Thoughts on the Market

In 2022 it seemed like there was nowhere to hide from the negative returns in traditional investing. But if we look to quantitative strategies, we may find more flexibility for the year ahead.----- Transcript -----Vishy Tirupattur Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's head of fixed income research and director of Quantitative Research.Stephan Kessler And I'm Stephan Kessler, Morgan Stanley's global head of Quantitative Investment Strategies Research.Vishy Tirupattur And on this special episode of the podcast, we will discuss the return of quantitative investing. It's Wednesday, January 11th, at 10 a.m. in New York.Stephan Kessler And 3 p.m. in London.Vishy Tirupattur Stephan, 2022 was a pretty dismal year for traditional investment strategies across various asset classes. You know, equities, credit, government bonds—all of them had negative total returns for the year. And in fact, for traditional investment strategies, there really was nowhere to hide. That said, 2022 turned out to be a pretty decent year for systematic investing or factor investing or quantitative investing strategies. So can you start us off by giving us an overview of what systematic factor strategies are and how they performed in 2022 versus traditional investment strategies?Stephan Kessler Absolutely. So, if you look at quant strategies, or systematic strategies, key is 'systematic.' So we look at repetitive, persistent patterns in the markets which can be beneficial for investors. Usually they're data driven. So we look at data which can be price data, fundamental data like economic growth data and the like, which then gives us signals for our investment. Those strategies tend to have low long-term exposures to traditional markets such as equities and fixed income. So they work as diversifiers and the rationale for why they work comes from academic theory, by and large, where we look at risk premia, we look at structural or behavioral patterns that are well known in the academic world. So common strategies that investors apply can be carry investing, for example. So we benefit here from interest rate differentials where we borrow, for example, money in low yielding regions or currencies, and then we invest in high yielding currencies, clipping the difference in the interest rate between these regions. Value investing is another important style that investors implement, where they simply identify undervalued investments, undervalued assets by looking at price to book ratios, by looking at dividend yields, for example, to identify what appears to be cheap. Momentum investing is probably the third most important strategy here, which is where we benefit from the price trends in markets which we know to be persistent. So those are the, I think, the important styles—carry, value and momentum—but there are also more complex strategies where we model and identify very minute details in markets. We go really deep into the functionality of markets. Then the final point I would make is that these strategies tend to be long-short so they are not long biased as traditional investing is, but they can go really both directions in terms of their positioning.Vishy Tirupattur Investors often ask how quant strategies, that are typically predicated on historical data patterns, can handle volatile market environments with very few historical precedents. 2022 was anything but normal. Don't such market aberrations break quant strategies?Stephan Kessler That's a really good question. If you look at it from the higher level, it does seem like this was a unique market that actually should be challenging for systematic strategies which look at historical patterns. When you dig a little bit deeper, it becomes actually more nuanced. So the strong outperformance of quant in '22, we think is driven by the different catalysts that we saw in the markets. So for example, the tightening by central banks led to substantial and durable macro trends that can be captured by trend following. We saw a reemergence of interest rates across the globe through this monetary policy, which sparked the revival of carry investing. And then equity value investing reemerged as higher rates forced investors to focus more on fundamental valuations, and that led to an increase in efficiency of the value factor.Vishy Tirupattur Will any of the performance patterns that you saw in 2022 carry over into 2023? Or do you think the investment landscape for quant investors would be very different in this year?Stephan Kessler 2023 we think we'll look, of course, different from the past year. So, we'll move into an environment of low inflation where terminal rates are going to be reached by many central banks. And then equities will start the year in Q1 likely down to then end the year rather flat according to our equity strategists. Now, from a quant perspective, while this is different in terms of the actual dynamics, what remains is that we are likely to see market swings, which tend to favor short- to mid-term trend following strategies. The differences in central bank policies are also likely to remain so there's going to be a dispersion in rates and this dispersion in rates will help, in our expectation, carry strategies. It makes carry strategies attractive. Indeed, if you think about being exposed to, say, for example, carry in fixed income, where we go long bonds with high yields, we go short bonds with low yields and clip the difference, those bonds with particularly high interest rates are likely to also benefit from a normalization of rates. So, you could actually see an additional benefit where being invested in high yielding bonds will be then doubly positive because you earn the carry, but you also benefit from a normalization of rates and the increase in prices of those bonds. And finally, when we look at, you know, value investing, we think that is also likely to remain important because higher rates simply force investors to be focused on the valuations, to be focused on the financing of business activities, to be focused on healthy companies. And so we think that the market dynamics, while different, will continue to favor quant investing.Vishy Tirupattur So Stephan, you talked about a wide range of investment strategies within the quant world. Which of those strategies, what kinds of strategies do you think will drive outperformance in 2023?Stephan Kessler Yeah, I think it's specific forms of what I've mentioned is generally strategies which will do well. So, you know, if we start again with trend following, the market should be positive for it. There are though iterations of trend falling where we bias. And we think these types of biases—we have a long-bias or as we call it defensively-biased trend following strategies—those will be particularly positively performing because they will benefit from the higher rates that we see. We also think that some of the pricing out of inflation and then eventually in terms of the lower rates that we see, that should be beneficial for rates value strategies, where rates converge to longer term levels. And then something we haven't talked much