As equity markets gyrate in response to unpredictable U.S. policy, credit has taken longer to respond. Our Head of Corporate Credit Research, Andrew Sheets, suggests other indicators investors should have an eye on, including growth data.----- Transcript -----Welcome to Thoughts on the Market. I’m Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today on the podcast, I’ll be discussing how much comfort or concern equity and credit markets should be taking from each other’s recent moves.It’s Friday, March 14th at 2pm in London. Credit has weakened as markets have gyrated in the face of rising uncertainty around U.S. economic policy. But it has been a clear outperformer. The credit market has taken longer to react to recent headlines, and seen a far more modest response to them. While the U.S. stock market, measured as the S&P 500, is down about 10 per cent, the U.S. High Yield bond index, comprised of lower-rated corporate bonds, is down about just 1 per cent.How much comfort should stock markets take from credit’s resilience? And what could cause Credit to now catch-down to that larger weakness in equities?A good place to start with these questions is what we think are really three distinct stories behind the volatility and weakness that we’re seeing in markets. First, the nature of U.S. policy towards tariffs, with plenty of on-again, off-again drama, has weakened business confidence and dealmaking; and that’s cut off a key source of corporate animal spirits and potential upside in the market. Second and somewhat relatedly, that reduced upside has lowered enthusiasm for many of the stocks that had previously been doing the best. Many of these stocks were widely held, and that’s created vulnerability and forced selling as previously popular positions were cut. And third, there have been growing concerns that this lower confidence from businesses and consumers will spill over into actual spending, and raise the odds of weaker growth and even a recession.I think a lot of credit’s resilience over the last month and a half, can be chalked up to the fact that the asset class is rightfully more relaxed about the first two of these issues. Lower corporate confidence may be a problem for the stock market, but it can actually be an ok thing if you’re a lender because it keeps borrowers more conservative. And somewhat relatedly, the sell-off in popular, high-flying stocks is also less of an issue. A lot of these companies are, for the most part, quite different from the issuers that dominate the corporate credit market.But the third issue, however, is a big deal. Credit is extremely sensitive to large changes in the economy. Morgan Stanley’s recent downgrade of U.S. growth expectations, the lower prices on key commodities, the lower yields on government bonds and the underperformance of smaller more cyclical stocks are all potential signs that risks to growth are rising. It's these factors that the credit market, perhaps a little bit belatedly, is now reacting to.So what does this all mean?First, we’re mindful of the temptation for equity investors to look over at the credit market and take comfort from its resilience. But remember, two of the biggest issues that have faced stocks – those lower odds of animal spirits, and the heavy concentration in a lot of the same names – were never really a credit story. And so to feel better about those risks, we think you’ll want to look at other different indicators.Second, what about the risk from the other direction, that credit catches up – or maybe more accurately down – to the stock market? This is all about that third factor: growth. If the growth data holds up, we think credit investors will feel justified in their more modest reaction, as all-in yields remain good. But if data weakens, the risks to credit grow rapidly, especially as our U.S. economists think that the Fed could struggle to lower interest rates as fast as markets are currently hoping they will.And so with growth so important, and Morgan Stanley’s tracking estimates for U.S. growth currently weak, we think it's too early to go bottom fishing in corporate bonds. 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.

Our Chief Asia Economist Chetan Ahya discusses the early indications of India’s economic recovery and why the country looks best-positioned in the region for growth.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today I’ll be taking a look at the Indian economy amidst escalating trade tensions in Asia and around the globe. It’s Thursday, March 13, at 2pm in Hong Kong.Over the last few months, investors have been skeptical about India’s growth narrative. Investors – like us – have been caught off-guard by the surprising recent slowdown in India’s growth. With the benefit of hindsight, we can very clearly attribute the slowdown to an unexpected double tightening of fiscal and monetary policy. But India seems to be on its way to recovery. Green shoots are already emerging in recent data. And we believe the recovery will continue to firm up over the coming months. What makes us so confident in our outlook for India? We see several key factors behind this trend: First, fiscal policy’s turning supportive for growth again. The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in recent months. They have also cut income tax for households which will be effective from April 2025. Second, monetary policy easing across rates, liquidity, and the regulatory front. With CPI inflation recently printing at just 3.6 per cent which is below target, we believe the central bank will continue to pursue easy monetary policy. And third, moderation in food inflation will mean real household incomes will be lifted. Finally, the strength in services exports. Services exports include IT services, and increasingly business services. In fact, post-COVID India’s had very strong growth in business services exports. And the key reason for that is, post-COVID, I think businesses have come to realize that if you can work from home, you can work from Bangalore. India's services exports have nearly doubled since December 2020, outpacing the 40 per cent rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to the $430 billion of goods exports. Moreover, India continues to gain market share in services exports, which now account for 4.5 per cent of the global total, up from 4 per cent in 2020. To be sure there are some risks. India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes select imports from the U.S. But we believe that by September-October this year, India can reach a trade deal with the U.S. In any case, India's goods exports-to-GDP ratio is the lowest in the region. And even if global trade slows down due to tariff uncertainties, India's economy won't be as severely affected. In fact, it could potentially outperform the other economies in the region.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.

