An Unprecedented Wave of Inheritances Is Coming

Markets have reacted positively to the U.S.-China détente in tariffs. Our Chief Fixed Income Strategist, Vishy Tirupattur, digs into the rallies to better understand potential longer-term outcomes.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today I'll talk about the impact of last week's 90-day pause in the reciprocal tariffs between the U.S. and China, and the impact on the economy and markets.It's Monday, May 19th at 11am in New York.Market response to last Monday's announcement has been resoundingly positive. The S&P 500 was up 4.5 percent in the first four days since the announcement and the year-to-date returns are back in the black after Liberation Day drove steep declines in April.Credit markets have also rallied, notably with the investment grade spreads tightening by over 10 basis points and high yield spreads by over 50 basis points. And the Treasury market took out 50 basis points of rate cuts in 2025, leaving market implied rate cuts by the end of 2026 at around 100 basis points.While these moves across markets are significant, it is really important to put them into perspective and tease out what this detente in trade tensions implies. And more importantly, what it does not imply.On the positive side, we think that the de-escalation reduces the risk of a sudden stop in trade volumes and a sharp rise in unemployment rate. While this is clearly just a truce and we don't know exactly where the tariffs between the two largest economies in the world will end up, it seems reasonable to infer that tariffs in the vicinity of 125 percent or 145 percent are substantially less likely now. Overall, the probability of a U.S. recession, therefore, has fallen on the margin.To be clear, a recession during 2025 was never really our base case. But the de-escalation shifts risks in the direction of a little more growth, a little less inflation, and keeps unemployment rate at near current levels. If the world before Liberation Day was bimodal and close to a coin toss; it is still bimodal, but skewed towards an expansion, not contraction. Since we were in the expansion mode to begin with, this detente gives us greater comfort in our baseline outlook and strengthens our conviction that the Fed will remain on hold for rest of the year.The positive vibes from Geneva not withstanding, we would stress that it is far from clear that the 90-day pause is an uncertainty clearing event. Trade tensions are likely to remain elevated. The administration is still investigating tariffs on pharmaceuticals, semiconductors, copper, and other products. It is also unclear if the template of negotiations between the U.S. and China can work for other regions, especially Europe. Even if U.S. tariffs on imports from China and the rest of the world end up roughly around the current levels, they would still be about four times higher than the levels at the start of the year.This means inflation should continue to move higher into year end, with the surge that peaks in the third quarter. While the impulse inflation from tariffs is likely to be smaller, it still is coming. Likewise, higher tariffs will dampen growth even though recession will continue to be avoided.For risk markets, we think that the detente has reduced the risk of substantial drawdowns. While policy uncertainty about the ultimate level of tariff remains, a return to last month’s mind-boggling volatility driven by trade policy is probably behind us. So, it's unlikely that we will see markets revisiting the lows of April in the near term.For credit markets, a lower likelihood of recession is indeed welcome news, especially considering the current strong credit fundamentals. With the market taking out a couple of rate cuts, the all in yields for credit remain in the range to sustain the demand for yield buyers such as insurance companies.Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

19 Maj 4min

As market uncertainty continues around the Trump administration’s trade policy, our Head of Corporate Credit Research Andrew Sheets reflects on the key takeaways that investors may learn from the ongoing volatility.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I'm going to discuss what we think we can actually learn from all of the back and forth in markets.It's Friday, May 16th at 2pm in London.One of the dominant questions of 2025 has been and continues to be: What exactly is the strategy behind U.S. tariff policy. Are these tariffs simply a negotiating tactic, designed to bring countries to the table in order to strike quick deals. Or are they something very, very different. An attempt to fundamentally reduce U.S. trade deficits, raise significant revenue, and bring production back to American shores.At a recent conference with some of our largest investors, we asked them which of these explanations they thought best applied. Well, about a quarter thought it was a negotiating tactic; another quarter thought it was that fundamental shift. And the remaining half simply weren't sure yet.Now, it's possible that this ambiguity is actually the point designed to keep trade partners guessing in order to secure better terms. It's also possible that very different views on trade exist within the administration, and we're seeing them vie for influence – perhaps almost in real time. So, amidst all this uncertainty and back and forth, it's useful for investors to try to take a step back and think what, if anything, we've learned.First, we think we've learned that markets have a pretty clear view on tariffs. Credit and equities sold off aggressively as tariffs were ramped up. They have rallied back almost as quickly as these same policies were paused or reversed. Second, this back and forth does complicate the economic data and makes it more likely that the Federal Reserve will leave interest rates unchanged, waiting for more clarity. At Morgan Stanley, we continue to think that the Fed makes no interest rate cuts this year.Third, even with the Fed doing nothing and interest rates moving around, bonds did diversify portfolios. Over the last 90 days, a portfolio of high-grade bonds, like the U.S. aggregate bond index has had just one-fifth of the volatility of the S&P 500, while at the same time delivering a higher total return. Yes, we think there is absolutely still a case for bonds to diversify within portfolios.Fourth and finally, the shock of the initial tariff announcement has passed. But there is still very real uncertainty about the economic impact, as even with the recent pauses, U.S. tariffs remain relatively high versus recent history.The next two months should start to give us the true picture of this impact – or the lack thereof – on both activity and prices. That will tell us whether the storm has truly passed through or whether we're simply in the eye of it.Thanks for listening. Let us know what you think about our thoughts in the market. You can leave us a review wherever you get this podcast. And if you like what you hear, share Thoughts on the Market with a friend or colleague today.