about yet; volatility carry we feel is particularly interesting. Volatility carry means we are selling options in the markets. We sell a call option, a put option in the market, we earn the premium and then we hedge the beta that is embedded. So, we essentially try to earn the option premium without taking directional market risk, which works quite well in terms of harvesting a carry in calm market environments. But it tends to be causing negative returns, when you see spikes in volatility, when you see jumps in markets. We think that this is going to be an interesting investment opportunity, first on the Treasury side and then, once equity markets through this more difficult slowdown that we see at the moment, we also think volatility should get lower and that should benefit generally volatility carry in equities. So, selling equity options into the market. So those would be the particularly strong strategies. And then, as I already mentioned, there's this crossing of equity value and quality is a theme that we believe is particularly well-suited for the environment.Vishy Tirupattur If you're thinking about the outlook for 2023 for quant investors, what are the real risks? What can go wrong?Stephan Kessler So I think there's, of course, a range of things that can go wrong in such a dynamic and fluid market environment as we are at the moment. So one is that rates could continue to increase more than we expect at the moment, possibly driven by inflation being more resilient. That would not be good for rates carry strategies which tend to underperform in such environments because they are long. And so as those assets build up further, as the rates go up, the price of those assets would be hit. And on the back of that, the carry strategies would suffer. We also think that against all odds, growth is very resilient. There's a growth rally. That would, of course, hurt value type strategies, maybe through higher efficiency or resilience of tech stocks, for example. And then finally, if markets become to gap-y, i.e., if they don't trend but they really jump around through this market environment, that that might actually be negative for trend following strategies.Vishy Tirupattur Looks like 2023 will be a fascinating year ahead for quant investing strategies. So, Stephan, thanks for taking the time to talk to us.Stephan Kessler Great speaking with you, Vishy.Vishy Tirupattur And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

As 2023 begins, most market participants agree the first half of the year could be challenging. But when we dig into the details, that's where the agreement ends.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, January 10th at 10 a.m. in New York. So let's get after it.To start the year, we return to a busy week of client meetings and calls. While our conversations ranged across a wide swath of topics, the most consistently asked question was, "if everybody has the same view, how can that be right?" The view I'm referring to is that most sell-side strategists and buy-side investors believe the first half of the year will be a challenging one, but the second half will be much better. Wrapped into this view is the notion that we will experience a mild recession starting in the first half. The Fed will cut rates in response and a new bull market will begin. Truth be told, this is generally our view too. So, how do we reconcile this dilemma of how the consensus can be right? We think the answer is that the consensus can be right directionally, but it will be wrong in the magnitude and rationale which may inhibit its ability to monetize the swings we envision. More importantly, our biggest issue with the consensus view is how nonchalant many investors seem to be about the risk of a recession. When we ask investors how low they think the S&P 500 will trade in a mild recession, most suggest 35-3600 will suffice, and the October lows will hold. One rationale for this more constructive view is that we are closer to a Fed pause, and that pivot will put a floor under stock valuations.The other reason we hear is that everyone is already bearish and expects a recession. Therefore, it must already be priced. We would caution against those conclusions as recessions are never priced until they arrive and we're not so sure the Fed is going to be coming to the rescue as fast as usual, given the inflation dynamics unique to this cycle.The other way we think the consensus is likely to be wrong is on earnings. With or without an economic recession, the earnings forecasts for 2023 remain materially too high in our view. Our base case forecast for 2023 S&P 500 earnings per share is $195, and this assumes no recession, while our bear case forecast of a recession leads to $180. This compares to the bottoms up consensus forecast of $230, which nearly every institutional investor agrees is too high. However, most are in the camp that the S&P 500 earnings per share won't be as bad as we think, with the average client around $210-$215. Coincidentally, this is in line with the consensus sell-side strategists' forecast of $210 as well. In summary, even if we don't experience an economic recession, investor expectations for earnings remain too high based on our forecasts and conversations with clients. This leaves equity prices unattractive at current levels.Our well-below-consensus earnings forecast is centered around a theme of negative operating leverage driven by falling inflation. One of the most consistent pieces of pushback we have received to our negative earnings outlook centers around the idea that higher inflation means higher nominal GDP and therefore revenue growth that can remain positive even in the event of a mild real GDP recession. Therefore, earnings should hold up better than usual. While we agree with the premise of this view that revenue growth can remain positive this year, even if we have a mild recession, it ignores the fact that margins are likely to materially disappoint. This is because the rate of change on cost inflation exceeds the rate of change on sales. Indeed, margins have started to fall and the consensus forecasts for fourth quarter results currently assume negative operating leverage. But we think this dynamic is likely to get much worse before it gets better.The bottom line, equity markets still appear to be overly focused on inflation and the Fed, as evidenced by the still meaningfully negative correlation between real yields and equity returns. Last week, we saw expectations improve slightly for inflation and the Fed's reaction to it. And stocks rallied sharply into the end of the week. We think this ignores the ramifications of falling prices on profit margins, which is likely to outweigh any benefit from increased Fed dovishness.In short, we think we're quickly approaching the point where bad news on growth is bad. And we see 3900 on the S&P 500 as a good level to be selling into again in front of what is likely to be another weak earnings season led by poor profitability and the broader introduction of 2023 guidance.Thanks for listening. 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 to find the show.