The discussion highlights the often-overlooked effects of U.S. policy beyond tariffs. Investors are urged to consider the potential overvaluation of clean energy stocks amid legislative uncertainties. Additionally, the impact of Medicaid cuts and expected delays in FDA approvals are explored, revealing how these elements could shape market strategies. This broad perspective encourages a more nuanced understanding of investment dynamics in today's climate.

Dive into the exciting future of AI as experts discuss its revolutionary impact on industries like tech, media, and automotive. Discover how companies like eBay and Salesforce are leveraging AI to transform operations. Get a glimpse of the advancements in autonomous vehicles, particularly with Waymo, and explore the rise of humanoid robotics. The shift from human-driven to self-driving cars is set to reshape daily life and entire industries, making this a must-listen for anyone curious about the future of technology.

Our Head of U.S. IT Hardware Erik Woodring gives his key takeaways from Morgan Stanley’s Technology, Media and Telecom (TMT) conference, including why there appears to be a long runway ahead for AI infrastructure spending, despite macro uncertainty. ----- Transcript -----Welcome to Thoughts on the Market. I’m Erik Woodring, Morgan Stanley’s Head of U.S. IT Hardware Research. Here are some reflections I recorded last week at Morgan Stanley’s Technology, Media, and Telecom Conference in San Francisco. It’s Monday, March 10th at 9am in New York. This was another year of record attendance at our TMT Conference. And what is clear from speaking to investors is that the demand for new, under-discovered or under-appreciated ideas is higher than ever. In a stock-pickers’ market – like the one we have now – investors are really digging into themes and single name ideas. Big picture – uncertainty was a key theme this week. Whether it’s tariffs and the changing geopolitical landscape, market volatility, or government spending, the level of relative uncertainty is elevated. That said, we are not hearing about a material change in demand for PCs, smartphones, and other technology hardware. On the enterprise side of my coverage, we are emerging from one of the most prolonged downcycles in the last 10-plus years, and what we heard from several enterprise hardware vendors and others is an expectation that most enterprise hardware markets – PCs , Servers, and Storage – return to growth this year given pent up refresh demand. This, despite the challenges of navigating the tariff situation, which is resulting in most companies raising prices to mitigate higher input costs. On the consumer side of the world, the demand environment for more discretionary products like speakers, cameras, PCs and other endpoint devices looks a bit more challenged. The recent downtick in consumer sentiment is contributing to this environment given the close correlation between sentiment and discretionary spending on consumer technology goods. Against this backdrop, the most dynamic topic of the conference remains GenerativeAI. What I’ve been hearing is a confidence that new GenAI solutions can increasingly meet the needs of market participants. They also continue to evolve rapidly and build momentum towards successful GenAI monetization. To this point, underlying infrastructure spending—on servers, storage and other data center componentry – to enable these emerging AI solutions remains robust. To put some numbers behind this, the 10 largest cloud customers are spending upwards of [$]350 billion this year in capex, which is up over 30 percent year-over-year. Keep in mind that this is coming off the strongest year of growth on record in 2024. Early indications for 2026 CapEx spending still point to growth, albeit a deceleration from 2025. And what’s even more compelling is that it’s still early days. My fireside chats this week highlighted that AI infrastructure spending from their largest and most sophisticated customers is only in the second inning, while AI investments from enterprises, down to small and mid-sized businesses, is only in the first inning, or maybe even earlier. So there appears to be a long runway ahead for AI infrastructure spending, despite the volatility we have seen in AI infrastructure stocks, which we see as an opportunity for investors. I’d just highlight that amidst the elevated market uncertainty, there is a prioritization on cost efficiencies and adopting GenAI to drive these efficiencies. Company executives from some of the major players this week all discussed near-term cost efficiency initiatives, and we expect these efforts to both help protect the bottom line and drive productivity growth amidst a quickly changing market backdrop. 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.

