Is There a Supply Side Enablement?

The way companies and individuals spend their money has changed in the wake of the COVID pandemic. How might market leadership shift as a result and will new market winners come into focus? Chief Cross-Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. 

Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. 

Andrew Sheets: And on part two of this special episode, we'll be continuing our discussion of the "Next American Productivity Renaissance". It's Friday, March 3rd at 2 p.m. in London. 

Lisa Shalett: And it's 9 a.m. in New York. 

Andrew Sheets: So Lisa, let's take this to markets, how do you think this impacts equity market leadership, given that we've been in a market that's really been defined by the age of secular stagnation. What do you think happens now and who will be those new leaders? 

Lisa Shalett: This is one of the most important, I think, outcomes of our thesis. And that is that pendulums swing and market leadership shifts all the time, but when it's at that moment of inflection there's huge amounts of pushback, typically. Our sense is that the wealth creation ahead of us may not be in the current leadership in consumer tech, but rather in enterprise tech and the technology providers who are the leaders in new automation technologies that are going to allow us potentially to automate parts of our economy that have heretofore resisted. So it's a lot of the services side of the economy. Think of financial services, consumer services, government services, education services, how manual some of those industries are. And yet when we think about these triads or four or five level combinations of things like artificial intelligence, and machine learning, and optical scanning, and natural language processing and voice recognition. These are things that could really transform service-oriented businesses in terms of their margins and the economics of them. And so we envision a leadership that is potentially bimodal, that includes the tech enterprise enablers. Some of the software or software-as-a-service, some of the technology consultants who will help implement these automation programs and some of the beneficiaries, the tech takers, right. Think about some of those banks, those insurance companies, those healthcare companies, educational-oriented institutions that are just so heavy in manual service support infrastructures that could be rationalized. 

Andrew Sheets: So I'd like to dive into two of those threads and in just a little bit more detail. Just in terms of, kind of, the decade we've just been in. And, you know, I think it was pretty unique that it was a decade with some of the lowest cost of capital we've ever seen in economic history, and yet, you know, it's kind of left us with an economy where it's very easy to order food and very hard to take a train to the airport. We've had a lot of investment in consumer-led technology and a lot less in infrastructure. Do you think that equation has finally changed in a bigger way? And what do you think that means for maybe winners and losers of the changes that might be happening? 

Lisa Shalett: Our perspective is that I don't know that it's a permanent change. I think pendulums swing and there are waves when technology is more consumer-oriented. The issue with consumer technology, as we know and certainly with the smartphone, has been there's 2 billion people implementing that technology in 2 billion different ways. So it's very hard to scale those productivity benefits, if there are any, across an economy. When you go through periods of enterprise or economy-wide or infrastructure deepening-based technology spends, that's when economies can transform. And so I think it's a phase in the market. But I think one that is really important, you know, when we think about the advancement of overall return on assets in the economy. 

Andrew Sheets: And so, Lisa, digging into that technology piece, is there an example that stands out to you of a type of technology consumption that you think could be more fleeting as a result of the post-COVID period? And to your point about the more tangible, long lasting shifts in technology investment, the types of things that will be a lot more permanent and could really surprise people in their permanence over the longer run? 

Lisa Shalett: I'm not a technology visionary, but I do think that so many of the consumer technologies that we see over time end up being cannibalizing and substitutive as opposed to truly revolutionary. So, think about the consumption of media. We're still consuming media, it's just on what mode. Are we consuming it through a radio broadcast, a television broadcast, now streaming services on demand and etc, but it's content nonetheless. I think that there are other technologies when we think about what's going on with things like A.I., when we think about some of the things that are going on in genomics and in health care in particular, that really are transformative and take us to places we truly have never been before. And I think that that's one of the things that's super exciting right now is that we've never seen this before in many industries, right? Whether we're talking about things like transport and things in terms of human robotics and artificial intelligence and machine learning. These are places that we really haven't been before. And so to me, this is an extraordinarily exciting time vis a vis the innovation path. 

Andrew Sheets: Lisa, you've been talking about some of these big secular drivers of this productivity shift and capital investment shifting to deglobalization, decarbonization. And so I guess the next question is there might be demand for these things, but is there the supply to address these issues? Can we actually build these plants and re-orient these supply chains? How do you think about the supply side of this? And do you think supply is going to be able to rise to the challenge of the potential demand for this capital expenditure? 

Lisa Shalett: So I think that that's the piece of this thesis that was most exciting to us because very often one of the things that constrains investment is that you don't have the supply side enablement. One of the things that we can't take for granted is how good, particularly in the United States, private sector balance sheets are today. And so whether we're talking about the degree to which the United States banking system has healed and recapitalized, or we're talking about corporations who are still reasonably cash-rich and have locked in almost historically low costs of capital, or we talk about the household sector, which has moved away and locked in to fixed rate mortgages. That's a huge enablement that says we have the capacity to fund new technology. Then one of the other things that we've been talking about that enable the supply side are demographics. We've gone through this period where there was a bit of an air pocket in terms of overall working age population growth because Gen X was just not all that big relative to the boom. And we're talking about a working age population that is rapidly going to be dominated by a humongous millennial and Gen Z wave. And these are digital natives, right? These are folks who were born with technology in their hands. And so having a workforce that is flexible and tech savvy, that helps implement. So I think those are some of the supply side factors that are different than perhaps what we saw 10-15 years ago, you know, in 2007 when Apple launched the iPhone. 

Andrew Sheets: Lisa, thanks for taking the time to talk. 

Lisa Shalett: It's my pleasure, Andrew. 

Andrew Sheets: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.