16 Maj 3min

Our analysts Adam Jonas and Sheng Zhong discuss the rapidly evolving humanoid technologies and investment opportunities that could lead to a $5 trillion market by 2050. Read more insights from Morgan Stanley.----- Transcript -----Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas Morgan Stanley's Global Head of Autos and Shared Mobility.Sheng Zhong: And I'm Sheng Zhong, Head of China Industrials.Adam Jonas: Today we're talking about humanoid robots and the $5 trillion global market opportunity we see by 2050.It's Thursday, May 15th at 9am in New York.If you're a Gen Xer or a boomer, you probably grew up with the idea of Rosie, the robot from the Jetsons. Rosie was a mechanical butler who cooked, cleaned, and did the laundry while dishing out a side of sarcasm.Today's idea of a humanoid robot for the home is much more evolved. We want robots that can adapt to unpredictable environments, and not just clean up a messy kitchen but also provide care for an elderly relative. This is really the next frontier in the development of AI. In other words, AI must become more human-like or humanoid, and this is happening.So, Sheng, let's start with setting some expectations. What do humanoid robots look like today and how close are we to seeing one in every home?Sheng Zhong: The humanoid is like a young child, in my opinion, although their abilities are different. A robot is born with a developed brain that is Large Language Model, and its body function develops fast.Less than three years ago, a robot barely can walk, but now they can jump, they can run. And just in last week, Beijing had a humanoid half marathon. While robot may lack on connecting its brain to its body action for work execution; sometimes they fail a lot of things. Maybe they break cups, glasses, and even they may fall down.So, you definitely don't want a robot at home like that, until they are safe enough and can help on something. To achieve that a lot of training and practice are needed on how to do things at a high success rate. And it takes time, maybe five years, 10. But in the long term, to have a Rosie at every family is a goal.So, Adam, our U.S. team has argued that the global humanoid Total Adjustable Market will reach $5 trillion USD by 2050. What is the current size of this market and how do we get to that eye-popping number in next 25 years?Adam Jonas: So, the current size of the market, because it's in development phase, is extremely low. I won't put it a zero but call it a black zero – when you look back in time at where we came from. The startups, or the public companies working on this are maybe generating single digit million type dollar revenues. In order to get to that number of $5 trillion by 2050 – that would imply roughly 1 billion humanoids in service, by that year. And that is the amount of the replacement value of actual units sold into that population of 1 billion humanoid robots on our global TAM model.The more interesting way to think about the TAM though is the substitution of labor. There are currently, for example, 4 billion people in the global labor market at $10,000 per person. That's $40 trillion. You know, we're talking 30 or 40 per cent of global GDP. And so, imagining it that way, not just in terms of the unit times price, but the value that these humanoids, can represent is, we think, a more accurate way of thinking about the true economic potential of this adjustable market.Sheng Zhong: So, with all these humanoids in use by 2050, could you paint us a picture in broad strokes of what the economy might look like in terms of labor market and economic growth?Adam Jonas: We can only work through a scenario analysis and there's certainly a lot of false precision that could be dangerous here. But, you know, there's no limit to the imagination to think about what happens to a world where you actually produce your labor; what it means for dependency ratios, retirement age, the whole concept of a GDP could change.I don't think it's an exaggeration to contemplate these technologies being comparable to that of electric light or the wheel or movable type or paper. Things that just completely transform an economy and don't just increase it by five or 10 per cent but could increase it by five or 10 times or more. And so, there are all sorts of moral and ethical and legal issues that are also brought up.The response to which; our response to which will also dictate the end state. And then the question of national security issues and what this means for nation states and, we've seen in our tumultuous human history that when there are changes of technologies – even if they seem to be innocent at first, and for the benefit of mankind – can often be uh, used to, grow power and to create conflict. So Sheng, how should investors approach the humanoid theme and is it investible right now?Sheng Zhong: Yes, it's not too early to invest in this mega trend. Humanoid will be a huge market in the future, like you said. And it starts now. There are multi parties in this industry, including the leading companies from various background: the capital, the smart people, and the government. So, I believe the industry will evolve rapidly. And in Morgan Stanley’s Humanoid: A Hundred Report a hundred names was identified in three categories. They are brand developers, bodies components suppliers, and the robot integrators. And we'd like to stick with the leading companies in all these categories, which have leading edge technology and good track record. But at the meantime, I would emphasize that we should keep close eyes on the disruptors.Adam Jonas: So, Sheng, it seems that national support for the humanoid and embodied AI theme in China is at least today, far greater than in any other nation. What policy support are you seeing and how exactly does it compare to other regions?Sheng Zhong: Government plays an important role in the industry development in China, and I see that in humanoid industry as well. So currently, the local government, they set out the target, and they connect local resources for supply chain corporation. And on the capital perspective, we see the government background funds flow into the industry as well. And even on the R&D, there are Robot Chinese Center set up by the government and corporates together. In the past there were successful experience in China, that new industry grow with government support, like solar panels, electronic vehicles. And I believe China government want to replicate this success in humanoids. So, I won't be surprised to see in the near future there will be national humanoid target industry standard setup or adoption subsidies even at some time.And in fact we see the government supports in other countries as well. Like in South Korea there is a K Humanoid Alliance and Korean Ministry of Trade has full support in terms of the subsidy on robotic R&D infrastructure and verification.So, what is U.S. doing now to keep up with China? And is the gap closing or widening?Adam Jonas: So, Sheng, I think that there's a real wake up call going on here. Again, some have called it a Sputnik moment. Of course the DeepSeek moment in terms of the GenAI and the ability for Chinese companies to show just extraordinary and remarkable level of ingenuity and competition in these key fields, even if they lack the most leading-edge compute resources like the U.S. has – has really again been quite shocking to the rest of the world. And it certainly gotten the attention of the administration, and lawmakers in the DOD. But then thinking further about other incentives, both carrot and stick to encourage onshoring of critical embodiment of AI industries – including the manufacturing of these types of products across not just humanoids, but electronic vertical takeoff and landing aircraft drones, autonomous vehicles – will become increasingly evident. These technologies are not seen as, ‘Hey, let's have a Rosie, the robot. This is fun. This is nice to have.’ No, Sheng. This is seen as existential technology that we have to get right.Finally, Sheng, as far as moving humanoid technology to open source, is this a region specific or a global trend? And what is your outlook on this issue?Sheng Zhong: I actually think this could be a global trend because for technology and especially for humanoid, the Vision Language Model is obviously if there is more adoption, then more data can be collected, and the model will be smarter. So maybe unlike the Windows and Android dominant global market, I think for humanoid there could be regional level open-source models; and China will develop its own model. For any technology the application on the downstream is key. For humanoid as an AI embodiment, the software value needs to be realized on hardware. So I think it's key to have mass production of nice performance humanoid at a competitive cost.Adam Jonas: Listen, if I can get a humanoid robot to take my dog, Foster out and clean up after him, I'm gonna be pretty excited. As I am sure some of our listeners will be as well. Sheng, thank you so much for this peak into our near future.Sheng Zhong: Thank you very much, Adam, and great speaking with you,Adam Jonas: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