The discussion highlights the ongoing shifts in global trade dynamics, emphasizing the transition to a multipolar world. Key topics include the impact of recent U.S. policy changes on tariffs and international relations. Investors face challenges amidst soaring policy uncertainty, particularly in sectors like European defense and fixed income markets. The hosts also reflect on the shifting role of the U.S. in international affairs, which underscores the complexity of navigating today's economic landscape.

The discussion dives into the remarkable rise of technology in the investment-grade market, now nearing 10%. It addresses why tech used to be a small player in this space and what has fueled its growth. Attention shifts to AI, revealing increasing capital needs from major tech firms and their innovative funding strategies. The podcast also explores bespoke capital solutions in private credit, particularly for the semiconductor sector. Finally, it examines the complexities of corporate decision-making influenced by the shifting economic landscape.

The discussion dives into the significance of Federal Reserve rate changes on the markets. Andrew Sheets argues that frequent cuts may not be as beneficial as investors believe. Instead, he emphasizes the need for stability in monetary policy. Other factors, like US trade and immigration policies, play a crucial role in shaping market conditions. The conversation challenges listeners to reconsider their focus on the Fed’s moves and the potential advantages of a more consistent approach.

Analysts delve into the intricate relationship between U.S. tariffs and the dollar's value, pondering if history might repeat itself as it did in 2017. They highlight the dollar's dominance in global markets, noting it accounts for over $7 trillion in daily transactions. The discussion also touches on the impact of fiscal policy and interest rate decisions on currency fluctuations. Recent trade policies, especially those targeting major economies like Mexico and China, are examined for their potential to sway the dollar's future trajectory.

