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Thoughts on the Market

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Morgan Stanley

Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

#1294

Potential Economic Consequences of Trump’s Executive Orders

On his first day in office, President Trump issued a series of executive orders, signaling his intent to deliver on campaign promises. Our Global Head of Fixed Income and Public Strategy Michael Zezas takes a closer look at economic impacts of Trump’s proposed policy path. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head of Fixed Income and Public Policy Strategy. On this episode of the podcast, we’ll discuss how trade policy uncertainty is creating volatility in markets. It’s Wednesday, January 22nd, at 10am in New York. Earlier this week, Donald Trump was again inaugurated as President of the United States. In the days that have followed, we’ve fielded tons of questions from investors, who are trying to parse the meaning of myriad executive orders and answers to press questions – looking through that noise for signals about the if, when, and how of policy changes around tariffs, taxes, and more.This effort is understandable because – as we’ve discussed here many times – the US public policy path will have substantial effects on the outlook for the global economy and markets. And while we’ve spent some time here explaining our assumptions for the US policy path, it's important for investors to understand this. Even if you correctly forecast the timing and severity of changes to trade, tax, immigration, and other policies, you shouldn’t expect markets to consistently track this path along the way. That’s because there’s bound to be a fair amount of confusion among investors, as President Trump and his political allies publicly speculate on their policy tactics and make a wide variety of outcomes seem plausible. Take tariff policy for example. On Monday, the President announced an America First Trade Policy, where the whole of government was instructed to come up with policy solutions to reduce goods trade deficits and related economic and national security concerns. Tariffs were cited as a tool to be used in furtherance of these goals, and instructions were given to develop authorities on a range of regional and product-specific tariff options. Said more simply, while new tariffs were not immediately implemented, the President appears to be maximizing his optionality to levy tariffs when and how he wants. That will mean that all public comments about tariffs and deadlines, including Trump’s comments to reporters on tariffs for Mexico, Canada, and China, must be taken seriously – even if they don’t ultimately come to fruition, which currently we don’t think they will for Mexico and Canada. For markets, that max optionality can drive all sorts of short term outcomes. In the US Treasury market, for example, our economists believe these tariffs and a variety of other factors ultimately make for slower economic growth in 2026; and so we expect Treasury yields will ultimately end the year lower. But along the way they could certainly move higher first. As my colleague Matt Hornbach points out, tariff threats can drive investor concerns about temporary inflation leading markets to price in a slower pace of Fed interest rate cuts, which helps push short maturity yields higher. So bottom line: investors should be carefully considering US public policy choices when thinking about the medium term direction of markets. But they should also expect considerable volatility along the way, because the short term path can look a lot different from the ultimate destination. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. ... Read more

6 hrs Ago

03 MINS

03:21

6 hrs Ago

#1293

Asia Outlook 2025: Three Critical Themes

Our Chief Asia Economist Chetan Ahya discusses how tariffs, the power of the U.S. dollar, and the strength of domestic demand will determine Asia’s economic growth in 2025. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today on the podcast: three critical themes that will shape Asia’s economy in 2025. It’s Tuesday, January 21, at 2 PM in Hong Kong. Let's start with the big picture: We foresee Asia's growth decelerating from 4.5 per cent last year to 4.1 per cent in 2025. The whole region faces a number of challenges and opportunities that could sway these numbers significantly. We highlight [the] following three key factors. First up,tariffs. They are our single biggest concern this year. The pace, scale and affected geographies will determine the magnitude of the growth drag. In our base case, within Asia, we expect tariffs to be imposed on China in a phased manner from the first half of 2025. As Mike Zezas, our Head of US Public Policy states, this will be about fast announcements and slow implementation. Given tariffs and trade tensions are not new, we think this means corporate confidence may not be as badly affected as it was in 2018-19. But the key risk is if trade tensions escalate. For instance, into more aggressive bilateral disputes outside of US-China or if [the] US imposes universal tariffs on all imports. Asia will be most affected, considering that seven out of [the] top ten economies that run large trade surpluses with the US are in Asia. If either of these risk scenarios materialize, it could bring a repeat of [the] 2018-19 growth shock. Next, let's consider the Fed and the US dollar. Asian central banks find themselves in a bind with the US Federal Reserve's hawkish shift – which we think will result in only two rate cuts in 2025. The Fed is taking a cautious approach, driven by worries over inflation concerns, which could be exacerbated by changes in trade and fiscal policy. This has led to strength in the US dollar and on the flipside, weakness in Asian currencies. This constrains Asian central banks from making aggressive rate reductions -- even though Asia’s inflation is in a range that central banks are comfortable with. Finally, with [the] external environment not likely to be supportive, domestic demand within key Asian economies will be an important anchor to [the[ region's growth outlook. We are constructive on the outlook for India and Japan but cautious on China. China has a deflation challenge, driven by excessive investment and excess capacity. Solving it requires policy makers to rely more on consumption as a means to meet its 5 per cent growth target. While some measures have been implemented and we think more are coming, we remain skeptical that these measures will be enough for China to lift consumption growth meaningfully. We see investmentremaining the key growth driver and the implementation of tariffs will only exacerbate the ongoingdeflationary pressures. In India and Japan, we think domestic demand tailwinds will be able to offset external headwinds. We expect a robust recovery in India fueled by government capital expenditure, monetary easing and acceleration in services exports. This should put GDP growth back on a 6.5 per cent trajectory. In Japan we expect real wage and consumption growth reacceleration, which will lead [the] Bank of Japan to be confident in the inflation outlook such that it hikes policy rates twice in 2025. This week marks the start of the new Trump administration. And together with my colleagues, we are watching closely and will continue to bring you updates on the impact of new policies on Asia. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. ... Read more

Yesterday

04 MINS

04:16

Yesterday

#1292

The Surge in Bond Yields Likely Doesn’t Present Risk – Yet

Government bond yields in the U.S. and Europe have risen sharply. Our Head of Corporate Credit Research Andrew Sheets explains why this surprising trend is not yet cause for concern. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. With bond yields rising substantially over the last month, I’m going to discuss why we’ve been somewhat more relaxed about this development and what could change our mind. It's Friday January 17th at 2pm in London. We thought credit would have a good first half of this year as growth held up, inflation came down, and the Federal Reserve, the European Central Bank and the Bank of England all cut rates. That mix looked appealing, even if corporate activity increased and the range of longer-term economic outcomes widened with a new U.S. administration. We forecast spreads across regions to stay near cycle tights through the first half of this year, before a modest softening in the second half. Since publishing that outlook in November of last year, some of it still feels very much intact. Growth – especially in the U.S. – has been good. Core inflation in the U.S. and in Europe has continued to moderate. And the Federal Reserve and the European Central Bank did lower interest rates back in December. But the move in government bond yields in the U.S. and Europe has been a surprise. They've risen sharply, meaning higher borrowing cost for governments, mortgages and companies. How much does our story change if yields are going to be higher for longer, and if the Fed is going to reduce interest rates less? One way to address this debate, which we’re mindful is currently dominating financial market headlines, is what world do these new bond yields describe? Focusing on the U.S., we see the following pattern. There’s been strong U.S. data, with Morgan Stanley tracking the U.S. economy to have grown to about 2.5 per cent in the fourth quarter of last year. Rates are rising, and they are rising faster than the expected inflation – a development that usually suggests more optimism on growth. We’re seeing a larger rise in long-term interest rates relative to shorter-term interest rates, which often suggests more confidencethat the economy will stay stronger for longer. And we’ve seen expectations of fewer cuts from the Federal Reserve; but, and importantly, still expectations that they are more likely to cut rather than hike rates over the next 12 months. Putting all of that together, we think it’s a pattern consistent with a bond market that thinks the U.S. economy is strong and will remain somewhat stronger for longer, with that strength justifying less Fed help. That interpretation could be wrong, of course; but if it's right, it seems – in our view – fine for credit. What about the affordability of borrowing for companies at higher yields? Again, we’re somewhat more sanguine. While yields have risen a lot recently, they are stillsimilar to their 24 month average, which has given corporate bond issuers a lot of time to adjust. And U.S. and European companies are also carrying historically high amounts of cash on their balance sheet, improving their resilience. Finally, we think that higher yields could actually improve the supply-demand balance in corporate bond markets, as the roughly 5.5 per cent yield today on U.S. Investment Grade credit attracts buyers, while simultaneously making bond issuers a little bit more hesitant to borrow any more than they have to. We now prefer the longer-term part of the Investment Grade market, which we think could benefit most from these dynamics. If interest rates are going to stay higher for longer, it isn’t a great story for everyone. We think some of the lowest-rated parts of the credit market, for example, CCC-rated issuers, are more vulnerable; and my colleagues in the U.S. continue to hold a cautious view on that segment from their year-ahead outlook. But overall, for corporate credit, we think that higher yields are manageable; and some relief this week on the back of better U.S. inflation data is a further support. 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. ... Read more

