what it will take for small caps to work from here on a relative basis. The Russell 2000, the small cap index, has underperformed the S&P 500 by 7 per cent year to date and is still more than 20 per cent below all time highs reached over two years ago.While some think this is an opportunity, our view is that we need more confirmation that we're headed for a higher nominal growth regime driven more by the private economy rather than inefficient government spending.As we've discussed in the past, small caps are particularly economically sensitive and reliant on pricing power to offset their lack of scale.As they await more definitive confirmation on whether a higher nominal growth environment is coming, small caps are being weighed down by a weakening margin profile, higher leverage, and borrowing costs. In short, stick with what works in a late cycle environment where the macro remains uncertain. Large cap, high quality growth. 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 to find the show.

5 Feb 20244min

Mortgage rates are down, sales volumes are rising and housing is gradually getting more affordable. Our analysts discuss why they think the U.S. housing market is on a healthy foundation. ----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co Head of Securitized Products Research at Morgan Stanley.Jay Bacow: And I'm Jay Bacow, the other Co Head of Securitized Products Research.Jim Egan: And on this episode of the podcast, we'll be talking about mortgage rates, home sales volumes and the U. S. housing market.Jay Bacow: Alright Jim. Mortgage rates are down. Sales volumes are up. [Is] the housing market back?Jim Egan: Sales volumes might finally be inflecting higher, or at least they might actually be finding that bottom. If we look at the seasonally adjusted annualized figures that came in in December, pending home sales increased 8 per cent to their highest level since July. Purchase applications, which -- little bit more high frequency, we have them through January -- they're up 23 percent from the lows that they put in in late October or early November.Jay Bacow: Alright, that sounds good, but seasonally adjusted annualized figure sounds like a mouthful. Can you lay that out a little easier for us?Jim Egan: I think that these numbers just need to be put [00:01:00] into a little bit more context. Yes, pending home sales were up 8 per cent month over month. But if I look at just the December print, it was the weakest pending home sales print for that month in the history of that index. Now, relative to 2022, it is improving. It was only down 1 per cent from December of 2022, and that's the lowest decrease we've had since 2021. But these numbers still aren't strong.Going around the horn to some of the other demand statistics, existing home sales finished 2023 down 19 per cent. But they also strengthened into year end only down 9 per cent in the fourth quarter. New home sales, as we've mentioned on this podcast before. That is the demand statistic that has actually been showing growth up 4 per cent in 2023 versus 2022. Up 15 per cent in the second half of 2023 versus the second half of 2022.Jay Bacow: Alright, so we’ve got a pickup or an inflection in housing activity, and we’ve had mortgage rates coming down. Affordability is also independent of home prices. So where does all this stand? Jim Egan: Right? [00:02:00] So because of those home price increases that you've mentioned, the monthly payment on the medium price home is still up almost $100 year over year. But the path of affordability, the deterioration that we've been talking about -- it's as small as it's been since February 2021. And if we're not looking at this on a year over year basis; if we're just looking at this on a month, over month, or every two-month basis. The two-month increase that we've seen in affordability is the steepest increase, or the steepest drop in unaffordability, if you will, since January of 2009.Suffice it to say, we think this is a much healthier housing market than 2009.Jay Bacow: Alright. Now what about the supply side? Because obviously, [there’s] a lot of ways we can get supply. One of the more straightforward methods is for someone just to build a new home. How’s that data looking? [00: 03:00]Jim Egan: We are building more homes. As new home sales have moved higher, single unit housing starts have moved higher as well. Now from cycle peak, which we estimate as April 2022, single unit starts fell about 23 per cent through the middle of 2023. And another thing that we've talked about on this podcast in the past is that build timelines have been elongating. And that was leading to a backlog in homes actually under construction.That decrease allowed that backlog to clear a little bit, and since the middle of 2023, June till the end of the year, single unit starts were actually up 7 per cent. We are building more homes.Jay Bacow: Alright. So new home sales are clearly, literally new homes. But people can also list their existing homes. What's that data look like?Jim Egan: Listing volumes are higher as well. In fact, as of this month, I can no longer say that we are at historic lows when it comes to for sale inventory. While inventory has also climbed throughout the second half of 2022 into the first half of 2023, [00:04:00] that historic low statement is something I could have made every month for the past 8 months.It's a statement I could have made for 41 of the past 54 months. Months of supply did retreat a little bit in December. But when we think about our models for housing activity and really for home prices, it's that growth in the absolute amount of for sale inventory that really plays a big role.Jay Bacow: Alright. I don’t have a PhD in economics. You’re the housing strategist. If we have more supply, does that mean prices are coming down?Jim Egan: That's what we think. We continue to think that these for sale inventory increases that are happening alongside what we do continue to believe will be sales growth in 2024 -- and we think we're seeing the first signs of now -- are going to be enough to bring home prices moderately negative in 2024. And alongside these recent activity prints, the most recent home price print was actually just a little bit softer than we thought it would be.We had forecasted about it a 15-basis point decrease in home prices in November. We saw an 18-basis point [00:05:00] decrease. It's not unusual for home prices to decrease month over month in November. But this is kind of from our perspective a little bit of validation from a home price forecast perspective.We're calling for them to fall 3 percent year over year in 2024. We think this is very moderate. We do not think this is a correction. We believe the housing market is on a very healthy foundation. Looks like we're moving towards sales increases. But we do still think you'll see a little bit of price weakness next year. Jay Bacow: Jim, thanks for taking the time to talk.Jim Egan: Great speaking with you, Jay.Jay Bacow: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcasts app; and share the podcast with a friend or colleague today.