15 Maj 10min

Our strategists Michael Zezas and Ariana Salvatore provide context around U.S. House Republicans’ proposed tax bill and how investors should view its potential market impact.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Ariana Salvatore: And I'm Ariana Salvatore, Public Policy Strategist.Michael Zezas: Today, we'll dig into Congress's deliberations on taxes and fiscal spending.It's Wednesday, May 14th at 10am in New York.Michael Zezas: So, Ariana, there's been a lot of news around the tax and spending plans that Congress is pursuing; this fiscal package – and clients are really, really focused on it. You're having a lot of those conversations right now. Why are clients so focused on all of this?Ariana Salvatore: So, clients have reasons to focus on this tax policy bill across equities, fixed income, and for macroeconomic impacts.Starting with equities, there's a lot of the 2017 tax cut bill that's coming up for expiration towards the end of this year. So, this bill is Congress's chance to extend the expiring TCJA. And add on some incremental tax cuts that President Trump floated on the campaign trail. So, there's some really important sector impacts on the specific legislation side. And then as far as the deficit goes, that matters a lot for the economic ramifications next year and for bond yields.But Mike, to pivot this back to you, where do you think investor expectations are for the outcome of this package?Michael Zezas: So there's a lot of moving pieces in this fiscal policy package, and I think what's happening here is that investors can project a lot onto this. They can project a lot of positivity and constructive outcomes for markets; and a lot of negativity and negative outcomes for markets.So, for example, if you are really focused on the deficit impact of cutting taxes and whether or not there's enough spending cuts to offset those tax extensions, then you could look at the array of possible outcomes here and expect a major deficit expansion. And that might make you less constructive on bonds because you would expect yields to go higher as there was greater supply of Treasuries needed to borrow that much to finance the tax cuts. Again, not necessarily fully offset by spending cuts.So, you could look at this and say, well, this will ultimately be something where economic growth helps tax revenues. And you might be looking at the benefits for companies and the feed through to the equity markets and think really positively about it.And we think the truth is probably somewhere in between. You’re not going to get policy that really justifies either your highest hopes or your greatest fears here.Ariana Salvatore: So, it's really like a Rorschach test for investors. When we think about our base case, how do you think that's going to materialize? What on the policy front are we watching for?Michael Zezas: Yeah, so we have to consider the starting point here, which is Congress is trying to address a series of tax cuts that are set to expire at the end of the year. And if they extend all of those tax cuts, then on a year-over-year basis, you didn't really change any policy. So that just on its own might not mean a meaningful deficit increase.Now, if Congress is able to extend greater tax cuts on top of that; but it's going to offset those greater tax cuts with spending cuts in revenue raises elsewhere, then again you might end up with a net effect close to zero on a deficit basis.And the way our economists look at this mix is that you might end up with an effect from a stimulus perspective on the economy that's something close to neutral as well. So, there's a lot of policy changes happening beneath the surface. But in the aggregate, it might not mean a heck of a lot for the economic outlook for next year.Now, that doesn't mean that there would be zero deficit increase in the aggregate next year because this is just one policy that is part of a larger set of government policies that make up the total spending posture of the government. There's already something in the range of $200-250 billion of deficit increase that was already going to happen next year. Because of weaker revenue growth on slower economic growth this year, and some spending that would automatically have happened because of inflation cost adjustments and higher interest on the debt. So, long story short, the policy that's happening right now that we think is going to be the endpoint for congressional deliberations isn't something our economists see as meaningfully uplifting growth for next year, and it probably increases the deficit – at least somewhat next year.Now we're thinking very short term here about what happens in 2026. But I think investors need to think around that timeline because if you're thinking about what this means for getting deficits smaller, multiple years ahead, or creating the type of tax environment that might induce greater corporate investment and greater economic growth years ahead – all those things are possible. But they're very hypothetical and they're subject to policy changes that could happen after the next Congress comes in or the next president comes in.So, Ariana, that's the overall look at our base case. But I think it's important to understand here that there are multiple different paths this legislation could follow. Can you explain what are some of the sticking points? And, depending on how they're resolved, how that might change the trajectory of what's ultimately passed here?Ariana Salvatore: There are a number of disagreements that need to be resolved. In particular, one of the biggest that we're focused on is on the SALT cap; so that's the cap on State And Local Tax deductions that individuals can take. That raised about a trillion dollars of revenue in the first iteration of the Tax Cuts and Jobs Act in 2017.Republicans generally are okay with making a modification to that cap, maybe taking it a bit higher, or imposing some income thresholds. But the SALT caucus, this small group of Republicans in Congress, they're pushing for a full repeal or something bigger than just a small dollar amount increase.There's also a group of moderate Republicans pushing against any sort of spending cuts to programs like Medicaid and SNAP; that's the food stamps program. And then there's another cohort of House Republicans that are seeking to preserve the Inflation Reduction Act. Ultimately, these are all going to be continuous tension points. They're going to have to settle on some pay fors, some savings, and we think where that lands is effectively at a $90 billion or so deficit increase from just the tax policy changes next year.Now with tariff revenue excluded, that's probably closer to [$]130 billion. But Mike, to your point, there are these scheduled increases in outlays that also are going to have to be considered for next year's deficit. So, you're looking at an overall increase of about $310 billion.Michael Zezas: Yeah, I think that's right and the different ways those different dynamics could play out, I think puts us in a range of a $200 billion expansion maybe on the low end, and a $400 billion expansion on the high end. And these are meaningful numbers. But I think important context for investors is that these numbers might seem a lot smaller than some of what's been reported in the press, and that's because the press reports on the congressional budget office scoring, and these are typically 10-year numbers.So, you would multiply that one-year number by 10 at least conceptually. And these are numbers relative to a reality in which the tax cuts were allowed to expire. So, it's basically counting up revenue that is being missed by not allowing the tax cuts to expire. So, the context matters a lot here. And so we have been encouraging investors to really kind of look through the headlines, really kind of break down the context and really kind of focus on the short term impacts because those are the most reliable impacts and the ones to really anchor to; because policy uncertainty beyond a year is substantially higher than even the very high policy uncertainty we're experiencing right now.So, sticking with the theme of uncertainty, let's talk timing here. Like we came into the year thinking this tax bill would be resolved late in the year. Is that still the case or are you thinking it might be a bit sooner?Ariana Salvatore: I think that timing still holds up. Right now, the reconciliation bill is supposed to address the expiring debt ceiling. So, the real deadline for getting the bill done is the X date or the date by which the extraordinary measures are projected to be exhausted. That's the date that we would potentially hit an actual default.Of course, that date is somewhat of a moving target. It's highly dependent on tax receipts from Treasury. But our estimate is that it's somewhere around August or September. In the meantime, there's a number of key catalysts that we're watching; namely, I would say, other projections of the X date coming from Treasury, as well as some of these markups when we start to get more bill text and hear about how some of the disputes are being resolved.As I mentioned, we had text earlier this week, but there's still no quote fix for the SALT cap, and the house is still tentatively pushing for its Memorial Day deadline. That's just six legislative days away.Michael Zezas: Got it. So, I think then that means that we're starting to learn a lot more about how this bill comes together. We will be learning even a lot more over the next few months and while we set out our expectations that you're going to have some fiscal policy expansion. But largely a broadly unchanged posture for U.S. fiscal policy. We're going to have to keep checking those regularly as we get new bits of information coming out of Congress on probably a daily basis at this point.Ariana Salvatore: That's right.Michael Zezas: Great. Well, Ariana, thanks for taking the time to talk.Ariana Salvatore: Great speaking with you, Michael.Michael Zezas: Thank you for your time. If you find Thoughts on the Market and the topics we cover of interest, leave us a review wherever you listen. And if you like what you hear, tell a friend or colleague about us today.