17 Jan 2025

04 MINS

04:06

17 Jan 2025

#1291

Should Drop in Fed Reserves Concern Investors?

The Federal Reserve’s shrinking balance sheet could have far-reaching implications for the banking sector, money markets and monetary policy. Global Head of Macro Strategy Matthew Hornbach and Martin Tobias from the U.S. Interest Rate Strategy Team discuss. ----- Transcript ----- Matthew Hornbach:Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. Martin Tobias:And I'm Martin Tobias from the U.S. Interest Rate Strategy Team. Matthew Hornbach:Today, we're going to talk about the widespread concerns around the dip in reserve levels at the Fed and what it means for banking, money markets, and beyond. It's Thursday, January 16th at 10am in New York. The Fed has been shrinking its balance sheet since June 2022, when it embarked on quantitative tightening in order to combat inflation. Reserves held at the Fed recently dipped below [$]3 trillion at year end, their lowest level since 2020. This has raised a lot of questions among investors, and we want to address some of them. Marty, you've been following these developments closely, so let's start with the basics. What are Fed reserves and why are they important? Martin Tobias:Reserves are one of the key line items on the liability side of the Fed balance sheet. Like any balance sheet, even your household budget, you have liabilities, which are debts and financial obligations, and you have assets. For the Fed, its assets primarily consist of U.S. Treasury notes and bonds, and then you have liabilities like U.S. currency in circulation and bank reserves held at the Fed. These reserves consist of electronic deposits that commercial banks, savings and loan institutions, and credit unions hold at Federal Reserve banks. And these depository institutions earn interest from the Fed on these reserve balances. There are other Fed balance sheet liabilities like the Treasury General Account and the Overnight Reversed Repo Facility. But, to save us from some complexity, I won't go into those right now. Bottom line, these three liabilities are inversely linked to one another, and thus cannot be viewed in isolation. Having said that, the reason this is important is because central bank reserves are the most liquid and ultimate form of money. They underpin nearly all other forms of money, such as the deposits individuals or businesses hold at commercial banks. In simplest terms, those reserves are a sort of security blanket. Matthew Hornbach:Okay, so what led to this most recent dip in reserves? Martin Tobias:Well, that's the good news. We think the recent dip in reserves below [$] 3 trillion was simply related to temporary dynamics in funding markets at the end of the year, as opposed to a permanent drain of cash from the banking system. Matthew Hornbach:This kind of reduction in reserves has far reaching implications on several different levels. The banking sector, money markets, and monetary policy. So, let's take them one at a time. How does it affect the banking sector? Martin Tobias:So individual banks maintain different levels of reserves to fit their specific business models; while differences in reserve management also appear across large compared to small banks. As macro strategists, we monitor reserve balances in the aggregate and have identified a few different regimes based on the supply of liquidity. While reserves did fall below [$]3 trillion at the end of the year, we note the Fed Standing Repo Facility, which is an instrument that offers on demand access to liquidity for banks at a fixed cost, did not receive any usage. We interpret this to mean, even though reserves temporarily dipped below [$]3 trillion, it is a level that is still above scarcity in the aggregate. Matthew Hornbach:How about potential stability and liquidity of money markets? Martin Tobias:Occasional signs of volatility in money market rates over the past year have been clear signs that liquidity is transitioning from a super abundancy closer to an ample amount. The fact that there has become more volatility in money market rates – but being limited to identifiable dates – is really indicative of normal market functioning where liquidity is being redistributed from those who have it in excess to those in need of it. Year- end was just the latest example of there being some more volatility in money market rates. But as has been the case over the past year, these temporary upward pressures quickly normalized as liquidity in funding markets still remains abundant. In fact, reserves rose by [$] 440 billion to [$] 3.3 trillion in the week ended January 8th. Matthew Hornbach:Would this reduction in reserves that occurred over the end of the year influence the Fed's future monetary policy decisions? Martin Tobias:Right. As you alluded to earlier, the Fed has been passively reducing the size of its balance sheet to complement its actions with its primary monetary policy tool, the Fed Funds Rate. And I think our listeners are all familiar with the Fed Funds Rate because in simplest terms it's the rate that banks charge each other when lending money overnight, and that in turn influences the interest you pay on your loans and credit cards. Now the goal of the Fed's quantitative tightening program is to bring the balance sheet to the smallest size consistent with efficient money market functioning. So, we think the Fed is closely watching when declines in reserves occur and the sensitivity of changes in money market rates to those declines. Our house baseline view remains at quantitative tightening ends late in the first quarter of 2025. Matthew Hornbach:So, bottom line, for people who invest in money market funds, what's the takeaway? Martin Tobias:The bottom line is money markets continue to operate normally, and even though the Fed has lowered its policy rates, the yields on money markets do remain attractive for many types of retail and institutional investors. Matthew Hornbach:Well, Marty, thanks for taking the time to talk. Martin Tobias:Great speaking with you, Matt. Matthew Hornbach:And thanks for listening. If you enjoy Thoughts on the Market, [00:06:00] please leave us a review wherever you listen and share the podcast with a friend or colleague today. ... Read more