With an eventful year for the oil market behind us, what are the factors that might influence the supply, demand, and ultimately the pricing of oil and gas in 2023?----- Transcript -----Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss some of the key uncertainties that the global oil market will likely face in 2023. It's Monday, January 9th at 3 p.m. in London. Looking back, 2022 was an eventful year for the oil market. The post-COVID demand recovery of 2021 continued during the first half and by June demand was back to 2019 levels. For a brief period the demand recovery appeared complete. Over the same period non-OPEC supply growth mostly disappointed, OPEC's spare capacity declined and inventories drew. Which eventually meant that oil markets had to start searching for the price level where demand destruction kicked in. Eventually, this forced prices of key oil products such as gasoline and diesel, to record levels of around $180-$290 a barrel in June. Clearly, those prices did the trick. Together with new mobility restrictions in China, aggressive rate hikes by central banks and rising risk of recession, particularly in Europe, they effectively stalled the oil demand recovery. And by September, global oil demand was once again below September 2019 levels. By late 2022, brent prices that retraced much of their earlier gains and other indicators, such as time spreads and refining margins, had softened too. Now, looking into 2023 we don't see this changing soon. Counting barrels of supply and demand suggest that the first quarter will still be modestly oversupplied. Also, declining GDP expectations, falling PMIs and central bank tightening are still weighing heavily on the oil market today. Eventually, however, we see a more constructive outlook emerging, say from the spring onwards. First, we expect to see a recovery in aviation. Global jet fuel consumption is still well below 2019 levels, and we think that a substantial share of that demand will return this year. Another key development will be China's reopening. At the end of 2022 China's oil demand was still well below 2020 and 2021 levels, held back by lockdowns and mobility restrictions. We expect China's oil demand to start recovering after the first quarter of this year. Shifting over to Europe and the EU embargo on Russian oil, as of last November, the EU still imported 2.2 million barrels a day of Russian crude oil and oil products. Now, especially after the EU's embargo on the import of oil product kicks in, which will be on February 5th, Russia will need to find other buyers and the EU will need to find other suppliers for much of this oil. Now, some of this has already been happening, but the full rearrangement of oil flows around the world as a result of this issue will probably not be full, smooth, fast and without price impact. As a result, we expect that some Russian oil will be lost in the process and Russian oil production is likely to decline in coming months. In the U.S., capital discipline and supply chain bottlenecks have already held back the growth in U.S. shale production. However, well performance and drilling inventory depth are emerging additional concerns putting further downward pressure on the production outlook. Eventually, the slowdown in U.S. shale will put OPEC in the driver's seat of the oil market. Also last year saw an unprecedented release of oil from the U.S. Strategic Petroleum Reserve. But this source of supply is now ended and the U.S. Energy Department will likely start buying back some of this oil in coming months. Finally, investment in new oil and gas production is rebounding, but it comes from a very low base and the recovery has so far been modest. Much of it is simply to absorb cost inflation that has also happened in the industry. In other words, the industry isn't investing heavily in new oil production, which has implications for the longer term outlook for oil supply. Eventually, we think these factors will combine in a set of tailwinds for oil prices. If we are wrong on those, the market would be left with the status quo, which would be neutral. But we believe that these risks will eventually skew positively later in 2023. We expect the oil market to return to balance in the second quarter, and be undersupplied in the second half of this year. With a limited supply buffer only, we think brent will return to over $100 a barrel by the middle of the year. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Discover what 2022, a historic year for markets, can teach investors as they navigate the new year.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 6th at 2 p.m. in London.For the year ahead, we think U.S. growth slows while China accelerates, inflation moderates and central banks pause their rate hikes while keeping policy restrictive enough to slow growth. We think that backdrop favors bonds over stocks, emerging over developed markets and international over U.S. equities.But there'll be plenty of time to discuss those views and more in the coming weeks. Today, I wanted to take a step back and talk a little about the year that was. 2022 was historic and within these unusual swings are some important lessons for the year ahead.First, for the avoidance of doubt, 2022 was not normal. It was likely the first year since at least the 1870s that both U.S. stocks and long-term bonds fell more than 10% in the same calendar year. We don't think that repeats and forecast small positive total returns for both U.S. stocks and bonds in the year ahead.Second, it was a year that challenged some conventional wisdom about what counts as a risky part of one's portfolio. So-called defensive stocks—those in consumer staples, health care and utilities—outperformed significantly, which isn't a surprise given the poor market environment. But other things were more unusual. Small cap stocks and value stocks, which are often seen as riskier, actually outperformed. Financial equities were the second-best performing sector in Europe, Japan and emerging markets despite being seen as a riskier sector. And both the stock market and currencies of Mexico and Brazil, markets that are seen as high beta, gained in dollar terms despite the historically difficult market environment.This is all a great reminder that the riskiness of an asset class is not set in stone. And it shows the importance of valuation. Small caps, value stocks and Mexico and Brazilian assets all entered 2022 with large historical valuation discounts, which may help explain why they were able to hold up so well. For this year, we think attractive relative valuation could mean international equities are actually less risky than U.S. equities, bucking some of the historical trends.Finally, 2022 was a great year for the so called 'momentum factor.' Factor investing is the idea that you favor a certain characteristic over and over. So, for example, always buying assets that are cheaper, the 'value factor,' buying assets that pay you more, the 'carry factor,' or always buying assets that are doing better, the 'momentum factor.'In 2022, buying what had been rising, both outright or relative to its peers, worked pretty well across assets despite the simplicity of this strategy. Our work has suggested that momentum has a lower return than these other factors but is often very helpful in more difficult market environments. It's a good reminder that it's not always best to be contrarian and sometimes going with the trend is a simple but effective strategy, especially in commodities and short-term interest rates.2022 is in the record books. It was an unusual year but one that still provides some useful and important lessons for the year that lies ahead.Happy New Year and thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us to review. We'd love to hear from you.