14 Maj 10min

Our analysts Vishy Tirupattur and Joyce Jiang discuss the health of private credit as default pressures are building for borrowers amid weaker growth, fewer rate cuts and policy uncertainty.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Joyce Jiang: And I'm Joyce Jiang, U.S. Leverage Finance Strategist.Vishy Tirupattur: Today we'll take a look at private credit markets. Will it stay resilient in the current macro conditions? Or a reckoning is ahead of us.It's Tuesday, May 13th at 10am in New York.Tariffs and policy uncertainty are on the top of mind for people with an eye on the economy and markets. Certainly, a frequent topic of discussion for us on this podcast. In this environment, there has been growing concern about the health of corporate credit – and within corporate credit direct lending or middle market segments, where companies tend to be smaller in size and have weaker fundamentals are of particular concern. The business models of these companies are sensitive to slower growth.Joyce, can you map out the risks associated with private credit companies?Joyce Jiang: To your point, risks are rising in private credit, but I think these risks would be measured given the still resilient fundamental backdrop. Looking at fundamental trends, there is no clear sign of leverage building up in the system yet, and multiple data sources actually show that the leverage ratios among direct lending companies have either improved or remained flat. And that's very different from the previous cycles where excessive corporate leverage set the stage for the eventual downturn.So, this time around credit, including both public credit and private credit, is not the source of the problem. But, of course, these direct lending companies would be impacted by higher tariffs. So, Vishy what's your view on the tariff impact?Vishy Tirupattur: So, the direct impact of tariffs, Joyce, we think is likely to be muted. It's quite hard to quantify this exposure, but if you look at a number of different data sources, we find that the direct lending loans are more skewed towards defensive and service-oriented sectors.For example, sectors such as a technology, business services and healthcare account for over half of the loans in typical BDC portfolios or Business Development Company portfolios of direct lending loans. But that said, even though the direct impact could be somewhat limited, there could be second order effects because there is higher uncertainty and weaker confidence, and that could weigh on demand. There could be a tail cohort that could be developing.So, some data from Lincoln International, for example, shows that about 15 per cent of direct lending companies have EBITDA interest coverage ratio below 1x. Another way of looking at tail cohort is by looking at companies generating negative free operating cash flow. According to S&P data, that's about 40 per cent. These tail cohorts are stretched and are weakly positioned to weather macro challenges ahead.So, Joyce, another thing that comes up frequently when we talk about private credit is Payment In Kind interest or the so-called PIK interest. Can you walk us through what is a PIK and why is it a concern?Joyce Jiang: So, Payment In Kind interest – it occurs when the company stops paying interest in cash, but instead the interest is accrued and added to the principal balance. It is quite common for companies under liquidity stress to switch to PIKs for cash preservation, But in many cases, PIKs don't really clean up the company's balance sheet, and the companies may still end up in a conventional default. So, PIK is generally considered as a leading indicator of default by market participants.And to be clear, not all PIK loans are bad. PIK toggles are actually a key feature that distinguishes direct lending loans from syndicated loans because it provides non-distressed companies the flexibility to reallocate cash for other business needs. So, PIKs do not necessarily signal higher defaults. And in fact, data showed that BDCs or Business Development Companies with a higher PIK income don't always see a greater increase in nonaccruals. So, in other words, the relationship between PIK income and defaults is not persistently strong.Vishy Tirupattur: So, to summarize, overall fundamentals are on a relatively strong footing, but risks in private credit are rising, especially if we have a potential economic slowdown ahead. On the other hand, there are a few structural features with the private credit loans that could potentially help mitigate some of the vulnerabilities we've just talked about.First thing, direct lending loans are not marked to market by design, so they have lower volatility and are relatively immune from daily price moves. And really related to that, redemption risk of private credit funds has been fairly contained so far. These funds usually have tools like lockup periods and redemption caps to guard against unexpected large outflows.But of course, the effectiveness of these mechanisms has not yet been tested in severe downturns. Moreover, the capital that is going into private credit is relatively sticky capital. Key investors, such as insurance companies and pension funds are hold-to-maturity type buyers, and they're entering in the space for the attractiveness of the higher yields and to harvest illiquidity premia embedded in these loans. So, with that long-term investment horizon, they would be more willing to support companies through temporary liquidity challenges. Also, small lender groups in direct lending market makes it easier to negotiate restructurings.Joyce Jiang: Lastly, there is also ample dry powder. According to PitchBook, there is $570 billion of dry powder in private debt fund, and another $2 trillion in private equity funds. And this capital can be deployed to backstop distressed companies and help keeping defaults in check. And in terms of defaults, we are expecting syndicated loan defaults to end the year at 4 per cent. And that's our base case.And based on the historical relationship, that implies a like for like default rate for perfect credit at 5 per cent, which means a mild uptake from the current level, but is still below the COVID peak.Vishy Tirupattur: Joyce, thanks for taking the time to talk about this.Joyce Jiang: Thanks for having me, Vishy.Vishy Tirupattur: And to our listeners, thank you for your attention. Let us know what you think of this podcast and the topics we cover. And if you think a friend or a colleague might find this information useful, please share Thoughts on the Market with them today.