16 Jan 2025

06 MINS

06:26

16 Jan 2025

#1290

Four Key Investment Themes for 2025

Our Global Head of Fixed Income & Public Policy Research Michael Zezas discusses how Morgan Stanley’s key themes – deglobalization, longevity, the future of energy, and artificial intelligence – will evolve in 2025 and beyond. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Public Policy Research. Today I’ll discuss the key investment megatrends Morgan Stanley Research will be following closely in 2025. It’s Wednesday, January 15th, at 10am in New York. Short-term trends can offer investors valuable insights into immediate market dynamics. But it’s the long-term trends that truly shape the investment landscape. That’s why each year, Morgan Stanley Research identifies a short list of megatrends that we believe will provide long-term investment opportunities in an ever-changing world. Three of Morgan Stanley’s megatrends—artificial intelligence, longevity, and the future of energy—carry over from last year. A fourth—the rewiring of the global economy—returns to our list after a hiatus in 2024. While none of these megatrends is new, each has evolved in terms of how it applies to investment strategies. Let’s start with the rewiring of global commerce for a Multipolar World. As I mentioned, this theme rejoins our list of key megatrends after a year-long break. Why? In short, it’s clear that policymakers globally are poised to implement policies that will speed up the breakdown of the post-Cold War globalization trend. Simply put, policymakers are keen to promote their visions of national and economic security through less open commerce and more local control of supply chains and key technologies. Multinationals and sovereigns may have to accelerate their adaptation to this reality. Some will face tougher choices than others, while there are some who may still benefit from facilitating this transition. Knowing who fits into which category—and how this new reality may play out—will be critical for investors. Our next theme—Longevity—remains an essential long-term secular trend, and this year the focus will be on measurable impacts for governments, economies, and corporates. The ripple effects of an aging population, the drive for healthy longevity, and challenging demographics across many geographies continue to impact markets. And in 2025, we see investors focusing on several specific longevity debates: First, innovation across healthcare – especially in an AI world, with obesity medications remaining front and center.Second, impacts on consumer behavior – including the drive for affordable nutrition.Third, the need to reskill aging workforces – especially if retirement ages move higher. And, finally, there’s implications for financial planning and retirement – with a bull market for financial advice just starting. Our next theme centers around energy.When we think about the future of energy, our focus for 2025 shifts from decarbonization to the wide range of factors driving the supply, demand, and delivery of energy across geographies. And the common thread here is the potential for rapid evolution. We’ll be tracking four key dynamics: First, an increasing focus on energy security. Second, the massive growth in energy demand driven by trillions of dollars of AI infrastructure spend, to be met both by fossil fuel-powered plants and renewables. Third, innovative energy technologies such as carbon capture, energy storage, nuclear power, and power grid optimization. And fourth, increased electrification across many industries. We continue to believe that carbon emissions will likely exceed the targets in various nations’ climate pledges. So, we expect focus to shift toward climate adaptation and resilience technologies and business models. Our last key theme is artificial intelligence and tech diffusion. Although it’s been two years since the launch of ChatGPT, we’re still in the early innings of AI's diffusion across sectors and geographies. However, while 2024 was driven by AI enablers and infrastructure companies, in 2025 we expect the market to focus on early AI downstream use cases that drive efficiency and market share. As you heard yesterday,our Global Head of Thematic Research Ed Stanley, explained that there’s alpha in understanding this rate of change. Agentic AI will be center stage, with robust enterprise adoption, stock outperformance for early adopters, positive surprises in model capabilities, greater breadth of monetization, and thus less attention to return-on-investment debates. Before I close, it’s worth mentioning that you will likely see connections between these complex themes. As an example, the complexity of a multipolar world makes energy security all the more vital.The demand for energy connects with the enormous power requirements of AI. And AI is set to drive healthcare innovations which could help us lead longer healthier lives. We see these four themes not as static categories but as an interconnected roadmap for investing over the long-term – and we’ll be sharing more on specific debates throughout the year. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. ... Read more

15 Jan 2025

05 MINS

05:16

15 Jan 2025

#1289

Finding Opportunity in AI’s Evolution

Our Global Head of Thematic Research Ed Stanley discusses how artificial intelligence is changing and what could be in store for investors in 2025. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Ed Stanley, Morgan Stanley’s Global Head of Thematic Research. Today I'll discuss how understanding AI’s rate of change can generate alpha in the year of AI agents. It’s Tuesday, the 14th of January, at 2 PM in London. Even if you haven't been using artificial intelligence in your work or home life yet – you’ll doubtless have heard about its capabilities by now. Tasked, for example, with drafting an elevator pitch for a 100-page report; it's a tedious task at the best of times. But using an AI model not only does it become a breeze, but these models can also generate you a podcast – if you so wish – through which to disseminate it, and almost in any language conceivable.But now imagine the algorithm begins thinking through multi-stage processes itself – planning, executing – to generate that 100-page report itself, in the first place. That … is an example of Agentic AI. As the name implies, this next phase of AI development is where software programs gain agency, transitioning from reactive chatbots that we’ve been using into proactive task fulfillment agents. And this transition is happening now. Over the past 36 months, we’ve gone from reliable output that can displace or supplement 5-second or 5-minute tasks, such as translation or quick summaries, to models that are providing reliable output for 15-minute tasks, 1-hour tasks – like the ones that I just mentioned. And each time the skeptics have claimed that model improvements are slowing down, and thus call into question the returns on hundreds of billions of dollars that have been spent on AI infrastructure, the AI research labs manage to take another leap forward, surprising even seasoned analysts. That’s why we think this is such an important trend for 2025. AI Adopter companies that can leverage these agents will start to pull ahead of their peers. And as a result, tracking AI’s evolution in the materiality of companies’ investment cases, we think, has never been more important. Since our first AI Adopter survey in January 2024 to our latest just published in January 2025, we've seen profound shifts in the thousands of stocks that we cover globally. This ongoing transformation not only underscores that AI’s diffusion is advancing rapidly, but that we’re still very much in its early innings. To understand the breakneck speed of the AI evolution through the lens of its impact on the stock markets, we need to wrap our heads around the concept of “rate of change.” We just published the third iteration of our AI mapping survey of 3,700 global stocks under coverage. And it reveals that 585 of those stocks had their AI exposure or materiality to investment case changed by our analysts – and that is just versus 6 months ago. And it impacts around $14 trillion of global market cap. And this rate of change in AI isn't just a buzzword; it's a tangible metric driving outperformance. So, if we look back in the second half of last year, 2024, stocks where our analysts previously increased both AI exposure and materiality in our last survey – went on to outperform broader equity markets by over 20 per cent in the second half of 2024. If we apply the same logic looking forward, where do we think most outperformance is going to come from? It’s in those same stocks where our analysts have just upgraded the exposure and materiality to the investment case. Beyond this simple screen for AI outperformers we think there are three other key conclusions from our latest survey. The first is AI Enabler stocks with Rising Materiality, within which we believe that Semiconductors, which have outperformed well, might soon pass the baton to the Software layer in terms of equity market dominance. Second, Adopters with Pricing Power. These are companies that adopt AI early and use it to expand their margins but sustainably, without having to give it back to their customers. And the third is Financial stocks, in particular, where AI Rate of Change has been the fastest of any sector in our global coverage – in terms of the efficiency gains that we think it can manifest for the share prices. So all in all, 2025 promises a slew of significant developments in AI, and, of course, we’ll be here to bring you all of the updates. Thank you for listening. If you enjoy the show, please leave a review wherever you listen to your podcasts and share Thoughts on the Market with a friend or a colleague today. ... Read more

