Europe in the Global AI Race

Hear how the Fed’s announcement of upcoming rate cuts could affect equity markets—particularly 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 me a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 18th at 11 a.m. in New York. So let's get after it. Going into last week, the key question for investors was whether Fed Chair Jay Powell would push back on the significant loosening of financial conditions over the prior six weeks. Not only did he not push back, his message was consistent with the notion that the Fed is likely done hiking and will begin cutting interest rates next year. Markets took the change in guidance as an all clear sign to ramp up risk further. Given that policy rates are well into restrictive territory, the Fed likely doesn't want to wait to shift to more accommodative policy until it's too late to achieve a soft landing. That's a bullish outcome for stocks because it means the odds of a soft landing outcome have gone up even if this dovish shift also increases the risk of inflation reaccelerating. Given the price reaction to the news last week, it appears that markets are of the view that the Fed isn't making a policy mistake by shifting more dovish too soon. For investors looking to capitalize on this shift, it's important to note that markets started to price this dovish tilt back in November, with one of the sharpest declines in interest rates and loosening of financial conditions. As discussed in prior podcast, this accounted for most of the 15% rally in equity valuations over the past six weeks. While Powell's dovish shift has given investors a catalyst to pursue higher valuations, the markets may have moved in advance of last week's dovish transition. We think equity prices will now be more dependent on the effect that this dovish shift has on growth rather than valuations alone. If growth doesn't improve, the rally will run out of steam. If it does improve, there could be further to go in the upside and we would also see a change in market leadership and a broadening of stock performance. On that note, since the lows in October, small cap stocks have done better and breadth has improved. However, when looking at past cycles we find that smallcaps underperform both before and after Fed rate cuts. This speaks to the notion that the Fed typically cuts rates as nominal growth is slowing and small caps tend to be quite economically sensitive. Thus, the introduction of rate cuts may not drive sustainable outperformance for small caps or lower quality stocks by itself. However, if the earlier than anticipated dovish shift in the context of a still healthy economic backdrop can drive a cyclical rebound in nominal growth next year, small caps look compelling over a longer investment horizon. In our view, the probability of this outcome has gone up given last week's Fed meeting, but it's far from a slam dunk after such a strong rally. From here it'll be important to watch relative earnings revisions, high frequency macro data and small business confidence for signs that a more durable period of cap outperformance is coming. For now, relative earnings revisions remain negative for small caps and relative margin estimates have just recently taken another turn lower. Meanwhile, purchasing manager indices remain below the expansion contraction line of fifty and small business confidence remains low in a historical context and is yet to turn convincingly higher. That said, these indicators may now start to turn in a more favorable manner given last week's events. The bottom line, small caps and lower quality stocks have rallied sharply with the S&P 500 since October. We believe most of this outperformance is due to short covering and the seasonal tendency for the year's laggards to do better into the end of the year in January. For this trend to continue beyond that, we will need to see nominal GDP reaccelerate and for inflation to stabilize at current levels rather than fall further toward the Fed's target of 2%. While this may seem counterintuitive, we remind listeners that the average stock does better when inflation is rising, not falling and that may be what the market is now anticipating. 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.