With the fight against inflation quieting down in many regions, Asia saw a relatively small step up in inflation. Will that leave 2023 open to the possibility of growth outperformance?----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing our 2023 outlook for Asia economics. It's Thursday, January 5th at 9 a.m. in Hong Kong. If 2022 was all about inflation, we believe 2023 will be about the aftermath of this battle with inflation. All eyes are now on how the world's largest economies will stack up after this battle with inflation. While Asia, along with the rest of the world, face multiple stagflationary shocks in 2022, we think that Asia weathered these shocks better. Indeed, we believe Asia will enter a rapid phase of disinflation and is well-positioned for growth outperformance in 2023. The step up in Asia's inflation was smaller compared to other regions. Furthermore, Asia's inflation had more of a cost-push element, meaning it was driven to a large extent by increases in cost of raw materials. And we believe Asia's inflation already peaked in third quarter of 2022. Asia's inflation should be rapidly returning towards central bank's comfort zone. We expect this to be the case for 90% of Asian economies by mid 2023. Cost-push factors are fading, resulting in lower food and energy inflation. Core good prices are descending rapidly, given the deflation in goods demand. Moreover, labor markets were not that tight in Asia, and wage growth has remained below its pre-COVID rates. Because of this backdrop, we've argued that central banks in Asia do not need to take policy rates deeper into restrictive territory. In fact, all of the central banks in the region will likely stop tightening in first quarter of 2023. This pause in Asia's rate hiking cycle, coupled with an easing in U.S. 10 year bond yields and with the peak of USD behind us, should lead to easier financial conditions in 2023. While weak external demand will remain a drag at least through the first half of 2023, Asia's domestic demand is supported by three factors. First, the easing of financial conditions will lift the private sector sentiment. Second, we are witnessing a strong uplift in large economies like India and Indonesia, supported by healthy balance sheets. Finally, China's reopening will lift consumption growth and have a positive effect on economies in the region, principally via the trade channel, helping Asian economies to get onto the path of growth outperformance. We expect Asia's growth to improve from a trough of 2.8% in first quarter of 2023, to 4.9% in second half of 2023, while DM growth will slow from 0.9% in first quarter of 2023 to 0.3% in second half of 23. Growth differentials will likely swing back in Asia's favor, rising back towards the levels last seen in 2017 and 2018. There are, of course, risks to our optimistic outlook for Asia. If U.S. inflation stays elevated for longer, this would lead to more tightening by the Fed than is expected and could drive renewed strength in the USD. This in turn would prolong the rate hike cycle in Asia, keeping financial conditions tight and exert downward pressures on growth. A delayed reopening in China could impact China's growth trajectory with adverse spillover implications for the rest of the region. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

The House of Representatives continues its struggle to appoint a new Republican Speaker. What should investors consider as this discord sets the legislative tone for the year?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, January 4th, at 10 a.m. in New York. The focus in D.C. this week has been on choosing the new speaker of the House of Representatives. Choosing this leader, who largely sets the House's voting and workflow agenda, is a necessary first step to opening a new Congress following an election. This process is usually uneventful, with the party in the majority typically having decided who they'll support long before any formal vote. But this week, something happened, which hasn't in 100 years. The House failed to choose a speaker on the first ballot. As of this recording, we're now three ballots in and the Republican majority has yet to agree on its choice. So is this just more DC noise? Or do investors need to be concerned? While it's too early to tell, and there don't appear to be any imminent risks, we think investors should at least take it seriously. The House of Representatives will eventually find a way to choose a speaker, but the Republicans' rare difficulty in doing so suggests it's worth tracking governance risk to the U.S. economic outlook that could manifest later in the year. To understand this, we must consider why Republicans have had difficulty choosing a speaker. In short, there's plenty of intraparty disagreement on policy priorities and governance style. And with a thin majority, that means small groups of Republican House members can create the kind of gridlock we're seeing in the speaker's race. This dynamic certainly isn't new, but the speaker's situation suggests it may be worse than in recent years. So whoever does become the next speaker of the House could have, even by recent standards, a higher degree of difficulty keeping their own position and holding the Republican coalition together. That's a tricky dynamic when it comes to negotiating on politically complex but economically impactful issues, such as raising the debt ceiling and keeping the government funded, two votes that will likely take place after the summer. On both counts, some conservatives have in the past been willing to say they will vote against those actions and in some cases have actually followed through. But aside from the debt ceiling situation in 2011, these votes have largely been protests and did not result in key policy changes. That's still the most likely outcome this year. And as listeners of this podcast are aware, we've typically dismissed debt ceiling and shutdown risks as noise that's not worth much investor attention. But we're not ready to say that today. Because while policymakers are likely to find a path to raising the debt ceiling, this negotiation could look and feel a lot more like the one in 2011 where party disagreements appeared intractable, even if they ultimately were not. That could remind investors that the compromise involved contractionary fiscal policy, which could weigh on markets if the U.S. economy is also slowing considerably per our expectations. This is a risk both our Chief Global Economist, Seth Carpenter, and I flagged in the run up to the recent U.S. midterm election. Of course, it's only January, and 6 to 9 months is a lifetime in politics. So, we don't think there's anything yet for investors to do but monitor this dynamic carefully. We'll be doing the same and we'll keep you in the loop. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

