Thoughts on the Market

Looking back on the 2016 and 2020 elections, it is clear that elections can have a significant impact on the U.S. economic outlook. The question is whether the coming midterm elections have any meaningful implications. Head of U.S. Public Policy Research and Municipal Strategy Michael Zezas and Chief U.S. Economist Ellen Zentner discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of U.S. Public Policy Research and Municipal Strategy for Morgan Stanley. Ellen Zentner: And I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Michael Zezas: And on this special edition of the podcast, we'll be talking about the 2022 U.S. midterm elections and the potential impact on markets and the economy. It's Wednesday, June 1st, at 10 a.m. in New York. Ellen Zentner: Michael, I'm going to start us off here because 13 states have now completed their primaries ahead of the midterm elections. And as our key Beltway observer, I'd love to get your initial impressions. There's a fair amount of belief that Democrats will have a difficult time maintaining majorities in both houses of Congress and maybe some investor complacency around this sort of outcome. So what are you hearing from investors and how should they be thinking about the midterms? Michael Zezas: Yeah. I think the word complacency is the correct word to use here. I think in some ways this election hasn't gotten as much attention as it should because in prior elections there was a big macro issue at play, whether it be tax cuts and trade policy in 2016, or in 2020 whether or not another tranche of COVID stimulus aid could get approved based on the election outcome. This election, we think the outcomes will really drive more sectoral impacts. So whether or not tech regulation becomes possible or regulation around cryptocurrency, or could there be a path toward spending more money on renewables and traditional energy exploration. And then, of course, corporate taxes. And then when you couple that with polls and other items suggesting that Republicans are very likely to take control of one or more chambers of Congress, it's easy to put this issue aside and become complacent about it. But Ellen, this focus on the micro doesn't necessarily mean that the outcome doesn't matter for the macro, i.e., the U.S. economic outlook. Can we look back a bit to some prior elections and how they changed the trajectory of your economic outlook? Ellen Zentner: So, you know, I would start with 2016 where we had a Republican sweep and that led to the Tax Cut and Jobs Act being passed. It was a significant increase in the fiscal deficit and a good deal of stimulus to the economy. And so we really saw that bear out in 2017 where you already had a late cycle dynamic. At the time we called it ill timed policy, where you're throwing stimulus at the economy, when the economy doesn't really need it, you really want to do the majority of your fiscal stimulus when you're actually in a downturn. Trade policy then followed. And of course, late in 2018 started to really bite the global economy. And that's when we saw the Fed also move,v to the sidelines and start cutting rates because they saw a big slowdown in the global economy that was also hitting the U.S. economy. So fiscal policy there had both an uplifting effect and a depressing effect in the outlook. And then I would point to 2020 where the election outcome really opened the door for further fiscal stimulus related to COVID. So we had already done rounds of significant fiscal stimulus, but then in a Democratic sweep, you had two further rounds of fiscal stimulus related to COVID. And so that also had a very big effect on shaping the economy in terms of the excess savings that households were building up and the amount of excess money in the economy. And so I think those are the two best examples, of course, the two most recent examples. Michael Zezas: So a common thread between 2016 and 2020 was that the outcome had one party in control of both chambers of Congress as well as the White House. And it's long been part of our framework that one party control is a prerequisite for Congress providing proactive fiscal aid to the economy. So let's say the conventional thinking about this election is correct and the Republicans pick up control of one or both chambers of Congress. Then we'd expect that Congress would be more reactive to economic conditions than proactive, basically, that the economy would have to demonstrably worsen before you'd see Congress deliver aid. Would that shift in dynamic mean anything to your US economic outlook? Ellen Zentner: I mean, our baseline outlook fiscal policy is really not a big factor. The biggest factor coming from fiscal policy has already passed. So late last year we passed a significant infrastructure spending bill and while at the time that had a market impact, it doesn't really have an economic impact until about four quarters later when the bulk of those funds hit the economy. And so that's something that starts to lift growth in the fourth quarter of this year, we estimated by about 3/10 lift to GDP from those funds going out. Otherwise, in our baseline outlook, fiscal policy is just not a big factor. I think when we think about our bear case where we actually have a recession, that would be the first chance for fiscal policy to really kick in meaningfully. But even there, because we don't expect the downturn to be very deep, we expect nothing more than, say, the automatic stabilizers that typically go in to support the economy when jobless claims are rising, and the unemployment rate is rising and other economic factors are weakening. Finally, Michael, I want to ask you about election night and the days that follow. And I'm going to ask this because uncertainty around election outcomes also can impact the economy near term. So how likely is it we'll see the same sort of delays in vote tallies that we saw in 2020?. Michael Zezas: Yeah. I think investors should be on guard for a very similar time frame. The problem that drove this delayed tally in 2020 was the growth in use of vote by mail, and that really hasn't changed or is unlikely to change in our view. And of course, the problem is voting by mail, those ballots get tallied separately and sometimes later, as opposed to the machine votes which get tallied much quicker on election night. And like last time, it seems that Democrats tend to use vote by mail more than Republicans. So it creates this dynamic where on election night, initial leads could be misleading and you have to wait until the final votes are tallied in order to understand what the true margin is. So investors should prepare to wait a few days to fully understand, particularly if this is a close election, who is going to control the House of Representatives and who is going to control the Senate. That could create some volatile moments in the parts of the market that are most sensitive to these outcomes. Again, that's going to be sectors that are sensitive to corporate tax changes, tech regulation, crypto regulation and energy spending. Michael Zezas: Ellen, thanks so much for taking the time to talk with me. Ellen Zentner: As always, great talking with you, Michael. Michael Zezas: And 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. 