18 Dec 20233min

Join our first quarterly roundtable where Morgan Stanley’s chief economists discuss the outlook for the U.S., Europe, China, and Japan.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. On this special episode of the podcast, we're going to hold a roundtable discussion focusing on Morgan Stanley's global economic outlook for 2024. It's Friday, December 15th at 4 p.m. in London. Ellen Zentner: 11 a.m. in New York. Jens Eisenschmidt: 5 p.m. in Frankfurt. Chetan Ahya: And midnight in Hong Kong. Seth Carpenter: So today I am joined by the leaders of the economics teams in key regions for a roundtable discussion that we're going to start to share each quarter. I'm with Ellen Zentner, our Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe economist. I want to talk with you three about the outlook for the global economy in 2024. Clearly, we're going to need to hit on growth, inflation, and we'll talk about how the various central banks are likely to respond. Let's start with the U.S., Ellen, how do you see the U.S. economy faring next year? What's just like the broad contours of that forecast? Ellen Zentner: Sure. Well, you know, the soft landing call that we've had since early 2022, we're rolling forward into a third year. I think what's important is why do we expect to finally get the slowing in the economy? We think that the fiscal impulse, which has been positive and made the Fed's job harder, is finally overcome by monetary policy lags that overcome and become more of a strain on the economy. We've got a slowing consumer. That's basically because labor demand is slowing and labor income is slowing. But again I think the whole view, the outlook is that the economy is slowing but not falling off a cliff. That's going to lead deflation in core goods to continue and disinflation in services so that inflation is coming down. So the Fed, after having remained on hold for quite some time, we think will start to cut in June of next year and ultimately deliver four rate cuts through the course of the year. And then another 200 basis points as we move through 2025. Jens Eisenschmidt: Yeah, if I can jump in here with a view from Europe. So it's striking how similar and at the same time different the views are here, in the sense that the starting point for Europe is much weaker growth. Yet we also get a big disinflation on the way we see actually euro area inflation ending at the ECBs target, or reaching the ECB target at the fourth quarter of 2024. Now for growth, we do have, as I said, a weak patch we are in. It's actually a technical recession with two negative quarters, Q3 and Q4 and 23. And then we are actually accelerating from there, but not an awful lot. So because we see potential growth very low, but consumption actually is picking up. So that's essentially the opposite in some sense, the flip side, but still very weak growth overall. Seth Carpenter: Okay, Jens. So against that backdrop of your outlook for Europe, what does that mean for the ECB? And in particular, it sort of looks like if the Fed's cutting in June, does the ECB have to wait until the Fed cuts or can it go before the Fed? How are you thinking about policy in Europe? Jens Eisenschmidt: No, I think that's a great question also, because we get that a lot from clients and we get a lot this sort of based on past regularities observation that the ECB will never cut before the Fed. And technically speaking, we have actually now forecast the ECB cutting before the Fed just one week. So they cut in June as well. And I think the issue here is really hardwired in the way we see the disinflation process and the information arriving at the doorstep of the ECB. They are really monitoring wages and are really worried about the wage developments. So they really want to have clarity about Q1 in particular wages, Q1 24. This clarity will only arrive late May, early June. And so June really for them is the first opportunity to cut in the face of weak inflation data. Seth Carpenter: Thanks, Jens. That makes a lot of sense. So if I'm reading you right, though, part of the weakness in Europe, especially in Germany, comes from the weakness in China, which is a target for exports from Germany. So let's turn to you, Chetan. What is the baseline outlook for China? It's been a little bit disappointing. How do you see China evolving in 2024? Chetan Ahya: Well, in our base case, we expect China's GDP growth to improve marginally from an underlying base of 4% in 2023 to 4.2% in 2024, as the effects from coordinated monetary and fiscal easing kicks in. However, a part of the reason why we see only a modest improvement is because the economy is constrained by the three D challenges of high levels of debt, weakening demographics and deflationary pressures. And within that, what will influence the near-term outlook the most is how policymakers will address the deflation challenge. Jens Eisenschmidt: Chetan, I get a lot of clients, though, questioning the outlook for China and thinking that this is quite optimistic. So what is the downside case for China that you have in your forecast? Chetan Ahya: Well in the downside case, we think the risk is China falls into that deflation loop. To recall, in our base case, we expect policymakers to stimulate domestic demand with coordinated monetary and fiscal easing. But if that does not materialize, deflationary pressures will persist, nominal GDP growth and corporate revenue growth will decelerate, Corporate profits will decline, forcing them to cut wage growth. This, against the backdrop of declining property prices, will mean consumers will turn risk averse, leading to the formation of a negative feedback loop. In this scenario, we could see real GDP growth at 2.7% and nominal GDP growth at just about 1%. Seth Carpenter: Wow. That would be a pretty bleak outcome in the downside scenario, Chetan. Maybe if we shift a little bit because we have a pretty compelling story for Japan that there's been a positive structural shift there. Why don't you walk us through the outlook for Japan for next year? Chetan Ahya: Well, we think Japan is entering a new era of higher nominal GDP growth. We expect Japan's nominal GDP growth to be at 3.8% in 2024, compared with the relatively flat trend for decades. The most important driver to this is policymakers concerted effort to deflate the economy with coordinated monetary and fiscal easing. We think Japan has decisively exited deflation, and its underlying inflation should be supported by sustained wage growth. Indeed, we are getting early signals that the wage increase in 2024 could be higher than the 2.1% that we saw in the 2023 spring wage negotiations. Seth Carpenter: Super helpful, Chetan. And it reminds me that a baseline forecast is critical, but thinking about the ways in which we can be wrong is just as important for markets as they think through where things are going to go. So, Ellen, let me turn to you. If we are going to be wrong about our Fed call, what's likely to drive that forecast error and which direction would it most likely be? Ellen Zentner: It's a great question because oftentimes you can get the narrative on the economy right, you can even get the numbers right sometimes, but you can get the Fed reaction function wrong. And so I think what we'll be looking for here is how well Chair Powell sends the message that you can cut rates in line with falling inflation and keep the policy stance just as restrictive. And if that's something that he really gives a full throated view around, then it could lead them to cutting in March, one quarter earlier than we've expected, because inflation has been coming down faster than expected. Jens Eisenschmidt: If I may chime in here for the ECB, I think we have essentially pretty high conviction that this will be June. And that has to do with what I explained before, that there is essentially a cascading of information and for the ECB, the biggest upside risk to inflation is wages. And they really want to have clarity on that. So it would take a much larger fall in inflation that we observe until, say, March for them to really move before June and we think June is it. But of course the latest is inflation that we are getting that was sort of a little bit more than was expected might have or is a risk actually to our 25 basis point cut calls. So it could well be a 50. In particular if we see more of these big prints. Seth Carpenter: Ellen, Chetan, Jens, thanks so much for joining and for everyone listening. Thank you 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 a colleague today.