14 Jan 2025

05 MINS

05:05

14 Jan 2025

#1288

Big Debates: The State of the Energy Transition

In the latest edition of our Big Debates miniseries, Morgan Stanley Research analysts discuss the factors that will shape the global energy market in 2025 and beyond, and where to look for investment opportunities. ----- Transcript ----- Michelle Weaver:Welcome to Thoughts on the Market. I'm Michelle Weaver, U.S. thematic and Equity strategist at Morgan Stanley. Devin McDermott:I'm Devin McDermott, Head of Morgan Stanley's North America Energy Team. Mike Canfield:And I'm Mike Canfield, Head of the Europe Sustainability Team, Michelle Weaver:This is the second episode of our special miniseries, Big Debates, where we cover key investment debates for 2025. Today, we'll look at where we are in the energy transition and some key investment opportunities. It's Monday, January 13th at 10am in New York. Mike Canfield:And 3pm in London. Michelle Weaver:Since 2005, U.S. carbon emissions have fallen by about 15 percent. Nearly all of this has been tied to the power sector. Natural gas has been displacing coal. Renewable resources have seen higher penetration. When you look outside the power sector, though, progress has been a lot more limited. Let me come to you first, Devin. What is behind these trends, and where are we right now in terms of the energy transition in the U.S.? Devin McDermott:Over the last 20 years now, it's actually been a pretty steady trend for overall U.S. emissions. There's been gradual annual declines, ratcheting lower through much of this period. [There’s] really two primary drivers. The first is, the displacement of coal by natural gas, which is driven about 60 percent of this reduction over the period. And the remainder is higher penetration of renewable resources, which drive the remaining 40 percent. And this ratio between these two drivers -- net gas displacing coal, renewables adding to the power sector -- really hasn't changed all that much. It's been pretty consistent even in this post COVID recovery relative to the 15 years prior. Outside of power, there's been almost no progress, and it doesn't vary much depending on which end market you're looking at. Industrial missions, manufacturing, PetChem --all relatively stable. And then the transport sector, which for the U.S. in particular, relative to many other markets and the rest of the world, is a big driver transport, a big driver of emissions. And there it's a mix of different factors. The biggest of which, though, driving the slow uptick in alternatives is the lack of viable economic options to decarbonize outside of fossil fuels. And the fact that in the U.S. specifically, there is a very abundant, low-cost base of natural gas; which is a low carbon, the lowest carbon fossil fuel, but still does have carbon intensity tied to it. Michelle Weaver:You've also argued that the domestic natural gas market is positioned for growth. What's your outlook for this year and beyond? Devin McDermott:The natural gas market has been a story of growth for a while now, but these last few years have had a bit of a pause on major expansion. From 2010 to 2020, that's when you saw the biggest uptick in natural gas penetration as a portion of primary energy in the U.S. The domestic market doubled in size over that 10-year period, and you saw growth in really every major end market power and decarbonization. There was a big piece of it. But the U.S. also transitioned from a major importer of LNG, which stands for liquefied natural gas, to one of the world's largest exporters by the end of last decade. And you had a lot of industrial and petrochemical growth, which uses natural gas as a feedstock. Over the last several years, globally, gas markets have faced a series of shocks, the biggest of which is the Russia-Ukraine conflict and Europe's loss of a significant portion of their gas supply, which historically had come on pipelines from Russia. To replace that, Europe bought a lot more LNG, drove up global prices, and in response to higher global prices, you saw a wave of new project sanctioning activity around the world. The U.S. is a key driver of that expansion cycle. The U.S. over the next five years will double; roughly double, I should say, its export capacity. And that is an unprecedented amount of volume growth domestically, as well as globally, and will drive a significant uptick in domestic consumption. So that the additional exports is pillar number one; and pillar number two, which I'd say is more of an emerging trend, is the rise of incremental power consumption. For the last 15 years, U.S. electricity consumption on a weather adjusted basis has not grown. But if you look out at forecasts from utilities, from various market operators in the country, you're now seeing a trend of growth for the balance of this decade and beyond tied to three key things. The first is onshore manufacturing. The second is power demand tied to data centers and AI. And the third is this broader trend of electrification. So, a little bit from EV's, more electric appliances, which fit into this decarbonization theme more broadly. We're looking at now an outlet, this is our base case of U.S. electricity demand growing at just shy of 2 percent per year over the next five years. That is a growth rate that we have not seen this century. And natural gas, which generates about 40 percent of U.S. power today, will continue to be a key player in meeting this incremental demand. And that becomes then a second pillar of consumption growth for the domestic market. Michelle Weaver:And we're coming up on the inauguration here, and I think one really important question for investors is what's going to happen to the energy sector and to renewables when Trump takes office? What are you thinking here? Devin McDermott:Yes. Well, the policy that supports renewable development in the U.S., wind and solar specifically, has survived many different administrations, both Republican and Democratic. And there's actually several examples over the last 10 to 15 years of Republican controlled Congress extending both the production tax credit and investment tax credit for wind and solar. So, our base case is no major change on deployments, but also unlikely to see any incremental supportive policy for these technologies. Instead, I think the focus will be on some of the other major themes that we've been talking about here. One, there's currently a pause on new LNG export permits under the Biden administration that should be lifted shortly post Trump's inauguration. Second, there are greenhouse gas intensity limits on new power plant and existing power plant construction in the U.S. that will likely be lifted, under the incoming Trump administration. So, gas takes a larger share of incremental power needs under Trump than it would have under the prior status quo. And then lastly. Consistently over the last few years, penetration of electric vehicles and low carbon vehicles in general in the United States have fallen short of expectations. And interestingly, if you look at just the composition of new vehicles sold in the U.S. over the past years, nearly two-thirds were SUVs or heavier light duty vehicles that offset some of the other underlying trends of some uptick in EV penetration. Under the prior Trump administration, there was a rollback of initiatives to improve the fuel economy of both light duty and heavy-duty transport. I would not be surprised if we see that same thing happen again, which means you have more longevity to gasoline, diesel, other fossil-based transport fuels. Which kind of put this all together -- significant growth for natural gas that could accelerate under Trump, more longevity to legacy businesses like gasoline and diesel for these incumbent energy companies is not a bad backdrop. Trade's still at double its historical discount versus the broader market. So, not a bad setup when you put it all together. Michelle Weaver:Great. Thank you, Devin. Mike, new policies under the second Trump administration will likely have an impact far beyond the U.S. And with a potential withdrawal of the U.S. from the Paris Agreement and increased greenhushing, many investors are starting to question whether companies may walk back or delay their sustainability ambitions. Will decarbonization still be a corporate priority or will the pace of the energy transition in Europe slow in 2025? Mike Canfield:Yeah, that's the big question. The core issues for EU policymakers at the moment include things like competitiveness, climate change, security, digitalization, migration and the cost of living. At the same time, Mario Draghi highlighted in his report entitled “The Future of European Competitiveness” that there are three transformations Europe has to contend with: to become more innovative and competitive; to complete its energy transition; and to adapt to a backdrop of less stable geopolitics where dependencies are becoming vulnerabilities, to use his phrase. We do still expect the EU's direction of travel on things like the Fit for 55 goals, its targets to address critical mineral supplies, and the overall net zero transition to remain consistent. And the UK's Labour Party has advocated for Clean Power 2030 goals of 95 percent clean generation sources. At the same time, it's fair to say some commentators have pointed to the higher regulatory burden on EU corporates as a potentially damaging factor in competitiveness, suggesting that regulations are costly and can be overcomplicated, particularly for smaller companies. While we've already had a delay in the implementation of the EU's deforestation regulation, some questions do remain over other rules, including things like the corporate sustainability, due diligence directive, and the design of the carbon border adjustment mechanism or CBAM. We're closely watching corporates themselves to see whether they'll reevaluate their investment plans or targets. One example we've actually already seen is in the metals and mining space where decarbonisation investment plans were adjusted because of inadequate green hydrogen infrastructure and policy concerns, such as the effectiveness of the CBAM. It does remain committed to its long-term net zero goals. But the company has acknowledged that practical hurdles may delay achievement of its 2030 climate ambitions. We wouldn't be surprised to see other companies take an arguably more pragmatic, in inverted commas, approach to their goals, accepting that technology, infrastructure and policy might not really be ready in time to reach 2030 targets. Michelle Weaver:Do you believe there are still areas where the end markets will grow significantly and where companies still offer compelling opportunities? Mike Canfield:Yeah, absolutely. We think sustainable investing continues to evolve and that, as with last year, stock selection will be key to generating alpha from the energy transition. We do see really attractive opportunities in enabling technologies across decarbonisation, whether that's segments like grid transmission and distribution, or in things like Industry 4.0. We'd recommend focusing on companies with clear competitive moats and avoiding the relatively commoditized areas, as well as looking for strong pricing power, and those entities offering mission critical products or services for the transition. We do anticipate a continued investment focus on data center power dynamics in 2025 with cooling technology increasingly a topic of investor interest. Beyond the power generation component, the urgent need for investment in everything from electrical equipment to grid technologies, smart grid software and hardware solutions, and even cables is now increasingly apparent. We expect secular growth in these markets to continue apace in 2025. Within Industry 4.0, we do think adoption of automation, robotics, machine learning, and the industrial Internet of Things is set to grow strongly this year as well. We also see further growth potential in other areas like energetic modernization in buildings, climate resilience, and the circular economy. Michelle Weaver:And with the current level of policy uncertainty has enthusiasm for green investing or the ‘E’ environmental pillar of ESG declined Mike Canfield:I think evolved might be a fairer expression to use than declined. Certainly, reasonable to say that performance in some of the segments of the E pillar has been very challenging in the last 12 to 24 months -- with the headwinds from geopolitics, from the higher interest rate backdrop and inflation. At the same time, we have seen a transition towards improver investment strategies, and they're continuing to gain in popularity around the world. As investors recognize that often the most attractive alpha opportunities are in the momentum, or direction of travel rather than simple, so-called positive screening for existing leaders in various spaces. To this end, the investors that we speak to are often focused on things like Capex trends for businesses as a way to determine how companies might actually be investing to deliver on their sustainability ambitions. Beyond those traditional E, areas like renewables or electric vehicles, we have therefore seen investors try to diversify exposures. So, broadening out to include things like the transition enablers, the grid technologies, HVAC -- that's heating, ventilation and cooling,products supporting energy efficiency in buildings, green construction and emerging technologies even, like small modular nuclear reactors alongside things like industrial automation. Michelle Weaver:And, given this evolution of the e pillar, do you think that creates an opportunity for the S or G, the social or governance components of ESG? Mike Canfield:We do think the backdrop for socially focused investing is very strong. We see compelling opportunities in longevity across a lot of elements, things like advanced diagnostics, healthier foods, as well as digitalization, responsible AI, personal mobility, and even parts of social infrastructure. So things as basic as access to water, sanitation, and hygiene. One topic we as a team have written extensively on in the last few months It's preventative health care, for example. So, while current health systems are typically built to focus on acute conditions and react to complications with pharmaceuticals or clinical care, a focus on preventative care would, at its most fundamental, address the underlying causes of illnesses to avoid problems from arising in the first place. We argue that the economic benefits of a more effective health system is self evident, whether that's in terms of reducing the overall burden on the system, boosting the workforce or increasing productivity. Within preventative healthcare, we point to fascinating investment opportunities across innovative biopharma, things like smart chemotherapy, for example, alongside solutions like integrated diagnostics, effective use of AI and sophisticated telemedicine advances -- all of which are emerging to support healthy longevity and a much more personalized targeted health system. Michelle Weaver:Devin and Mike, thank you for taking the time to talk, and to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today. ... Read more