13 Maj 6min

Equity markets saw big rallies after trade tensions eased over the weekend. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why he’s optimistic that the worst of the market trough is over.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing how to think about the recent tariff negotiations for equity markets. It's Monday, May 12th at 11:30am in New York. So, let’s get after it. Over the weekend, U.S.-China trade negotiations made better than expected progress with both sides agreeing to a détente in the trade war that began just one short month ago. The main question I’m getting from investors is whether they should trust this initial agreement, and if it will eventually lead to something more sustainable? From my perspective, this misses the more important point for equity investors. To remind listeners, equity markets trade in the future. Therefore, the question to ask yourself is do you think things will be more or less uncertain in six months and will they be better or worse? The other thing to consider is that stocks trade on the second derivative, or rate of change, in growth. On that score, I believe it is likely we saw the trough rate of change in variables that tend to correlate with stock prices the most. More specifically, earnings revisions breadth showed a meaningful uptick last week for the first time this year. Some of this was driven by a pull forward in demand during the first quarter ahead of the tariff announcements that led to better than feared earnings. In addition, several leading companies posted better than expected results thanks to a weaker dollar. Importantly, the translation benefit for U.S. multinational earnings is likely to be a big earnings tailwind for the next six months. Many of the growth negative things we were worried about five months ago have played out now with Liberation Day marking the point of maximum negative sentiment and positioning. There is an adage that equity markets bottom on bad news, and I can’t think of a better example of that than Liberation Day last month. Similarly, markets tend to top on good news and this weekend’s better than expected outcome on trade negotiations with China could very well lead to a pause in the rally. Therefore, we would buy dips rather than chase stocks on days like today. Markets can look forward to the possibility of growth positive policy changes that still may be in front of us. Things like tax cut extensions, de-regulation and resolution of the debt ceiling and budget appropriations for the next year. Finally, with the threat of further escalation of tariff rates now diminished, the Fed can also come back into the picture with rate cuts sooner than perhaps what the Fed told us last week. While we don’t know exactly how much the tariffs will impact inflation over the next year, it is likely to be front-end loaded. In fact, there is a case to be made that tariffs may hurt demand and end up being disinflationary. The Fed is likely to determine this outcome over the summer and could begin to at least signal rate cuts. Such a move will potentially lead to a more sustainable rotation towards lower quality, cyclical stocks and drive animal spirits in a way that many investors were expecting six months ago but simply jumped the gun. Bottom line, I feel more confident in our original outlook for this year for a tough first half, followed by a strong second one. This outlook was based on our view that AI capex growth was bound to decelerate this year, while policy changes were likely to be growth negative to start. Now, we can look forward to growth positive policy changes and productivity benefits from the spending on AI that has already taken place. After such a strong rally, pullbacks are inevitable but unlikely to be anything like we saw last month. So, buy the dips. Thank you for choosing to listen. Leave us a review, and let us know what you think about the podcast. If you enjoy listening to Thoughts on the Market, tell a friend or colleague about us today.