16 Dec 20238min

The U.N. Climate Change Conference, COP28, delivered positive news around technology, clean energy and methane emissions. But investors should be wary about slower progress in other areas.----- Transcript -----Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss some takeaways from the recent UN Climate Change Conference. It's Thursday, December 14th at 10 a.m. in New York. Achieving net zero emissions is a top priority as the world moves into a new phase of climate urgency. Decarbonization, or energy transition, is one of the three big themes Morgan Stanley research has followed closely throughout this year. As we approach the end of 2023. I wanted to give you an update on the space, especially as the U.N. Climate Change Conference or COP 28 just concluded in Dubai. First, there have been multiple announcements from the conference around the issue of decarbonizing the energy sector, which accounts for about three-quarters of total greenhouse gas emissions. The first was a surprisingly broad effort to curb methane gas emissions. Fifty oil and gas producers, accounting for 40% of global oil production, signed an agreement to cut methane emissions to 0.2% by 2030 and to reduce carbon emissions to net zero by 2050. Methane accounts for 45 to 50% of oil and gas emissions, and the energy sector is responsible for about 40% of human activity methane globally. Important to note, this agreement will be monitored for compliance by three entities, the U.N. International Methane Emissions Observatory, the Environmental Defense Fund, and the International Energy Agency. Second, 118 countries reached an agreement to commit to tripling renewable energy and doubling energy efficiency by 2030, an action that boosts the global effort to reduce the usage of fossil fuels. A smaller group of countries also agreed to triple nuclear power capacity by 2050. And third, several governments have reached an agreement on the Loss and Damage Startup Fund, designed to provide developing nations with the necessary resources to respond to climate disasters. The fund is especially important because it could alleviate the debt burden of countries that are under-resourced and overexposed to climate events and to improve their climate resiliency. So what do all of these developments mean for the energy transition theme? Overall, our outlook is mixed, and at a global level, we do see challenges on the way to achieving a range of emissions reductions goals. On the positive side, we see many data points indicating advances in energy transition technology and a more rapid scaling up of clean energy deployment. We are also encouraged to see a major focus on reducing methane emissions and a small but potentially growing focus on providing financial support for regions most exposed to climate change risks. On the negative side, however, we see multiple signs that fossil fuel demand is not likely to decline as rapidly as needed to reach a variety of emissions reduction goals. We see persistent challenges across the board, for instance, in raising capital to finance energy transition efforts, especially in emerging markets. This is in part driven by greater weather extremes stressing power grids, as well as a broad geopolitical focus favoring energy security. An example of this dynamic is India. Not only does India depend on coal for over 70% of its national power generation, but it intends to bolster further its coal power generation capacity despite the global efforts to move towards renewable energy, and this is really driven by a focus on energy security. 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.