13 Jan 2025

13 MINS

13:56

13 Jan 2025

#1287

Big Debates: The AI Evolution

In the first of a special series, Morgan Stanley’s U.S. Thematic and Equity Strategist Michelle Weaver discusses new frontiers in artificial intelligence with Keith Weiss, Head of U.S. Software Research. ----- Transcript ----- Michelle:Welcome to Thoughts on the Market I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and Equity Strategist. Keith:And I'm Keith Weiss, Head of U.S. Software Research. Michelle:This episode is the first episodeof a special series we’re calling “Big Debates” – where we dig deeper into some of the many hot topics of conversation going on right now. Ideas thatwill shape global markets in 2025. First up in the series: Artificial Intelligence. It'sFriday, January 10that 10am in New York. When we look back at 2024, there were three major themes that Morgan Stanley Research followed. And AI and tech diffusion were among them. Throughout last year the market was largely focused on AI enablers – we’re talkingsemiconductors, data centers, and power companies. The companies thatare really building out the infrastructure of AI. Now though, as we’re looking ahead, that story is starting to change. Keith, you cover enterprise software. Within your space, how will the AI story morph in 2025? Keith:I do think 2025 is going to be an exciting year for software [be]cause a lot of these fundamental capabilities that have come out from the training of these models, of putting a lot of compute into the Large Language Models, those capabilities are now being built into software functionality. And that software functionality has been in the market long enough that investors can expect to see more of it come into results. That the product is there for people to actually buy on a go forward basis. One of the avenues of that product that we're most excited about heading into 2025 is what we're calling agentic computing, where we'removing beyond chatbots to a more automated proactive type of interface into that software functionality that can handle more complex problems, handle it more accurately and really make use of that generative AI capability in a corporate or in an enterprise software setting as we head into 2025. Michelle:Could you give us an example of what agentic AI is and how might an end user interact with it? Keith:Sure. So, you and I have been interacting with chatbots a lot to gain access to this generative AI functionality. And if you think about the way you interact with that chatbot, right, you have a prompt, you have a question. You have to come up with the question. going to take that question and it's going to, try to contextually understand the nature of that question, and to the best of its ability it's going to give you back an answer. In agentic computing, what you're looking for is to add more agency into that chatbot; meaning that it can reason more over the overall question. It's not just one model that it's going to be using to compose the answer. And it's not just the composition of an answer where the functionality of that chatbot is going to end. There's actually an ability to execute what that answer is. So, it can handle more complex problems. And it could actually automate the execution of the answer to those problems. Michelle:It sounds like this tech is going to have a massive impact on the workplace. Have you estimated what this could do to productivity? Keith:Yeah, this is -- really aligns to the work that we did actually back in 2023, where we did our AI index, right. We came up with the conclusion that given the current capabilities of Large Language Models, 25 per cent of U.S. occupations are going to be impacted by these technologies. As the capabilities evolve, we think that could go as high as 45 per cent of U.S. labor touched by these productivity enhancing. Or, sort of, being replaced by these technologies. That equates to, at the high end, $4 trillion of labor that's being augmented or replaced on a go forward basis. The productivity gains still yet to be seen; how much of a productivity gain you could see on average. But the numbers are massive, right, in terms of the potential because it touches so much labor. Michelle:And finally on agentic, is the market missing anything and how does your view differ from the consensus? Keith:I think part of what the market is missing is that these agentic computing frameworks is not just one model, right? There's typically a reasoning engine of some sort that's organizing multiple models, multiple components of the system that enable you to -- one, handle more complex queries, more complex problems to be solved, lets you actually execute to the answer. So, there's execution capabilities that come along with that. And equally as important, put more error correction into the system as well. So, you could have agents that are actually ensuring you have a higher accuracy of the answer. It's the sugar that's going to make the medicine go down, if you will. It's going to make a lot easier to adopt in enterprise environments. I think that's why we're a little bit more optimistic about the pace of adoption and the adoption curves we could see with agentic computing despite the fact it's a relatively early-stage technology. Michelle:You just mentioned Large Language Models, or LLMs; and one barrier there has been training these models. It requires a ton of computing power, among other constraints. How are companies addressing this, and what's in the cards for next year? Keith:So, if you think about the demand for that compute in our mind comes from two fundamental sources. And as a software analyst, I break this down into research versus development, right? Research is investment that you make to find core fundamental capabilities. Development is when you take those capabilities and make the investment to create product out of it. Thus far, again, the primary focus has been on the training side of the equation. I think that part of the equation looks to be asymptotic to a certain extent. The – what people call the scaling laws, the amount of incremental capability that you're getting from putting more compute at the equation is starting to come down. What people are overlooking is the amount of improvement that you could see from the development side of the equation. So, whereas the demand for GPUs, the demand for data center for that pure training side of the equation might start to slow down a little bit, I think what we're going to see expand greatly is the demand for inference, the demand to utilize these models more fully to solve real business problems. In terms of where we're going to source this; there are constraints in terms of data center capacity. The companies that we cover,they've been thinking about these problems for the past decade, right? And they have these decade long planning cycles. They have good visibility in terms of being able to meet that demand in the immediate future. But these questions on how we are going to power these data centersis definitely top of mind for our companies, and they're looking for new sources of power and trying to get more creative there. The pace with which data centers can be built out is a fundamental constraint in terms of how quickly this demand can be realized. So those supply constraints I don't think are going to be a immediate limiter for any of our names when we're thinking about calendar [20]25. But definitely, part of the planning process and part of the longer-termforecasting for all of these companies in terms of where are they going to find all this fundamental resource – because whether it's training or inference, still a lot of GPUs are going to be needed. A lot of compute is going to be needed. Michelle:Recently we've been hearing about so called artificial general intelligence or AGI. What is it? And do you think we're going to see it in 2025? Keith:Yeah, so, AGI is the – it's basically the holy grail of all of these development efforts.Can we come up with models that can reason in the human world as well as we can, right? That can understand the inputs that we give it, understand the domains that we're trying to operate in as well or better than we can, so it can solve problems as effectively and as efficiently as we can. The easiest way to solve that systems integration problem of like, how can we get the software, how could we get the computers to interact with the world in the way that we do? Or get all the impact that we do is for it to replicate all those functionalities. For it to be able to reason over unstructured text the same way we do. To take visual stimuli the same way that we do. And then we don't have to take data and put into a format that's readable by the system anymore. 2025 is probably too early to be thinking about AGI, to be honest.Most technologists think that there's more breakthroughs needed before the algorithms are going to be that good; before the models are going to be that good. There's very few people who think Large Language Models and the scaling of Large Language Models in themselves are going to get us to that AGI. You're probably talking 10 to 20 years before we truly see AGI emerge. So, 2025 is probably a little bit too early. Michelle:Well, great, Keith. Thank you for taking the time to talk and helping us kick off big debates. It looks like 2025 we'll see some major developments in AI. And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today. ... Read more