As new weight management medications are being developed, might the obesity market parallel the likes of hypertension or high blood pressure to become the next blockbuster Pharma category?----- Transcript -----Welcome to Thoughts on the Market. I'm Terence Flynn, Head of the U.S. Pharma Sector for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, today I'll talk about the global obesity challenge and some of the key developments we expect in 2023. It's Tuesday, January 3rd, at 4 p.m. in New York. If you're like most people, you're probably seeing a lot of post-holiday ads for gym memberships, diet apps and nutrition services. So this seems like a relevant time to provide an update on obesity. A few months ago, we hosted an episode on this show discussing the global obesity epidemic and how it's now reached an inflection point because of new weight management drugs that show a lot of promise and benefits. We continue to believe that obesity is the "new hypertension or high blood pressure", and that it looks set to become the next blockbuster pharma category. Obesity has been classified by the American Medical Association, and more recently the European Commission, as a chronic disease, and its treatment is on the cusp of moving into mainstream primary care management. Essentially, the obesity market is where the treatment of high blood pressure was in the mid to late 80's, before it transformed into a $30 Billion market by the end of the 90's. One of the main reasons the narrative around obesity is inflecting is because the focus is shifting to the upstream cause, as opposed to the downstream consequences of diabetes and cardiovascular disease. Now, given this change in focus, we expect excess weight to become a treatment target. The World Health Organization estimates that about 650 million people are living with obesity, and the associated personal, social and economic costs are significant. Over time, we're expecting about a quarter of obese individuals will engage with physicians, up from about 7% currently. Now, this compares to approximately 80% for high blood pressure and diabetes. Furthermore, well over 300 million of these people could potentially receive a new anti-obesity medicine. Looking back historically, previous medicines for obesity had minimal efficacy and were plagued by safety issues, which also contributed to limited reimbursement coverage. In our view, this is all poised to change as the more efficacious GLP-1 drugs are adopted and utilized and the companies begin to generate outcomes data to support the derivative benefits of these drugs beyond weight loss. Of course, as with biopharma, there are many de-risking clinical, regulatory and commercial steps in the development of the obesity market. This year, we're most focused on a key phase three outcomes trial called "SELECT", which we expect to read out this summer to conclude that "weight management saves lives". Furthermore, we think the innovation wave should continue as companies are working on a next generation of injectable combo drugs that could come to the market later this decade for obesity and Type two diabetes. And beyond the possibility of turning the tide on the obesity epidemic, it's also exciting to see room in the markets for multiple players and investment opportunities in a market that could reach over $50 billion by 2030. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.

Original Release on November 15th, 2022: As we look ahead to 2023, we see a divergence away from the trends of 2022 in key areas across growth, inflation, and central bank policy. Chief Cross Asset Strategist Andrew Sheets and Global Chief Economist Seth Carpenter discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's chief cross-asset strategist. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's global chief economist. Andrew Sheets: And on the special two-part episode of the podcast, we'll be discussing Morgan Stanley's Global Year Ahead outlook for 2023. Today, we'll focus on economics, and tomorrow we'll turn our attention to strategy. It's Tuesday, November 15th at 3 p.m. in London. Seth Carpenter: And it's 10 a.m. in New York. Andrew Sheets: So, Seth I think the place to start is if we look ahead into 2023, the backdrop that you and your team are forecasting looks different in a number of important ways. You know, 2022 was a year of surprisingly resilient growth, stubbornly high inflation and aggressively tightening policy. And yet as we look ahead, all three of those elements are changing. I was hoping you could comment on that shift broadly and also dig deeper into what's changing the growth outlook for the global economy into next year. Seth Carpenter: You're right, Andrew, this year, in 2022, we've seen growth sort of hang in there. We came off of last year in 2021, a super strong year for growth recovering from COVID. But the theme this year really has been a great deal of inflation around the world, especially in developed markets. And with that, we've seen a lot of central banks everywhere start to raise interest rates a great deal. So what does that mean as we end this year and go into next year? Well, we think we'll start to see a bit of a divergence. In the developed market world where we've seen both a lot of inflation and a lot of central bank hiking, we think we get a great deal of slowing and in fact a bit of contraction. For the euro area and for the U.K, we're writing down a recession starting in the fourth quarter of this year and going into the beginning of next year. And then after that, any sort of recovery from the recession is going to be muted by still tight monetary policy. For the US, you know, we're writing down a forecast that just barely skirts a recession for next year with growth that's only slightly positive. That much slower growth is also the reflection of the Federal Reserve tightening policy, trying to wrench out of the system all the inflation we've seen so far. In sharp contrast, a lot of EM is going to outperform, especially EM Asia, where the inflationary pressures have been less so far this year, and central banks, instead of tightening aggressively to get restrictive and squeeze inflation out, they're actually just normalizing policy. And as a result, we think they'll be able to outperform. Andrew Sheets: And Seth, you know, you mentioned inflation coming in hot throughout a lot of 2022 being one of the big stories of the year that we've been in. You and your team are forecasting it to moderate across a number of major economies. What drives a change in this really important theme from 2022? Seth Carpenter: Absolutely. We do realize that inflation is going to continue to be a very central theme for all sorts of markets everywhere. And the fact that we have a forecast with inflation coming down across the world is a really important part of our thesis. So, how can we get any comfort on the idea that inflation is going to