14 Dec 20233min

Investors are concerned about the potential impact of the upcoming U.S. presidential election in a number of sectors. Here’s what to watch.----- Transcript -----Welcome to the Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research from Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impact of the U.S. elections on markets. It's Wednesday, December 13th at 10 a.m. in New York. Following our publication last week of our early look for investors at the U.S. election, we've had plenty of discussion with clients trying to sort out what the event might mean for markets. Here's the three most frequently asked questions we've received and of course, our answers. First, could the election be a catalyst to undo planned investment into the clean energy industry? This question often gets asked as, under what conditions could the Inflation Reduction Act be repealed? That Act allocated substantial sums to investment in clean energy alternatives, a boon for the industry. In our view, we don't see that act being repealed, even if Republicans who oppose the act take control of both Congress and the White House. We think there's too many negative local economic consequences to undoing that investment, to get a sufficient number of Republicans to vote for the repeal. However, clean energy investors should note that a Republican administration might be able to slow the spend of that money using the regulatory process. Second, should healthcare investors be concerned that there's an election outcome that could substantially change the U.S. healthcare system? This was a concern in prior elections where Republicans promised to repeal the Affordable Care Act, an outcome current President Trump has recommitted to in his current campaign. Republicans couldn't make good on that promise, despite unified government control in 2017 and 2018. And here we think history would repeat itself with even a Republican majority having difficulty finding sufficient votes if it means restricting health care delivery to some of their voters. That said, investors in sectors that would be negatively impacted by a repeal of the Affordable Care Act could see market effects if Republicans start surging in the polls, as markets would then have to account for the possibility, albeit modest, of repeal. Finally, when might political campaigns begin impacting markets? We don't have a clear answer here. In 2016 and 2020, health care stocks started reflecting campaign statements early in the year. Whereas macro market effects, such as the sensitivity of the Mexican peso to then candidate Trump's comments around renegotiating trade agreements, didn't kick in until much closer to November. The bottom line is that we don't really know, which is why we're here to help you prepare now. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