2 Feb 20245min

Our analyst explains what parts of the consumer staples sector could benefit from an aging global population.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European consumer staples team at Morgan Stanley, and today I’ll be talking the increasingly important longevity theme and its impact on consumers. It’s Thursday, the first of February, at 3 PM in London.It's no secret that global life expectancy is increasing. The rise of modern medicine, improved working conditions, urbanization, and greater access to food and water have all contributed to a greater life expectancy. According to the United Nations, global life expectancy has risen more than 54% since 1950, reaching about 71 years in 2021, with Asia improving the most. At the same time people are living longer, birth rates for most developed economies have dropped. Higher levels of education, the increasing proportion of women in the workforce, and modern medicine have all contributed to lower birth rates. In fact, over the last several decades, the global population has aged significantly, with the median global age increasing 8 years since 1950, hitting 30 years in 2021. Looking ahead, the United Nations expects the percentage of population aged 65+ will continue to increase at a faster rate than younger populations. An ageing population has far-reaching implications, but let’s consider the spending power of older adults. Real disposable income among older adults has increased throughout the years. In 2022, an older adult had about 50% more than in 2000. As a result, older adults today have more money to spend on consumer goods and services than in the last decades. Here are three categories within the Consumer Staples sector that could benefit from the rise in longevity.First, Consumer Health. As consumers skew older and their disposable income increases it bodes well for a wide range of consumer health products – think Vitamins, Minerals and Supplements (VMS), denture care, cold and flu remedies and more.Second, Active Nutrition, including protein supplements and probiotic-rich foods such as kimchi, kombucha, or yogurt, is a likely beneficiary of the longevity theme. This sub-category is currently growing mid- to high single digits on average (over 10% for protein-related categories), and we see room for further long-term growth.Finally, Medical Nutrition. With age comes increasing prevalence of chronic diseases, including cancers, and with malnutrition. Addressing malnutrition improves the cost, and effectiveness, of medical treatment and also allows for shorter hospital stays. To that end, healthcare providers are increasing turning to medical nutritional solutions--driving demand for these products.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.