Our Semiconductors and Software analysts Joe Moore and Keith Weiss dive into the biggest market debate around AI and why it’s likely to shape conversations at Morgan Stanley’s Technology, Media and Telecom (TMT) Conference in San Francisco. ----- Transcript -----Joe Moore: Welcome to Thoughts on the Market. I'm Joe Moore, Morgan Stanley's Head of U.S. Semiconductors.Keith Weiss: And I'm Keith Weiss, Head of U.S. Software.Joe Moore: Today on the show, one of the biggest market debates in the tech sector has been around AI and the Return On Investment, or ROI. In fact, we think this will be the number one topic of conversation at Morgan Stanley's annual Technology, Media and Telecom (TMT) conference in San Francisco.And that's precisely where we're bringing you this episode from.It's Monday, March 3rd, 7am in San Francisco.So, let's get right into it. ChatGPT was released November 2022. Since then, the biggest tech players have gained more than $9 trillion in combined market capitalization. They're up more than double the amount of the S&P 500 index. And there's a lot of investor expectation for a new technology cycle centered around AI. And that's what's driving a lot of this momentum.You know, that said, there's also a significant investor concern around this topic of ROI, especially given the unprecedented level of investment that we've seen and sparse data points still on the returns.So where are we now? Is 2025 going to be a year when the ROI and GenAI finally turns positive?Keith Weiss: If we take a step back and think about the staging of how innovation cycles tend to play out, I think it's a helpful context.And it starts with research. I would say the period up until When ChatGPT was released – up until that November 2022 – was a period of where the fundamental research was being done on the transformer models; utilizing, machine learning. And what fundamental research is, is trying to figure out if these fundamental capabilities are realistic. If we can do this in software, if you will.And with the release of ChatGPT, it was a very strong, uh, stamp of approval of ‘Yes, like these transformer models can work.’Then you start stage two. And I think that's basically November 22 through where are today of, where you have two tracks going on. One is development. So these large language models, they can do natural language processing well.They can contextually understand unstructured and semi structured data. They can generate content. They could create text; they could create images and videos.So, there's these fundamental capabilities. But you have to develop a product to get work done. How are we going to utilize those capabilities? So, we've been working on development of product over the past two years. And at the same time, we've been scaling out the infrastructure for that product development.And now, heading into 2025, I think we're ready to go into the next stage of the innovation cycle, which will be market uptake.And that's when revenue starts to flow to the software companies that are trying to automate business processes. We definitely think that monetization starts to ramp in 2025, which should prove out a better ROI or start to prove out the ROI of all this investment that we've been making.Joe Moore: Morgan Stanley Research projects that GenAI can potentially drive a $1.1 trillion dollar revenue opportunity in 2028, up from $45 billion in 2024. Can you break this down for our listeners?Keith Weiss: We recently put out a report where we tried to size kind of what the revenue generation capability is from GenerativeAI, because that's an important part of this ROI equation. You have the return on the top of where you could actually monetize this. On the bottom, obviously, investment. And we took a look at all the investment needed to serve this type of functionality.The [$]1.1 trillion, if you will, it breaks down into two big components. Um, One side of the equation is in my backyard, and that's the enterprise software side of the equation. It's about a third of that number. And what we see occurring is the automation of more and more of the work being done by information workers; for people in overall.And what we see is about 25 percent, of overall labor being impacted today. And we see that growing to over 45 percent over the next three years.So, what that's going to look like from a software perspective is a[n] opportunity ramping up to about, just about $400 billion of software opportunity by 2028. At that point, GenerativeAI will represent about 22 percent of overall software spending. At that point, the overall software market we expect to be about a $1.8 trillion market.The other side of the equation, the bigger side of the equation, is actually the consumer platforms. And that kind of makes sense if you think about the broader economy, it's basically one-third B2B, two-thirds B2C. The automation is relatively equivalent on both sides of the equation.Joe Moore: So, let's drill further into your outlook for software. What are the biggest catalysts you expect to see this year, and then over the coming three years?Keith Weiss: The key catalyst for this year is proving out the efficacy of these solutions, right?Proving out that they're going to drive productivity gains and yield real hard dollar ROI for the end customer. And I think where we'll see that is from labor savings.Once that occurs, and I think it's going to be over the next 12 to 18 months, then we go into the period of mainstream adoption. You need to start utilizing these technologies to drive the efficiencies within your businesses to be able to keep up with your competitors. So, that's the main thing that we're looking for in the near term.Over the next three years, what you're looking for is the breakthrough technologies. Where can we find opportunities not just to create efficiencies within existing processes, but to completely rewrite the business process.That's where you see new big companies emerge within the software opportunity – is the people that really fundamentally change the equation around some of these processes.So, Joe, turning it over to you, hardware remains a bottleneck for AI innovation. Why is that the case? And what are the biggest hurdles in the semiconductor space right now?Joe Moore: Well, this has proven to be an extremely computationally intensive application, and I think it started with training – where you started seeing tens of thousands of GPUs or XPUS clustered together to train these big models, these Large Language Models. And you started hearing comments two years ago around the development of ChatGPT that, you know, the scaling laws are tricky.You might need five times as much hardware to make a model that's 10 percent smarter. But the challenge of making a model that's 10 percent smarter, the table stakes of that are very significant. And so, you see, you know, those investments continuing to scale up. And that's been a big debate for the market.But we've heard from most of the big spenders in the market that we are continuing to scale up training. And then after that happened, we