10 Jan 2025

09 MINS

09:18

10 Jan 2025

#1286

2025: Setting Expectations

Our Head of Corporate Credit Research, Andrew Sheets, offers up bull, bear and base cases for credit markets in the year ahead. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today, I’m going to revisit our story for 2025 – and what could make things better or worse. It's Thursday, January 9th at 2pm in London. Based on the number of out-of-office replies, I have a sneaking suspicion that many investors took advantage [of] the timing of holidays this year for a well deserved break. With this week marking the first full week back, I thought it would be a good opportunity to refresh listeners on what we expect in 2025, and realistic scenarios where things are better or worse. Our base case is that credit holds up well this year, doing somewhat better in the first half of 2025 than the second. Credit likes moderation, and while we think the shift in U.S. policy leadership generally means less moderation, and a wider range of economic outcomes, this shift doesn’t arrive immediately. On Morgan Stanley’s forecasts, the bulk of the disruptive impact from any changes to tariffs or immigration policy hits in 2026. Meanwhile, Credit is entering 2025 with some pretty decent tailwinds. The economy is good. The all-in yield – the total yield – on US investment grade corporate bonds, at above 5.4 per cent, is the highest to start any year since January of 2009 – which we think helps demand. And while we think corporate confidence and aggression will rise this year, normally a bad thing for credit; this is going to be coming off of a low, conservative starting point. We think thatcredit spreads will be modestly tighter by mid-year relative to where they finished 2024, and then start to widen modestly in the second half of the year – as the market attempts to price that greater policy uncertainty in 2026. We think that issuers in the Financial and Utilities sectors outperform, and we think bonds between five- and ten-year maturity will do the best. The bear case is that we exit the current period of moderation more quickly. At one end, a deregulatory push by a new administration could usher in an even faster rise in corporate confidence and aggression, leading to more borrowing and riskier dealmaking. At the other extreme, the strong current state of the economy and jobs market could make further gains harder to come by. If the rise in unemployment that our economists expect in 2026 is larger or arrives earlier, credit could start to weaken well ahead of this. So, how could things be better – especially given the relatively low, tight starting point for credit spreads? Well, we’d argue that the current mix of data for credit is border-line ideal: reasonable growth, falling inflation, still-low levels of corporate aggressiveness, and still-high yields that are attracting buyers. Recall that the tightest levels of credit in the modern era, which are still tighter than today, occurred during a period with similar characteristics – the mid-1990s. When thinking about the mid-90s as a bull case, there’s a further detail that’s relevant and topical, especially this week. At that time, interest rates stayed somewhat high and the Fed only lowered short-term rates modestly because the economy held up. In short, in the best environment that we’ve seen for credit, less action by the Federal Reserve was fine – so long as the economic data was good. This is a bull-case, rather than our base case, because there are also a number of key differences with the mid 1990s, not the least being a much worse trajectory – today – for the US government's budget. But in a scenario where things change less, and the status quo lasts longer, it could come into play. 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. ... Read more

10 Jan 2025

03 MINS

03:54

10 Jan 2025

#1285

Market Implications of Trump’s Agenda

With the inauguration of President-elect Donald Trump approaching, our Global Head of Fixed Income and Public Policy Research weighs the impact for investors of his potential policy measures. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Public Policy Research. Today on the podcast I'll be talking about what investors need to know about recent US policy developments. It’s Wednesday, Jan 8th, at 2:30pm in New York. In less than two weeks, Donald Trump will again become the sitting President of the United States. The economic and market consequences of the policies he might enact, either on his own or in concert with the Congress, continue to be an important debate for investors. Our view has been that the sequencing and severity of policy choices across tariffs, taxes, immigration, and regulation would be very meaningful to the market's outlook. So, have we learned anything from news around the policy discussions inside the incoming administration and congressional leaders?Let’s consider it here and level set. First, there‘s been news about Republicans debating their approach to legislating some of President Trump’s top policy priorities. That debate centers around whether to create one big bill around taxes, immigration, and a host of other issues or to break it into multiple bills. Leading with immigration reforms, where there may be more consensus within Republicans’ slim Congressional majority; and then following it up with tax cuts and extensions, which may take more time to negotiate given myriad interests. While investors have asked us about this debate quite a bit, the distinction between the approaches may not make much of a difference to investors. At the end of the day, what should matter most to markets is the timing and size of the fiscal impact driven by tax changes. Going with one big bill may seem faster, but we’re reminded of the saying ‘Nothing is agreed until everything is agreed.’ In other words, that one big bill would probably only pass as fast as Republicans could agree on its toughest negotiating points – so likely not very soon. As for the size of fiscal impact, we continue to see consensus around extending most of the tax cuts that expire at the end of 2025, with some new benefits, like a domestic manufacturing tax credit. So, there should be some fiscal expansion in 2026, a few hundred billion dollars in our view; but this is meaningfully different than the trillions of dollars that the media cites when discussing the whole of the tax policy wish list. There’s also been some news on the approach to tariffs, but again it seems more noise than signal. Recent media reports are that Trump might adopt a tariff plan focused on specific products as opposed to a blanket approach on all imports. Trump denied the report via social media. But even if he hadn’t, it's unclear that such a plan could be executed quickly through existing executive powers or through legislation, where it's far from clear that tariffs could be enacted given Democrats' opposition and procedural barriers from budget reconciliation. So, our view remains that new tariffs will likely be enacted but through executive authority – which means a phased-in focus on China and Europe in 2025; and any new authorities developed via existing laws might not be enactable until 2026. So said more simply, the impact of tariffs on the economy may be a late 2025 into 2026 story. Putting it together for investors: So far, the news flow hasn’t materially changed our view on the US policy path. Yes, important policy changes are coming, but their implementation may be slow. That should mean that, to start 2025, the healthy fundamentals of the US economy should help drive risk markets, namely U.S. equities and corporate credit, to outperform. If we’re wrong and, for example, tariffs are implemented in larger magnitude at a quicker pace, then it may be a year where less risky assets, like government bonds, outperform. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today. ... Read more