13 Dec 20232min

China continues to face the triple challenge of debt, deflation and demographics. But are investors missing an opportunity in China equities? ----- Transcript -----Laura Wang:] Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. Robin Xing: And I'm Robin Xing, Morgan Stanley's Chief China Economist. Laura Wang: On this special episode of the podcast, we'll discuss our 2024 outlook for China's economy and equity market and what investors should focus on next year. It's Tuesday, December 12th, 9 a.m. in Hong Kong. Laura Wang: Robin, China's post reopening recovery has been lackluster in 2023, disappointing expectations. We've seen significant challenges in housing and local government financing vehicles, which are pressuring the Chinese economy to the verge of a debt deflation loop. Can you explain some of these current dynamics? Robin Xing: China is in this difficult battle against the it's 3D problems, namely debt, deflation and demographics. China has stepped up reflationary measures since the July Politburo meeting, including immediate budgetary expansion, kick start of local government debt resolution and easing on the housing sector. Growth also bottomed out from its second quarter trough. That said, the reflationary journey remains gradual and bumpy. In particular, the downturn in the housing sector and its spillover to local government are still lingering. And it might take some time until it converges to a new steady state. Against this backdrop, we expect China to continue to roll out stronger and more coordinated fiscal, monetary and housing easing policies. Laura Wang: What measures does China need to undertake to avoid a debt deflation loop? Robin Xing: Well, there is no easy way out. We think China needs a systematic macro solution, including both cyclical stimulus and structural reforms, to decisively fend off a debt deflation loop. In particular, we proposed a 5R action plan. Reflation, Rebalance, Restructuring, Reform and Rekindle. So that includes reflecting the economy with policy stimulus to support aggregate demand. Rebalancing the economy towards consumption with structural initiatives such as fiscal transfer to the households. Restructuring balance sheets of troubled sectors, including property and financing league of Local Government. Reforming the SOE's of the public sector and rekindle the private sectors animal spirit. So far, Beijing has only completed 25% of the 5R strategy, led by some stimulus in reflation sector and also restructuring its local debt. We expect the progress to reach 50% by end 2024, and China could lead to this debt deflation loop in about two years after 2025. Laura Wang: Debt and deflation are 2 of the 3D's in what you call China's 3D journey. Demographics is the third challenge on this list. Why are demographics an economic headwind and how is China handling this challenge now? Robin Xing: Well, Laura, there is a little dispute on China's aging population. This will diminish capital returns and drag growth. So in our long term growth forecast, labor quantity will lower overall GDP growth by 40 basis points every year between 2025 to 2030. Though the declining labor quantity is unlikely to be reversed, Beijing would make more efforts in better utilizing higher labor quality, which has been increasing steadily. On that front, Beijing could step up reviving private sector confidence, which will bring more jobs and translate to labor with higher education into stronger output. Detailed measures could include, they start to issue the financial license to FinTech and resumption of offshore IPO by firms with sensitive data. That could send a clearer message to the end of regulatory reset since 2021. Laura Wang: With all these macro backdrops, what are your expectations for GDP growth in 2024 and 2025, and what are some of the biggest economic challenges facing China over this forecast horizon? Robin Xing: Well, we expect a modest growth recovery next year. Real GDP growth could edge up mildly from 4% two year kegger in 2023 to a slightly better 4.2% in 24. And the GDP deflator, which is a broader defined inflation indicator, it could rebound from a -.8% in this year, to .6% in 2024. But this is still way below a 2 to 3%, the level of inflation. So China will continue to grow and reflate at a subpar rate next year. The biggest challenge here is stabilizing the aggregate demand amid continued housing and the local government deleveraging. That requires more debt initially, particularly by the central government, to cushion this downturn. We expect a 1.5% point widening in China's government deficit next year. Led by a rising official budget and some increase in local special purpose bond. Monetary policy will likely remain accommodative as well. We expect a 25 basis point cut and the cumulatively another 20 basis points interest rate cuts in 2024. Now, Laura, turning it over to you. Over the past the year, the debate on investing in China has shifted profoundly towards long term structural challenges, we just discussed. And you have argued that this would continue into 2024. So what is your outlook for Chinese equities within the global EM framework over the next year? Laura Wang: We see a largely range bound market at best in our base case for China equity market at the index level. For example, our price target for MSCI China by end of 2024 is 60, suggesting very limited upside from its current level. Such upside puts China very much on par with what we expect from the broader emerging market index, MSCI EM. Therefore, we retain our equal weight rating on China within our EM API allocation framework. There will still be quite strong headwinds on corporate earnings as we go through the earnings results season for the rest of the year and then into the first quarter of 2024. This could lead to continuous downward revisions of consensus estimates. For example, we Morgan Stanley expect 9% earnings growth for MSCI China in 2024 compared to consensus at 16%, which we think is overly positive. Such downward revisions could also cap the valuation rerating opportunities. Robin Xing: Given this backdrop, Laura, how should investors be positioned in 2024 in terms of Chinese equities? Laura Wang: The Asia market, if we use CSI 300 as a proxy, has been outperforming the offshore MSCI China index for five years in a row. We expect this trend to continue at least in the next 3 to 6 months, given that the top down easing policies are starting to pivot to further support economic growth. And Robin, you are still expecting some easing on the monetary side with PSI rate cuts and the triple R cuts. Those usually tend to have a bigger impact on the Asia market than on the offshore space. Plus, I think we're also expecting some further currency weakness in the first half of next year and A-shares tend to be more resilient in such a scenario. Robin Xing: Finally, Laura, what is the market missing right now when it comes to Chinese equities? Laura Wang: As investors are still debating over the beta opportunities being largely absent for the past couple of years. We think some investors may easily come to the conclusion that there are not good investment opportunities in China anymore. We disagree with that. There are still plenty of alpha generating opportunities and particularly high quality names in the growth categories who can offer a strong earnings and ROE track record, good management teams and limited reliance on foreign technology input or on domestic government policy support. We believe those names can offer strong downside protection and help minimize your portfolio's volatility, while also offer the upside from their respective growing sectors when the market turns around. We have put together selected names that we believe meeting these criteria, and we call them the China best business model. Laura Wang: Robin, thanks a lot for taking the time to talk. Robin Xing: Great speaking with you, Laura. Laura Wang: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