started seeing inference suddenly as a big user of advanced processors, GPUs, in a way that they hadn't before. And that was sort of simple conversational types of AI.Now as you start migrating into more of a reasoning AI, a multi pass approach, you're looking at a really dramatic scaling in the amount of hardware, that's required from both GPUs and XPUs.And at the same time the hardware companies are focused a lot on how do we deliver that – so that it doesn't become prohibitively expensive; which it is very expensive. But there's a lot of improvement. And that's where you're sort of seeing this tug of war in the stocks; that when you see something that's deflationary, uh, it becomes a big negative. But the reality is the hardware is designed to be deflationary because the workloads themselves  are inflationary.And so I think there's a lot of growth still ahead of us. A lot of investment, and a lot of rich debate in the market about this.Keith Weiss: Let's pull on that thread a little bit. You talked initially about the scaling of the GPU clusters to support training. Over the past year, we've gotten a little bit more pushback on the ideas or the efficacy of those scaling laws.They've come more under question. And at the same time, we've seen the availability of some lower cost, but still very high-performance models. Is this going to reshape the investments from the large semiconductor players in terms of how they're looking to address the market?Joe Moore: I think we have to assess that over time. Right now, there are very clear comments from everybody who's in charge of scaling large models that they intend to continue to scale.I think there is a benefit to doing so from the standpoint of creating a richer model, but is the ROI there? You know, and that's where I think, you know, your numbers do a very good job of justifying our model for our core companies – where we can say, okay, this is not a bubble. This is investment that's driven by these areas of economic benefit that our software and internet teams are seeing.And I think there is a bit of an arms race at the high end of the market where people just want to have the biggest cluster. And that's, we think that's about 30 percent of the revenue right now in hardware – is supporting those really big models. But we're also seeing, to your point, a very rich hardware configuration on the inference side post training model customization. Nvidia said on their on their earnings call recently that they see several orders of magnitude more compute required for those applications than for that pre-training. So, I think over time that's where the growth is going to come from.But you know, right now we're seeing growth really from all aspects of the market.Keith Weiss: Got it. So, a lot of really big opportunities out there utilizing these GPUs and ASICs, but also a lot of unknowns and potential risks. So, what are the key catalysts that you're looking for in the semiconductor space over the course of this year and maybe over the next three years?Joe Moore: Well, 2025 is, is a year that is really mostly about supply.You know, we're ramping up, new hardware But also, several companies doing custom silicon. We have to ramp all that hardware up and it's very complicated.It uses every kind of trick and technique that semiconductors use to do advanced packaging and things like that. And so, it's a very challenging supply chain and it has been for two years. And fortunately, it's happened in a time when there's plenty of semiconductor capacity out there.But I think, you know, we're ramping very quickly. And I think what you're seeing is the things that matter this year are gonna be more about how quickly we can get that supply, what are the gross margins on hardware, things like that.I think beyond that, we have to really get a sense of, you know, these ROI questions are really important beyond 2025. Because again, this is not a bubble. But hardware is cyclical and there; it doesn't slow gracefully. So, there will be periods where investment may fall off and it'll be a difficult time to own the stocks. And that's, you know, we do think that over time, the value sort of transitions from hardware to software.But we model for 2026 to be a year where it starts to slow down a little bit. We start to see some consolidation in these investments.Now, 12 months ago, I thought that about 2025. So, the timeframe keeps getting pushed out. It remains very robust. But I think at some point it will plateau a little bit and we'll start to see some fragmentation; and we'll start to see markets like, you know, reasoning models, inference models becoming more and more critical. But that's where when I hear you and Brian Nowak talking about sort of the early stage that we are of actually implementing this stuff, that inference has a long way to go in terms of growth.So, we're optimistic around the whole AI space for semiconductors. Obviously, the market is as well. So, there's expectations, challenges there. But there's still a lot of growth ahead of us.So Keith, looking towards the future, as AI expands the functionality of software, how will that transform the business models of your companies?Keith Weiss: We're also fundamentally optimistic about software and what GenerativeAI means for the overall software industry.If we look at software companies today, particularly application companies, a lot of what you're trying to do is make information workers more productive. So, it made a lot of sense to price based upon the number of people who are using your software. Or you've got a lot of seat-based models.Now we're talking about completely automating some of those processes, taking people out of the loop altogether. You have to price differently. You have to price based upon the number of transactions you're running, or some type of consumptive element of the amount of work that you're getting done. I think the other thing that we're going to see is the market opportunity expanding well beyond information workers.So, the way that we count the value, the way that we accrue the value might change a little bit. But the underlying value proposition remains the same. It's about automating, creating productivity in those business processes, and then the software companies pricing for their fair share of that productivity.Joe Moore: Great. Well, let me just say this has been a really useful process for me. The collaboration between our teams is really helpful because as a semiconductor analyst, you can see the data points, you can see the hardware being built. And I know the enthusiasm that people have on a tactical level. But understanding where the returns are going to come from and what milestones we need to watch to see any potential course correction is very valuable.So on that note, it's time for us to get to the exciting panels at the Morgan Stanley TMT conference. Uh, And we'll have more from the conference on the show later this week. Keith, thanks for taking the time to talk.Keith Weiss: Great speaking with you, Joe.Joe Moore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.