08 Jan 2025

04 MINS

04:04

08 Jan 2025

#1284

What Could Shape the Global Economy in 2025

Our Global Chief Economist Seth Carpenter weighs the myriad variables which could impact global markets in 2025, and why this year may be the most uncertain for economies since the start of the pandemic. ----- Transcript ----- Seth Carpenter:Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about 2025 and what we might expect in the global economy. It's Tuesday, January 7th at 10am in New York. Normally, our year ahead outlook is a roadmap for markets. But for 2025, it feels a bit more like a choose your own adventure book. uncertainty is a key theme that we highlighted in our year ahead outlook. The new U.S. administration, in particular, will choose its own adventure with tariffs, immigration, and fiscal policy. Some of the uncertainty is already visible in markets with the repricing of the Fed at the December meeting and the strengthening of the dollar. Our baseline has disinflation stalling on the back of tariffs and immigration policy, while growth moderates, but only late in the year as the policies are gradually phased in. But in reality, the sequencing, the magnitude and the timing of these policies remains unknown for now, but they're going to have big implications for the economies and central banks around the world. The U.S. economy comes into the year on solid footing with healthy payrolls and solid consumption spending. Disinflation is continuing, and the inflation data for November were in line with our forecast, but softer in terms of PCE than what the Fed expected. While the Fed did lower their policy rate 25 basis points at the December meeting, Chair Powell's tone was very cautious, and the Fed's projections had inflation risks skewed to the upside. The chair noted that the FOMC was only beginning to build in assumptions about policy changes from the new administration. Now, we have conviction that tariffs and immigration restriction will both slow the economy and boost inflation -- but we've assumed that these policies are phased in gradually over the entirety of the year. And consequently -- that materially Stagflationary impetus? Well, it's reserved for 2026, not this year. Similarly, we've assumed that effectively the entire year is consumed by the process of tax cut extensions. And so, we've penciled in no meaningful fiscal impetus for this year. And in fact, with the bulk of the process simply extending current tax policy, we have very little net fiscal impact, even in 2026. Now, in China, the deflationary pressure is set to continue with any policy reaction further complicated by U.S. policy uncertainty. The policymaker meeting in late December that they held provided only a modest upside surprise in terms of fiscal stimulus, so we're going to have to wait for any further details on that spending until March with the National People's Congress. Meanwhile, during our holiday break, the renminbi broke above 7.3, and that level matches roughly the peaks that we saw in 2022 and 2023. The strong dollar is clearly weighing on the fixing. The framework for policy will have to account for a potentially trade relationship with the U.S. So, again, in China, there's a great deal of uncertainty, a lot of it driven by policy. The euro area is arguably less exposed to U.S. trade risks than China. A weaker euro may help stabilize inflation that's trending lower there, but our growth forecasts suggest a tepid outlook. Private consumption spending should moderate, and maybe firm a bit, as inflation continues to fall, and continued policy easing from the ECB should support CapEx spending. Fiscal consolidation, though, is a key risk to growth, especially in France and Italy, and any postponement in investment from potential trade tensions could further weaken growth. Now, in Japan, the key debate is whether the Bank of Japan will raise rates in January or March. After the last Bank of Japan meeting, Governor Ueda indicated a desire for greater confidence on the inflation outlook. Nonetheless, we've retained our call that the hike will be in January because we believe the Bank of Japan's regional Branch manager meeting will give sufficient insight about a strong wage trend. And in combination with the currency weakness that we've been watching, we think that's gonna be enough for the BOJ to hike this month. Alternatively, the BOJ might wait until the Rengo negotiation results come out in March to decide if a hike is appropriate. So far, the data remains supportive and Japanese style core CPI inflation has gone to 2.7 per cent in November. The market's going to focus on Deputy Governor Himino's speech on January 14th for clues on the timing – January or March. Finally, as the Central Bank of Mexico highlighted in their most recent rate cut decision, caution is the word as we enter the new year. As economists, we could not agree more. The year ahead is the most uncertain since the start of the pandemic. Politics and policy are inherently difficult to forecast. We fully expect to revise our forecasts more -- and more often than usual. Thanks for listening, and if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. ... Read more

07 Jan 2025

05 MINS

05:12

07 Jan 2025

#1283

Will 2024’s Weak Finish Extend into the New Year?

Our CIO and Chief U.S. Equity Strategist Mike Wilson considers the year-end slump in U.S. stocks, and whether more market-friendly policies can change the narrative. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I’ll be discussingthe weak finish to 2024 and what it means for 2025. It's Monday, Jan 6th at 11:30am in New York. So let’s get after it. While 2024 was another solid year for US equity markets, December was not. The weak finish to the yearis likely attributable to several factors. First, from September to the end of November, equity markets had one of their better 3-month runs that also capped the historically strong 1- and 2-year advances. This rally was due to a combination of events including a reversal of recession fears this summer, an aggressive 50basis pointsstart to a new Fed cutting cycle, and an election that resulted in both aRepublican sweep and an unchallenged outcome that led to covering of hedges into early December. This also lines up with my view in October that the S&P 500 could run to 6,100 on a decisive election outcome. Second, long-term interest rates have backed up considerably since the summer when recession fears peaked. Importantly, this 100basis pointback-up in the 10-year USTreasuryyield occurred as the Fed cutinterestrates by 100 basis points. In my view, the bond market may be calling into question the Fed’s decision to cut rates so aggressively in the context of stabilizing employment data. The fact that the term premium has risen by 77 basis points from the September lows is also significant and may be a by-product of this dynamic anduncertainty around fiscal sustainability. As we suggested two months ago, if the change in the termpremium was to materially exceed 50 basis points, the equity market could start to take notice and hurt valuations. Indeed, Equity multiples peaked in early- tomid-December around the time when the termpremium crossed this threshold. Finally, the rise in rates and the Trump election win has ushered in a stronger dollar which is now reaching a level that could also weigh on equities with significant international exposure. More specifically, the US dollar is quickly approaching the10per centyear-over-yearrate of change threshold that hashistorically pressured S&P 500 earnings growth and guidance. All of these factors have combined to weigh on market breadth, something that still looks like a warning.The divergence between the S&P 500 Index as a ratio of its 200-day movingaverage and the percent of stocks trading above their 200-day moving average has rarely been wider.This divergence can close in two ways—either breadth improves or the S&P 500 trades closer to its own 200-day moving average, which is 10per centbelow current prices. The first scenario likely relies on acombination of lower rates, a weaker dollar, clarity on tariff policy and stronger earnings revisions. In the absence of those developments, we think 2025 could be a year of two halves with the first half being more challenged before the more market-friendly policy changes can have their desired effects. It's also worth pointing out that this gap between index pricing and breadth has been more persistent in recent years, something that we attribute to the generous liquidity provisions provided by the Treasury andtheFed. It's also been aided by interventions from other central banks. While not a perfect measure, we do find that the year-over-yearchange in globalmoney supplyin US Dollars is a good way to monitor key inflection points, and that measure has recently rolled over again. The recent moves in rates and US dollar is just another reason to stick with quality equities. Our quality bias is rooted in the notion that we remain in a later cycle environment which is typicalofa backdrop that is consistent with outperformance of this cohort and the fact that the relative earnings revisions for thishigh quality factor are inflecting higher. As long as these dynamics persist, we think it also makes sense to stay selective within cyclicals and focused on areas of the market that are showing clear relative strength in earnings revisions. These groups include Software, Financials, and Media & Entertainment. Thanks for listening. If you enjoy the podcast, leave us a review wherever youlisten, and share Thoughts on the Market with a friend or colleague today. ... Read more