12 Maj 4min

The initial shock of the U.S. administration’s tariff announcements is over, but Andrew Sheets, our Head of Corporate Credit Research, suggests the current calm could still give way to headwinds for the markets.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today we're going to discuss whether the worst is over for markets – or whether it's just the eye of the storm.It's Friday, May 9th at 2pm in London.After extreme recent volatility, markets have bounced back, generally unwinding their losses since April 2nd. So was that it? The shock of tariff announcements and positioning adjustments may have now passed through, but the impact on the real economy is still to come. In meteorological terms, we think this may be just the eye of the storm.There are several specific bouts of potentially bad weather that we're looking at, driven by tariffs that may be about to pass through.First is the Federal Reserve. Our economists still see no cuts from the Fed this year as tariffs keep inflation elevated on our forecast. The markets in contrast are expecting more action. A scenario where credit markets face both weaker growth and a lack of central bank support remains one of our top concerns.Second is the data. So far in 2025, measures of consumer and company expectations have generally been weak, while readings of activity have tended to be stronger. Now, we think there's a good historical case that it's the expectations that tend to leave and are thus concerned that actual activity could start to soften – as it starts to be measured in a post tariff period.To this end, we're keenly watching measures like shipping and trucking activity, which could give us a better picture of the real impact. Again, a core driver of our concern, despite the economic data holding up so far, is that the impact of tariffs usually takes more time. As our economists note, tariffs historically have pushed up prices after a couple of months and pushed down growth after a couple of quarters. In short, the full storm of that impact may be yet to pass through.That thinking also lies behind our inflation views. Those more optimistic on inflation, and thus expecting more interest rate cuts from the Fed, note that the latest core inflation readings were generally fine. But in contrast, our economists remain more concerned that tariff price impacts simply haven't yet arrived in the official data, noting little change in the core inflation readings for things like goods that in theory should see the largest tariff impact. This, in our view, suggests that the impact on the underlying numbers that the Fed is looking at is still to come.The initial surprise of the U.S. tariff announcements is behind us. Things feel calmer. And the recent economic data has been relatively resilient. One scenario is this simply speaks to how resilient the U.S. economy is. But another explanation is that there's a gap between the surprise of those tariffs and their ultimate economic impact. And our concern remains that those impacts are real, driving forecast at Morgan Stanley for weaker growth, higher inflation, and later interest rate cuts by the Federal Reserve than the market consensus.With credit spreads below average, we'd recommend patience. Those forecasts at these spreads could still drive turbulence.Thank you, as always, for your time. If you find Thoughts in the Market useful, let us know by leaving a review wherever you listen; and also tell a friend or colleague about us today.