come down? I think if you break up inflation into different parts, it makes it easier to understand when we're thinking about headline inflation, clearly, we have food, commodity prices and we've got energy prices that have been really high in part of the story this year. Oil prices have generally peaked, but the main point is we're not going to see the massive month on month and year on year increases that we were seeing for a lot of this year. Now, when we think about core inflation, I like to separate things out between goods and services inflation. For goods, the story over the past year and a half has been global supply chains and we know looking at all sorts of data that global supply chains are not fixed yet, but they are getting better. The key exception there that remains to be seen is automobiles, where we have still seen supply chain issues. But by and large, we think consumer goods are going to come down in price and with it pull inflation down overall. I think the key then is what goes on in services and here the story is just different across different economies because it is very domestic. But the key here is if we see the kind of slowing down in economies, especially in developed market economies where monetary policy will be restrictive, we should see less aggregate demand, weaker labor markets and with it lower services inflation. Andrew Sheets: How do you think central banks respond to this backdrop? The Fed is going to have to balance what we see is some moderation of inflation and the ECB as well, with obvious concerns that because forecasting inflation was so hard this year and because central banks underestimated inflation, they don't want to back off too soon and usher in maybe more inflationary pressure down the road. So, how do you think central banks will think about that risk balance and managing that? Seth Carpenter: Absolutely. We have seen some surprises, the upside in terms of commodity market prices, but we've also been surprised at just the persistence of some of the components of inflation. And so central banks are very well advised to be super cautious with what's going on. As a result. What we think is going to happen is a few things. Policy rates are going to go into restrictive territory. We will see economies slowing down and then we think in general. Central banks are going to keep their policy in that restrictive territory basically over the balance of 2023, making sure that that deceleration in the real side of the economy goes along with a continued decline in inflation over the course of next year. If we get that, then that will give them scope at the end of next year to start to think about normalizing policy back down to something a little bit more, more neutral. But they really will be paying lots of attention to make sure that the forecast plays out as anticipated. However, where I want to stress things is in the euro area, for example, where we see a recession already starting about now, we don't think the ECB is going to start to cut rates just because they see the first indications of a recession. All of the indications from the ECB have been that they think some form of recession is probably necessary and they will wait for that to happen. They'll stay in restrictive territory while the economy's in recession to see how inflation evolves over time. Andrew Sheets: So I think one of the questions at the top of a lot of people's minds is something you alluded to earlier, this question of whether or not the US sees a recession next year. So why do you think a recession being avoided is a plausible scenario indeed might be more likely than a recession, in contrast maybe to some of that recent history? Seth Carpenter: Absolutely. Let's talk about this in a few parts. First, in the U.S. relative to, say, the euro area, most of the slowing that we are seeing now in the economy and that we expect to see over time is coming from monetary policy tightening in the euro area. A lot of the slowing in consumer spending is coming because food prices have gone up, energy prices have gone up and confidence has fallen and so it's an externally imposed constraint on the economy. What that means for the U.S. is because the Fed is causing the slowdown, they've at least got a fighting chance of backing off in time before they cause a recession. So that's one component. I think the other part to be made that's perhaps even more important is the difference between a recession or not at this point is almost semantic. We're looking at growth that's very, very close to zero. And if you're in the equity market, in fact, it's going to feel like a recession, even if it's not technically one for the economy. The U.S. economy is not the S&P 500. And so what does that mean? That means that the parts of the U.S. economy that are likely to be weakest, that are likely to be in contraction, are actually the ones that are most exposed to the equity market and so for the equity market, whether it's a recession or not, I think is a bit of a moot point. So where does that leave us? I think we can avoid a recession. From an economist perspective, I think we can end up with growth that's still positive, but it's not going to feel like we've completely escaped from this whole episode unscathed. Andrew Sheets: Thanks, Seth. So I maybe want to close with talking about risks around that outlook. I want to talk about maybe one risk to the upside and then two risks that might be more serious to the downside. So, one of the risks to the upside that investors are talking about is whether or not China relaxes zero COVID policy, while two risks to the downside would be that quantitative tightening continues to have much greater negative effects on market liquidity and market functioning. We're going through a much faster shrinking of central bank balance sheets than you know, at any point in history, and then also that maybe a divided US government leads to a more challenging fiscal situation next year. So, you know, as you think about these risks that you hear investors citing China, quantitative tightening, divided government, how do you think about those? How do you think they might change the base case view? Seth Carpenter: Absolutely. I think there are two-way risks as usual. I do think in the current circumstances, the upside risks are probably a little bit smaller than the downside risks, not to sound too pessimistic. So what would happen when China lifts those restrictions? I think aggregate demand will pick back up, and our baseline forecast that happens in the second quarter, but we can easily imagine that happening in the first quarter or maybe even sometime this year. But remember, most of the pent-up demand is on domestic spending, especially on services and so what that means is the benefit to the rest of the global economy is probably going to be smaller than you might otherwise think because it