06 Jan 2025

04 MINS

04:33

06 Jan 2025

#1282

Lessons to Take Into 2025

With the start of the new year, our Head of Corporate Credit Research Andrew Sheets looks back to look ahead at trends for credit and other markets in 2025. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’ll be discussing the lessons we can learn from 2024 – a remarkable year that also may be easily forgotten. It's Friday January 3rd at 2pm in London. In 2024 I celebrated my 20th year with Morgan Stanley. Among my regrets over this time was not keeping a better journal. It’s notable how quickly events in the market that seemed large and remarkable at the time can fade in one’s memory as the years merge together. How markets that seem easy or obvious in hindsight were anything but. I say this because many years from now, 2024 may end up being one of those relatively forgettable years. Another year where – as usually happens – the stock market went up. Another year where stocks outperformed bonds, the US dollar strengthened, and US stocks beat those abroad. Yet what is significant about 2024 is the scale of all these trends. For anyone managing money, the question of “stocks versus bonds”, “US versus rest-of-world”, “large versus small” or “growth versus value” are some of the most fundamental strategic questions one faces. These calls don’t always matter. But last year, they did – to a very large degree.Global stocks outperformed bonds by about 20 percent. Growth outperformed Value by practically the same amount. US stocks beat their global peers by 13 per cent. In short, one’s experience in 2024 and relative performance could have varied significantly, based on just a few relatively simple decisions. Related to that is the second lesson. 2024 was the reminder that while Valuation is a powerful long-term force, it can be a much more frustrating 12-month guide. All of those relative relationships I just mentioned – stocks versus bonds, growth versus value, US versus International – all worked in favor of the market that was historically richer entering last year. For our third lesson from last year, we’ll focus on Credit, where investors earned a premium over safer government bonds by lending to riskier corporate borrowers. Notable for this asset class in 2024 was, for the most part, it did its own thing; showing some encouraging independence from other markets and highlighting the value of digging into a borrower’s details. Specifically, I think this independence showed up in a few different ways. Credit showed low correlation to government bonds, for example, delivering good excess returns despite very large swings in yields or central bank expectations. It also, even more impressively, bucked some of 2024’s biggest trends. For example, while the outperformance of the US economy and US assets was one of the biggest stories of 2024, that wasn’t the case in Credit – where Europe and Asia credit actually did marginally better. In contrast to the equity market, smaller companies and Credit outperformed, as spreads and higher yielded loans outperformed larger Investment Grade spreads, even after adjusting for risk. And this was true even at a more granular level. Rising corporate activity, alongside more aggressive strategies for companies to deal with their own borrowing created very dispersed outcomes driven by bond-level documentation; far removed from the macro machinations of politics and monetary policy. This somewhat weaker connection to the broader world is central to how we think about Credit looking ahead. While big economic and political questions certainly loom in 2025, we think that Credit, for now, will be driven more by more micro, company level trends, and show somewhat lower correlation to other assets – at least through the first half of this year. From all of us at Thoughts on the Market, we wish you a very Happy New Year,and all the best for 2025. 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. ... Read more

03 Jan 2025

04 MINS

04:13

03 Jan 2025

#1281

A Bumpy Road Ahead for Onshoring EVs

Our Head of Global Autos & Shared Mobility Adam Jonas discusses why the electric vehicle market may see a small reset in 2025, but ultimately accelerate under a Trump Administration. ----- Transcript ----- Adam Jonas:Welcome to Thoughts on the Market. I'm Adam Jonas, Morgan Stanley's Head of Global Autos and Shared Mobility. Today, I'll be talking about the outlook for U.S. automakers and electric vehicles. It's Thursday, January 2nd at 1pm in New York. With Trump's inauguration just around the corner, we've seen a resurgence in many auto stocks tied to Internal Combustion Engines, also known as ICE. While questions swirl around the outlook for electric vehicles. In the near term we do think it'll be a bumpy ride for the U.S. EV market. But looking toward the second half of this year and beyond, we think there's hidden value in the EV sector for a number of reasons. First, let's look at the big picture. In our 2025 outlook for U.S. auto sales, we anticipate demand of 16.3 million units, a modest increase from the previous year, underpinned by projected U.S. GDP growth of around 1.9 percent and lower policy interest rates for auto loans. Looking specifically at EVs, we think the trajectory will be first a dip, then a rip scenario. That is, we're lowering our 2025 forecasts for U.S. EV penetration to 8.5 percent, down slightly from 9 percent previously. However, our long-term outlook remains unchanged, and we continue to forecast significant growth for EVs by 2040. Now for the big question. What does a Trump administration mean for EVs? Following the U.S. election, investors hopped on the ‘ICE is Nice’ trade based on the expectation that a Trump administration will bring more relaxed U.S. emission standards, reduced EV incentives, and finally increased tariffs – which would drive up the costs of key EV components, such as batteries and semiconductors, predominantly manufactured in Asia. But the real story is more nuanced. You can't talk about EVs without talking about Elon Musk, who will be leading Trump's Department of Government Efficiency. And we struggle with the idea that the incoming Trump administration working in close partnership with Musk would structurally impede U.S. participation in two of the most important industrial transitions in over a century: electrification and embodied AI. If the U.S. wants to be a leader in autonomy, it must ultimately embrace EVs, which are the sockets of autonomous capability, and expand its EV infrastructure. How long will the U.S. cling to the soothing vibrations of its internal combustion fleet, while its rivals in China solidify their dominance in software defined electric mobility? Not for very long, in our opinion. While a rolling back of incentives under Trump may make 2025 a reset year for EV adoption, we view this mainly as a temporary action to help support a more capable and sustainable crop of domestic champions. That takes us to a resurgence in U.S. onshoring. Bringing manufacturing back to American soil has gained significant momentum and is another factor influencing the long-term outlook; not just for EV makers, but the entire supply chain. With the U.S. light vehicle market predominantly ICE-based at 92 percent of total sales, the real issue isn't the presence of gas powered combustion engines, but the glaring lack of advanced onshore EV production capabilities. Again, this puts the U.S. at a disadvantage compared to its global competitors and raises questions the Trump administration will need to address. Just what type of manufacturing does the U.S. want to prioritize? Are we looking to maintain the status quo with ICE, or are we aiming to be at the forefront of EV technology? No doubt, the U.S. auto industry stands at a crossroads between maintaining traditional technologies and embracing new, potentially disruptive advancements in EV and AV sectors. The decisions made in the next few years will likely dictate the pace and direction of the U.S.'s role in the global automotive landscape; and for investors, this brings new challenges – as well as opportunities. Thanks for listening. And if you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. ... Read more

02 Jan 2025

04 MINS

04:30

02 Jan 2025

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A Bumpy Road Ahead for Onshoring EVs