9 Maj 3min

Investors were caught off guard last week when the Taiwanese dollar surged to a multi-year high. Our strategists Michael Zezas and James Lord look at what was behind this unexpected rally.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy.James Lord: And I'm James Lord Morgan Stanley's, Global Head of FX and EM Strategy.Michael Zezas: Today, we'll focus on some extreme moves in the currency markets and give you a sense of what's driving them, and why investors should pay close attention.It's Thursday, May 8th at 10am in New York.James Lord: And 3pm in London.Michael Zezas: So, James, coming into the year, the consensus was that the U.S. dollar might strengthen quite a bit because the U.S. was going to institute tariffs amongst other things. That's actually not what's happened. So, can you explain why the dollar's been weakening and why you expect this trend to continue?James Lord: I think a big factor for the weakening in the dollar, at least in the initial part of the year before the April tariff announcements came through, was a concern that the U.S. economy was going to be slowing down this year. I mean, this was against some of the consensus expectations at the beginning of the year.In our year ahead outlook, we made this call that the dollar would be weakening because of the potential weakness in the U.S. economy, driven by slow down in immigration, limited action on fiscal policy. And whatever tariffs did come through would be kind of damaging for the U.S. economy.And this would all sort of lead to a big slowdown and a kind of end to the U.S. exceptionalism trade that people now talk about all the time. And I think since April 1st or April 2nd tariff announcements came, the tariffs were so large that it raised real concerns about the damage that was potentially going to happen to the U.S. economy.The sort of methodology in which the tariff formulas were created raised a bit of concern about the credibility of the announcements. And then we had this constant on again, off again, on again, off again tariffs. That just created a lot of uncertainty. And in the context of a 15-year bull market of the dollar where it had sucked enormous amounts of capital inflows into the U.S. economy. You know, investors just felt that maybe it was worth taking a few chips off the table and unwinding a little bit of that dollar risk. And we've seen that play out quite notably over the last month. So, I think it's been, yeah, really that those concerns about growth but also this sort of uncertainty about policy in general in the context of, you know, a big bull run for the dollar; and fairly heavy valuations and positioning. Those have been the main issues, I think.Michael Zezas: Right, so we've got here this dynamic where there are economic fundamental reasons the dollar could keep weakening. But also concerns from investors overseas, whether they're ultimately founded or not, that they just might have less demand for owning U.S. dollar denominated assets because of the U.S. trade dynamic. Now it seems to me, and correct me if I'm wrong, that there was a major market move in the past week around the Taiwanese dollar, which reflected these concerns and created an unusually large move in that currency. Can you explain that dynamic?James Lord:  Yeah, so we've seen really significant moves in the Taiwan dollar. In fact, on May 2nd, the currency saw its largest one-day rally since the 1980s, and over two days gained over 6.5 percent, which for a Taiwan dollar, which is pretty low volatility currency usually, these are really big moves. So in our view, the rally in the Taiwan dollar, and it was remarkably big. We think it's been mostly driven by Taiwanese exporters selling some of their dollar assets with a little bit of foreign equity inflow helping as well. And this is linked back to the sort of trade negotiations as well.I mean, as you know, like one of the things that the U.S. administration has been focused on currency valuations. Historically, many people in the U.S. administration believe the dollar is very strong. And so there has been this sort of issue of currency valuations hanging over the trade negotiations between the U.S. and various Asian countries. And local media in Taiwan have been talking about the possibility that as part of a trade negotiation or trade deal, there could be a currency aspect to that – where the U.S. government would ask the Taiwanese authorities to try to push Taiwan dollar stronger.And you know, I think this sort of media reporting created a little bit of a -- well, not just a little, a significant shift from Taiwanese exporters where they suddenly rush to sell their dollar deposits in to get ahead of any possible effort from the Taiwanese authorities to strengthen their currency. The central bank is being very clear on this.We should have to point this out that the currency has not been part of the trade deal. And yet this hasn't prevented market participants from acting on the perceived risk of it being part of the trade talks. So, you know, Taiwanese exporters own a lot of dollars. Corporates and individuals in Taiwan hold about $275 billion worth of FX deposits and for an $800 billion or so economy, that's pretty sizable. So we think that is that dynamic, which