12 Dec 20238min

Here’s how upcoming inflation data and this week’s Federal Open Market Committee meeting could affect the U.S. bond and equity markets. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 11th at 11am in New York. So let's get after it. Last week we discussed the increasing importance of interest rates in terms of dictating equity prices over the past six months. First, the sharp move higher in rates between July and October weighed heavily on stocks with the Russell 2000 selling up by 20% and the S&P 500 by 10%. Over the following six weeks, the opposite occurred as ten year yields fell by 90 basis points due to a perceived dovish pivot by the Fed and less longer dated bond issuance guidance from the Treasury. This move, lowering yields, helped the S&P 500 regain all of its losses from the prior three months, while several other indices, including the Russell 2000, clawed back 50% or more of their prior losses. This week, we remain focused on the bond market, which may be due for some consolidation after seeing such strong gains and that could weigh on equities in the near term. Friday's job data was important in this regard, with the stronger than expected release taking ten year U.S. Treasury yields higher by a modest 8 basis points. Though 135 basis points of Fed cuts that were priced into the bond market a week ago were now reduced to 110 basis points as of Friday's close. This reaction makes sense to us and there may be more to go in the near-term if inflation data released this week comes in a little hotter than consensus expects. Finally, the Fed is also meeting this week and will have taken notice of the data as well. With the unemployment rate falling by almost 2/10 in November, and inflation data potentially remaining bumpy over the next 3 to 6 months, the Fed may push back on the bond markets' more aggressive interest rate cuts. Given the severe underperformance of small caps this year, clients are more interested to know if the introduction of Fed rate cuts could reverse it. To address this question, we took a more in-depth look at small cap value and growth relative performance around prior Fed rate cuts. Interestingly, small cap value and growth underperformed large cap value and growth in the months before and after the Fed's first rate cut. Large cap growth is historically the best performing category following the first rate cut, and it also tends to see strong performance before the cut. We think these data reflect the notion that growth is typically slowing. When the Fed initially pivots to more accommodative policy. Given small caps greater sensitivity to economic activity, they tend to underperform in this context. Therefore, the more important determinant of small cap relative outperformance from here will be the rate of change on economic and earnings growth. Given our less optimistic growth outlook, we stick with a large cap defensive growth bias for one's portfolio. In addition to the recent fall in interest rates, the liquidity picture has also been a key driver of elevated equity valuations, in our view. More specifically, the draining of the reverse repo facility has continued to help fund the Treasuries elevated amount of issuance over the past six months. That issuance provided the financing for the fiscal deficit, which has been a key factor in stronger than expected GDP growth this year, especially in the third quarter. With over $800 billion remaining in a reverse repo facility, that balance should be drained towards zero next year and continue to play a supportive role both through Treasury funding and asset prices. Finally, our work suggests the Producer Price Index is a very good leading indicator for sales growth. Recent softness in the Producer Price Index does not yet point to a positive inflection in revenue growth. As a result we'll be closely watching this week's Producer Price Index release for signs that pricing trends are either stabilizing or decelerating further. Interestingly, small business surveys indicate that corporates intend to raise prices in 2024, a strategy that looks unlikely in our view. Our work leveraging company transcripts indicate that mentions of pricing power and related terms have been concentrated in hotels, restaurants, leisure, commercial services and supplies, household durables, specialty retailers and software over the last 90 days. And this is another area to watch closely for confirmation of inflation trends. 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.

11 Dec 20234min

Will the U.S. dollar weaken further as the economy slows? What will its value be compared to the Euro by spring 2024? Our analyst tackles those key currency questions and more.----- Transcript -----Welcome to Thoughts on the Market. I'm Dave Adams, Head of G10 FX Strategy at Morgan Stanley. And today I'll be talking about our views on the US dollar. It's Friday, December 8th at 3 p.m. in London. The US dollar has fallen about 4% since it peaked in October and has retraced about half of its gains since July. We think this correction should be faded and we're affirming our call for Euro/Dollar to fall back to parity by the spring of next year, meaning the US dollar will rise a further 8% versus the Euro. This is a controversial and out of consensus call, but we think the market is still underpricing weakness in Europe and strength in the U.S., and a continued widening in growth and rate differentials should weigh on the pair. A lot of investors claim that the US dollar should weaken further as the US economy slows from its growth rate this summer. We agree US growth is likely to slow, but by far less than investors think. Our US economics team thinks the US growth will be about 1% stronger than consensus estimates, with the biggest gap for data leading into the second quarter of next year. This is a dollar-positive outcome. We also hear from investors a lot that weakness in Europe is fully priced, but we respectfully disagree. Sure, there's a lot of cuts priced in for the European Central Bank, but not as much as there should be once the ECB more formally acknowledges that cuts are coming.The real risk here is that markets begin to price in ECB rate cuts below the long-run estimate of the neutral rate of 2%, and in a world where the ECB is cutting, this is a real possibility. A fast and deep cutting cycle in Europe would sharply contrast with the Fed, whose rhetoric continues to emphasize higher for longer, a view amplified by strong domestic growth. Divergence in economic data between Europe and the US should keep the euro falling versus the greenback. Now, I'm the first to admit that an 8% move in a few months time is a pretty big move and moves that large don't happen that often. If we look at options pricing, the market is pricing in an even lower risk of such a move compared to historical frequencies. And it's worth remembering that large moves do happen. Eurodollar fell 10% in a four month window two different times last year. So while this call may be bold and buck consensus, we think the fundamental story still holds. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

8 Dec 20232min

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

7 Dec 20234min