will be a lot of domestic spending. Now, there hasn't been as much constraint on exports, but there has been some, and so we could easily see supply chains heal even more quickly than we assume in the baseline. I think all of these phenomena could lead to a rosier outlook, could lead to a faster growth for the global economy. But I think it's measured just in a couple of tenths. It's not a substantial upside. In contrast, you mentioned some downside risks to the outlook. Quantitative tightening, central banks are shrinking their balance sheets. We recently published on the fact that the Fed, the Bank of England and the European Central Bank will all be shrinking their balance sheet over the next several months. That's never been seen, at least at the pace that we're going to see now. Could it cause market disruptions? Absolutely. So the downside risk there is very hard to gauge. If we see a disruption of the flow of credit, if we see a generalized pullback in spending because of risk, it's very hard to gauge just how big that downside is. I will say, however, that I suspect, as we saw with the Bank of England when we had the turmoil in the gilt market, if there is a market disruption, I think central banks will at least temporarily pause their quantitative tightening if the disruption is severe enough and give markets a chance to settle down. The other risk you mentioned is the United States has just had a mid-term election. It looks like we're going to have divided government. Where are the risks there? I want to take you back with me in time to the mid-term elections in 2010, where we ended up with split government. And eventually what came out of that was the Budget Control Act of 2011. We had split government, we had a debt limit. We ended up having budget debates and ultimately, we ended up with contractionary fiscal policy. I think that's a very realistic scenario. It's not at all our baseline, but it's a very realistic risk that people need to pay attention to. Andrew Sheets: Seth, thanks for taking the time to talk. Seth Carpenter: Andrew, I always like getting a chance to talk to you. Andrew Sheets: And thanks for listening. Be sure to tune in for part two of this episode where Seth and I will discuss Morgan Stanley's year ahead. Strategy Outlook. If you enjoy thoughts of the market, please leave us a review on Apple Podcasts and share this podcast with a friend or colleague today.

Original Release on December 7th, 2022: As India enters a new era of growth, investors will want to know what’s driving this growth and how it may create once-in-a-generation opportunities. Head of Global Thematic and Public Policy Research Michael Zezas and Chief India Equity Strategist Ridham Desai discuss.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research. Ridham Desai: And I'm Ridham Desai, Morgan Stanley's Chief India Equity Strategist. Michael Zezas: And on this special episode of Thoughts on the Market, we'll discuss India's growth story over the next decade and some key investment themes that global investors should pay attention to. It's Wednesday, December 7th, at 7 a.m. in New York. Michael Zezas: Our listeners are likely well aware that over the past 25 years or so, India's growth has lagged only China's among the world's largest economies. And here at Morgan Stanley, we believe India will continue to outperform. In fact, India is now entering a new era of growth, which creates a once in a generation shift in opportunities for investors. We estimate that India's GDP is poised to more than doubled to $7.5 trillion by 2031, and its market capitalization could grow 11% annually to reach $10 trillion. Essentially, we expect India to drive about a fifth of global growth in the coming decade. So Ridham, what in your view are the main drivers behind India's growth story? Ridham Desai: Mike, the full global trends of demographics, digitalization, decarbonization and deglobalization that we keep discussing about in our research files are favoring this new India. The new India, we argue, is benefiting from three idiosyncratic factors. The first one is India is likely to increase its share of global exports thanks to a surge in offshoring. Second, India is pursuing a distinct model for digitalization of its economy, supported by a public utility called India Stack. Operating at population scale India stack is a transaction led, low cost, high volume, small ticket size system with embedded lending. The digital revolution has already changed the way India handles documents, the way it invests and makes payments and it is now set to transform the way it lends, spends and ensures. With private credit to GDP at just 57%, a credit boom is in the offing, in our view. The third driver is India's energy consumption and energy sources, which are changing in a disruptive fashion with broad economic benefits. On the back of greater access to energy, we estimate per capita energy consumption is likely to rise by 60% to 1450 watts per day over the next decade. And with two thirds of this incremental supply coming from renewable sources, well in short, with this self-help story in play as you said, India could continue to outperform the world on GDP growth in the coming decade. Michael Zezas: So let's dig into some of the specifics here. You mentioned the big surge in offshoring, which has resulted in India's becoming "the office of the world". Will this continue long term? Ridham Desai: Yes, Mike. In the post-COVID environment, global CEOs appear more comfortable with work from home and also work from India. So the emergence of distributed delivery models, along with tighter labor markets globally, has accelerated outsourcing to India. In fact, the number of global in-house captive centers that opened in India over the past two years was double of that in the prior four years. During the pandemic years, the number of people employed in this industry in India rose by almost 800,000 to 5.1 million. And India's share in global services trade rose by 60 basis points to 4.3%. In the coming decade we think the number of people employed in India for jobs outside the country is likely to at least double to 11 million. And we think that global spending on outsourcing could rise from its current level of U.S. dollar 180 billion per year to about 1/2 trillion U.S. dollars by 2030. Michael Zezas: In addition to being "the office of the world", you see India as a "factory to the world" with manufacturing going up. What evidence are we seeing of India benefiting from China moving away from the global supply chain and shifting business activity away from China? Ridham Desai: We are anticipating a wave of manufacturing CapEx owing to government policies aimed at lifting corporate profits share and GDP via tax cuts, and some hard dollars on the table for investing in specific sectors. Multinationals are more optimistic than ever before about