has been the biggest factor in pushing Taiwan dollar stronger.Michael Zezas: Right, so the Taiwan dollar is this interesting case study then in how U.S. public policy choices might be creating the perception of changes in demand for the dollar changes in policy around how foreign governments are supposed to value their currency and investors might be getting ahead of that.Are there any other parts of the world where you're looking at foreign exchange globally, where you see things mispriced in a way relative to some of these expectations that investors need to talk about?James Lord: We do think that the dollar has further to go. I mean, it's on the downside. It's not necessarily linked to expectations that currency agreements will be part of any trade agreement. But, we think the Fed will need to cut rates quite a bit on the back of the slow down in the U.S. economy. Not so much this year. But Mike Gapen and Seth Carpenter, and the U.S. economics team are expecting to see the Fed cut to around 2.5 per cent or so next year. And that's absolutely not priced. And, And so I think as this slowdown – and, this is more of a sort of traditional currency driver compared to some of these other policy issues that we've been talking about. But if the Fed does indeed cut that far, I do think that that's going to put some meaningful pressure on the dollar. And on a sort of interest rate differential perspective, and when we look at what is mispriced and correctly priced, we see the Fed as being mispriced, but the ECB is being quite well priced at the moment.So as that weakening downward pressure comes through on the dollar, it should be reflected on the euro leg. And we see it heading up to 1.2. But just on the trade issue, Mike, what's your view on how those trade negotiations are going? Are we going to get lots of deals being announced soon?Michael Zezas: Yeah, so the news flow here suggests that the U.S. is engaged in multiple negotiations across the globe and are looking to establish agreements relatively quickly, which would at least give us some information about what happens next with regard to the tariffs that are scheduled to increase after that 90 day pause that was announced in earlier in April. We don't know much beyond that.I'd say our expectation is that because the U.S. has enough in common in terms of interests and how it manages its own economy and how most of its trading partners manage their own economies – that there are trade agreements, at least in concept. Perhaps memorandums of understanding that the U.S. can establish with more traditional allies, call it Japan, Europe, for example, that can ultimately put another pause on tariff escalation with those countries.We think it'll be harder with China where there are more fundamental disagreements about how the two countries should interact with each other economically. And while tariffs could come down from these very, very high levels with China, we still see them kind of settling out at still meaningful substantial headline numbers; call it the 50 to 60 per cent range. And while that might enable more trade than we're seeing right now with China because of these 145 per cent tariff levels, it'll still be substantially less than where we started the year where tariff levels were, you know, sub 20 per cent for the most part with China.So, there is a variety of different things happening. I would expect the general dynamic to be – we are going to see more agreements with more counterparties. However, those will mostly result in more pauses and ongoing negotiation, and so the uncertainty will not be completely eliminated. And so, to that point, James, I think I hear you saying that there is potentially a difference between sometimes currencies move based on general policy uncertainty and anxieties created around that.James Lord: Yeah, that's right. I think that's safer ground, I think for us as currency strategists to be anchoring our view to because it’s something that we deal with day in, day out for all economies. The impact of this uncertainty variable. It could be like, I think directionally supports a weaker dollar, but sort of quantifying it, understanding like how much of that is in the price; could it get worse, could it get better? That's something that's a little bit more difficult to sort of anchor the view to. So, at the moment we feel that it's pushing in the same direction as the core view. But the core view, as you say, is based around those growth and monetary policy drivers.So, best practice here is let's keep continuing to anchor to the fundamentals in our investment view, but sort of recognize that there are substantial bands of uncertainty that are driven by U.S. policy choices and by investors' perceptions of what those policy choices could mean.Michael Zezas: So, James conversations like this are extremely helpful to our audience. We'll keep tracking this carefully. And so, I just want to say thank you for taking the time to talk with us today.James Lord: I really enjoyed it. Looking forward to the next one.Michael Zezas: Great. And thank you for listening. If you enjoy the podcast, please leave us a review wherever you listen to the podcast and share Thoughts on the Market with a friend or colleague today.

8 Maj 11min