1 Feb 20243min

While 2023 was an active year for U.S. mergers and acquisitions, according to Wally Cheng, Head of West Coast M&A in our Technology Investment Banking Group, 2024 is positioned to be a busy year.Wally Cheng is not a member of Morgan Stanley’s Research department. Unless otherwise indicated, his views are his own and may differ from the views of the Morgan Stanley Research department and from the views of others within Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Wally Cheng: And I'm Wally Cheng, Head of West Coast Tech M&A for Investment Banking. Michael Zezas: And on this special episode of Thoughts on the Market, we'll focus on the outlook ahead for mergers and acquisitions in US tech. Michael Zezas: Wally, I really wanted to talk with you because 2023 was arguably the toughest year for U.S. mergers and acquisition markets since the global financial crisis. And we saw a three prong set of challenges in the form of rising interest rates, geopolitical conflicts and recession concerns. And that seems to have weighed on deal activity across the globe. Looking back, the first quarter of 2023 marked the lowest point of the M&A market, and since then we've seen deal activity tick higher. But from your perspective in tech banking, where are we right now and what should investors be watching for this year? Wally Cheng: The punch line answer that, Mike, is they should be looking for a bounce back in M&A in 2024 for all the reasons that you mentioned. Activity was very muted in 23. You highlighted rising interest rates. You highlighted geopolitical risks, wars, etc.. In that kind of environment deals just don't get done. There's not a meeting of the minds between buyer and seller. We're in a different environment now, I think what's happened over the last quarter or so is an appreciation or an acceptance of the new normal. The world has a lot of uncertainty around it, and that's no longer a new thing. It's a thing that buyers and sellers now know that they have to face for the foreseeable future. So my expectation for 2024 is much more activity, and we're seeing green shoots of that. And we saw a lot of that happening towards the end of last year. A number of large strategic deals that complemented the flow of private equity driven deals that we've seen for the last couple of years. The playing field now going into the full year of 2024 is really about all groups of buyers and sellers being active. What do I mean by that? I mean, on the buyer side, it's both corporate buyers and private equity buyers. Both active. First half of 2023 was only sponsors. Second half of 2023 was largely only strategics. Now they are both playing in the game. That's on the buyer's side. On the seller side, for the reasons that are articulated, sellers are no longer playing for a material change in the operating environment and a return or snap back, back to 2021 valuation levels. That was a blip on the screen, going to be a very long time to get back to there, if ever, and they're being much more sober and reasonable and realistic about valuations that they can get. So we're seeing much more of a meeting of the minds between buyer and seller. All buyer groups are active. Michael Zezas: So drilling down into your area of expertise a little bit more. It's been a slower tech IPO market recently. What's the impact of a slower IPO market on M&A? Wally Cheng: That is going to drive more M&A. And what I mean by that is when private companies can't get public, and return money to their private shareholders, they have to seek other ways of doing that. And that's M&A. Last year, and the year before were historically low in terms of IPO volume. Every year, on average over the last decade or so, there's been roughly 40 tech IPOs, last year and the year before less than ten. We're not expecting much more than that this year either. So with that kind of IPO volume, the huge number of private companies, by last count, about 1300 private companies of $1 billion in greater valuation were sitting in the private domain in technology. And of those 1300 companies, just a few of them are going to make it public in the next few years, which means they're going to have to seek other ways of monetizing for their shareholders. And that's going to be through M&A. Michael Zezas: So there's obviously a lot of discussion right now about when the Fed will begin cutting interest rates this year. But in any case, the consensus is that even when they are cutting, you're likely to see levels of interest rates also will be somewhat higher than what we saw in the decade between the financial crisis and the pandemic. So what's the potential impact on the next wave of M&A activity from having somewhat higher interest rates? Wally Cheng: It will be a factor that is going to hold back a more robust M&A market. But I think the real impact of it is going to be twofold. One is there are going to be many more stock deals. So deals where stock is used as an acquisition currency to buy the target. And then two is I think there's going to be a lot more activity from buyers who have a lot of cash firepower sitting on their balance already. They're going to press their advantage in an environment like this, where for many buyers who don't have that same luxury of cash on their balance sheet and require outside financing at the higher rates that you mentioned to go finance deals, which will make those deals a little bit more difficult to justify economically. So if you've got very inexpensive cash sitting on your balance sheet, now's the time to go use it. Michael Zezas: Drilling down a bit here, what sub sectors within technology do you think will see the most M&A activity? Wally Cheng: Number one software. And number two Semis with an asterisks on Semis, which I'll get to in a second. In both of those industries consolidation is imperative. In software. Customers are looking for best of platform solutions not best of breed anymore. So in a landscape where there are a thousand plus software companies valued at greater than $1 billion that are either public or private today there's going to be a lot of M&A happening, to get to a product offering that looks more like a best of platform solution for their customers. Similarly, in Semis, the dynamic is the same, a little bit more driven by scale, and that is really what's driving M&A in Semis. There's about 100 semiconductor companies that are public today with more than $1 billion in value. Our expectation is that the need for scale is going to drive that number down to about a third of that through M&A over the next 5 to 10 years. The asterisks that I mentioned on the semiconductor activity is that in order to get the semiconductor deal done today, given the global nature of their revenue, is that they require regulatory approval from governments all over the globe. And in today's environment, where East and West are in a tug of war for tech supremacy, those approvals are really difficult to get. Are they impossible? No. Does it take longer to get them? Yes. So buyers and sellers in semis are really, really taking a hard look at whether or not they can get regulatory approval before announcing their deals, because the last thing they want to do is announce a deal, wait for two years to get it approved, it not be approved, and they've got damaged companies coming out of the end of that. Michael Zezas: Got it. So geopolitical concerns, still a limiting factor for cross-border M&A, but overall we're seeing tailwinds for M&A activity picking up. Wally Cheng: You got it. Michael Zezas: Well Wally thanks for taking the time to talk. Wally Cheng: Super speaking to you Mike. Thanks. Michael Zezas: As a reminder if you enjoy Thoughts on the Market, please take a moment to rate review us on the Apple Podcasts app. It helps more people find the show.