investing in India, and that's evident in the all-time high that our MNC sentiment index shows, and the government is encouraging investments by building both infrastructure as well as supplying land for factories. The trends outlined in Morgan Stanley's Multipolar World Thesis, a document that you have co authored, Mike, and the cheap labor that India is now able to offer relative to, say, China are adding to the mix. Indeed, the fact is that India is likely to also be a big consumption market, a hard thing for a lot of multinational corporations to ignore. We are forecasting India's per capita GDP to rise from $2,300 USD to about $5,200 USD in the next ten years. This implies that India's income pyramid offers a wide breadth of consumption, with the number of rich households likely to quintuple from 5 million to 25 million, and the middle class households more than doubling to 165 million. So all these are essentially aiding the story on India becoming a factory to the world. And the evidence is in the sharp jump in FDI that we are already seeing, the daily news flows of how companies are ramping up manufacturing in India, to both gain access to its market and to export to other countries. Michael Zezas: So given all these macro trends we've been discussing, what sectors within India's economy do you think are particularly well-positioned to benefit both short term and longer term? Ridham Desai: Three sectors are worth highlighting here. The coming credit boom favors financial services firms. The rise in per capita income and discretionary income implies that consumer discretionary companies should do well. And finally, a large CapEx cycle could lead to a boom for industrial businesses. So financials, consumer discretionary and industrials. Michael Zezas: Finally, what are the biggest potential impediments and risks to India's success? Ridham Desai: Of course, things could always go wrong. We would include a prolonged global recession or sluggish growth, adverse outcomes in geopolitics and/or domestic politics. India goes to the polls in 2024, so another election for the country to decide upon. Policy errors, shortages of skilled labor, I would note that as a key risk. And steep rises in energy and commodity prices in the interim as India tries to change its energy sources. So all these are risk factors that investors should pay attention to. That said, we think that the pieces are in place to make this India's decade.Michael Zezas: Ridham, thanks for taking the time to talk. Ridham Desai: Great speaking with you, Mike. Michael Zezas: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people find the show.

Original Release on December 2nd, 2022: While 2022 saw the fastest pace of policy tightening on record, has the Fed’s hiking cycle properly set the U.S. economy up for a soft landing in 2023?----- Transcript -----Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss our 2023 outlook for the U.S. economy. It's Friday, December 2nd, at 10 a.m. in New York. Let's start with the Fed and the role higher interest rates play in the overall growth outlook. The Fed has delivered the fastest pace of policy tightening on record and now feels comfortable to begin slowing the pace of interest rate increases. We expect it to step down the pace to 50 basis points at its meeting later this month and then deliver a final hike in January to a peak rate of between 4.5 and 4.75%. But in order to keep inflation on a downward trajectory, the Fed will likely keep rates at that peak level for most of next year. This shift to a more cautious stance from the Fed we think will help the U.S. economy narrowly miss recession in 2023. And we think only in the back half of 2024 will the pace of growth pick back up as the Fed gradually reduces the policy rate back toward neutral, which is around 2.5%. Altogether, we forecast 2023 GDP growth of just 0.3% before rebounding modestly to 1.4% in 2024. One bright spot in the outlook is that inflation seems to have reached a turning point. Mounting evidence points to a slowing in housing prices and rents, though they continue to drive above target inflation. Core goods inflation should turn to disinflation as supply chains normalize and demand shifts to services and away from goods. Used vehicle prices are a big contributor to lower overall inflation in our forecast, as our motor vehicle analysts believe that used car prices could be down as much as 10 to 20% next year. So overall, we expect core PCE - or personal consumption expenditures inflation - to slow from 5% this year, to 2.9% in 2023, and further to 2.4% in 2024. Throughout 2022, rising interest rates have raised borrowing costs, which has weighed on consumption. And we expect that to continue into 2023 as the cumulative effects of past policy hikes continue to flow through to households. On the income side, we expect a rebound in real disposable income growth in 23, because inflation pressures abate while job growth continues to be positive. So if I put those together, slower consumption and rising incomes should lift the savings rate from 3.2% this year, to 5.1% in 2023, and 6.2% in 2024. So households will start to rebuild that cushion. Now we're in the midst of a sharp housing correction, and we expect a double digit decline in residential investment to continue. But we don't expect a commensurate drop in home valuations. Our housing strategies predict just a 4% drop in national home prices in 2023, and further price declines are likely in the years ahead, but that's a much milder drop in home valuations compared with the magnitude of the drop off in housing activity. So we think that residential wealth, real estate wealth will continue to be a strong backdrop for household balance sheets. Now going forward, mortgage rates will start to fall again after reaching these peaks around 7%. And with healthy job gains, and that increase in real disposable income growth affordability should begin to ease somewhat, we think starting in the back half of 2024. Turning to the labor market, while signs of falling inflation is important to the Fed, so are signs that the labor market is softening and we expect softer demand for labor and further labor supply gains to create the slack in the labor market the Fed is looking for. So we expect job growth will likely fall below the replacement rate by the second quarter of 2023, pushing up the unemployment rate to 4.3% by the end of next year and 4.4% by the end of 2024. In sum, we think the U.S. economy is at a turning point, but not a turning point toward recession, a turning point toward what is likely to prove to be two sluggish years of growth in the economy. The Fed's hiking cycle is working as it should. The labor market is softening. The inflation rate is coming down. And we think that puts the U.S. economy on track for a soft landing in 2023. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.