1 Feb 20247min

Who is going to buy nearly $11 trillion in new fixed-income assets in 2024? Find out where our Chief Cross-Asset strategist expects to see demand.----- Transcript -----Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset strategist. Along with my colleagues bringing you a variety of perspectives, today I'll discuss our outlook for global fixed income supply and demand in 2024. It's Tuesday, January 30th at 10 a.m. in New York. This year is shaping out to be a big year for bond markets. We see global fixed income growth supply rising 12% to almost $11 trillion in 2024, and expect U.S. Treasury gross supply alone to increase 30% to $4 trillion in 2024. So the big questions investors are grappling with are one, what drives this increase in supply? And two, will there be sufficient demand and from where to meet the supply?One of the drivers for this rise in supply is quantitative tightening or QT. As G4 central banks have undertaken aggressive measures to curb inflation, they've shrunk their balance sheets by about $250 trillion. Yes, that's trillion with a T, since January 2023, and we expect them to do so by another $245 trillion in 2024. With central bank buying of coupon bonds dropping off, someone else will need to step in. A prevailing narrative in 2023 was that markets would get overwhelmed by the amount of fixed income issuance, either because of quantitative tightening or maturing corporate bonds, and this would push yields higher. Yields were indeed pushed higher last year, but it wasn't on the back of supply, instead, the economy turned out to be stronger than expected. And we think that 2024 will be no different. Gross and net issuance across global fixed income products will likely rise versus last year, but demand should be there to meet supply, especially in the second half of 2024, when central banks are expected to start cutting rates and rates volatility normalizes. With that said, what is interesting to note is the shift in the type of buyers of bonds. Bank portfolios are the most likely to see a decrease in net buying, while we anticipate that demand will pick up for overseas investors, especially in the second half of the year. Meanwhile, we think demand from U.S. pension funds remains strong. They've been big buyers of treasuries in the last few quarters, and should continue to support demand on the very long end of the curve. Another important point is that foreign private demand for U.S. treasuries never really went away. Foreign official demand exhibits cyclicality with the fed rate cycle, that is, it decreases as the Fed hike rates and increases when the Fed cuts. Private demand from Japan is particularly cyclical, and we are already seeing signs of Japanese investors returning to the scene as the fed cycle peaks. We also think Japanese investors will find Agency Mortgage-Backed Securities, or MBS, attractive this year, but will likely commit capital only when volatility in both rates and the bases normalize. Bottom line: as global fixed income supply rises in 2024, we think there will be sufficient demand to meet this increase. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

30 Jan 20243min