While there continues to be turbulence in many sectors, such as energy and food, some Asia and Emerging Markets may fare better than others through the second half of an already hectic 2022.-----Transcript-----Welcome to Thoughts on the Market. I'm Jonathan Garner, Morgan Stanley's Chief Asia and Emerging Markets Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about our mid-year outlook for Asia and Emerging Markets. It's Tuesday, May the 31st at 8 p.m. in Hong Kong. In our mid-year outlook, our advice was to stick with the markets and sectors which have performed well already this year. These are in the main plays on high energy, materials and food prices. In our coverage, this means commodity exporters including Australia, Indonesia and Saudi Arabia, which we have been overweight for some time. We also added another commodity exporter, Brazil, to this overweight group and reiterated our overweight on energy and materials. Despite outperformance, we continue to encounter skepticism that these markets and sectors can continue to perform. And this is mainly due to concerns over global growth, and in particular growth in China. Certainly, it's true that energy and materials tend to perform well late on in the cycle, whereas I.T hardware, semiconductors and consumer discretionary tend to do well coming out of recession. And it's also true that the Chinese economy is weak right now, with data showing a considerable slowdown in April and May. And that is a key reason why we remain cautious on China equities themselves. But we think the combination of underinvestment in the prior cycle in supply and the Russia-Ukraine conflict keep the commodity markets tight for the foreseeable future. The pattern of earnings revisions confirms our thesis. Analysts are upgrading numbers for stocks in Australia, Brazil, Indonesia and Saudi Arabia, in some cases at an accelerating pace. Whilst they’re downgrading for China, Korea and Taiwan, which are manufacturing exporting and commodity importing markets, Japan is slightly different, with balanced earnings revisions as corporate margins are helped by the recent trend to a weaker yen, amongst other factors. Hence, thus far, for some key emerging markets, notably Brazil and Indonesia, their commodity producing and exporting characteristics are offsetting, both from a currency and equity market perspective, the traditionally negative impact on growth from a stronger U.S. dollar and monetary policy tightening by the U.S. Federal Reserve. In time, this pronounced pattern of earnings dispersion may reverse and we are on the lookout for a trend reversal. This could be driven by factors like a change in COVID management approach in China or cessation of the conflict in Ukraine. For the time being though, we recommend keeping things simple in turbulent times. 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. 

So far this year's economic story has been dominated by inflation and central bank policy, but as that landscape changes, is it time to shift focus back towards growth?-----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, May 27th at 2 p.m. in London. 2022 has given investors a lot to chew on. But out of the many developments of this year, one really stands out. It's inflation and the impact that high inflation has had on central bank policy. If you had to pick a defining economic trend in the last 40 years, it was probably the steady moderation of inflation. Then, if you had to pick a defining trend of the last decade, it was the issue of inflation being unusually low, a symptom of weak growth that warranted major central bank support. This year, the story changed. Rising prices started to be driven by strong demand that outstripped available supply, rather than COVID related disruptions. The persistence of these rising prices caught central banks and professional forecasters by surprise. Central bank policy then shifted rapidly, a shift that drove bond yields higher, market valuations lower, and defined much of the market's performance year to date. But now this story may be changing again, away from inflation and back towards growth. After rocketing higher over the first five months of the year, Morgan Stanley's economists do expect U.S. inflation to moderate for the rest of 2022. Some of this is that we're passing the peak rate of change, recall that on a year over year basis, prices today are being compared to May of 2021, a time when the U.S. vaccination rate was still low and activity was a long ways from being back to normal. We're also seeing encouraging signs that some of the worst disruption to supply chains are easing. Fewer ships are sitting off of U.S. ports, unloaded. The cost of freight is declining. Many retailers are now reporting plenty of inventory. And don't just take our word for it. Market based estimates of future inflation have been declining, in both the U.S. and Europe, over the last month. If this trend of moderating inflation can hold, there are some important implications. First, at a very simple but very important level, inflation that is high but falling, is much less frightening to the market than inflation that's high, but rising. This should help reduce the market's fear about a more extreme, 1970's style scenario. Second, it suggests that expectations of future central bank interest rates don't need to rise much further. That, in turn, could help bond yields stabilize, especially in the U.S. And more stable bond yields could help higher quality parts of the fixed income market, like mortgages and municipal bonds, that tend to be very sensitive to that interest rate volatility. The flip side is that as markets focus less on inflation, they will likely focus more on growth, where Morgan Stanley's economists see a sharp deceleration. While short term bounces are possible, we'd like to see more conservative estimates for earnings before assuming that the market's challenges are truly behind it. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you. 

With growth slowing and the Fed focused on fighting inflation, investors should note that the outlook for government bonds depends on more than just central bank policy.-----Transcript-----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, May 26th, at 11 a.m. in New York. For government bond markets, the start to 2022 will go down in the history books. Since the start of the year, central banks have delivered changes to monetary policies and associated forward guidance. And as a result, government bond markets have had their worst start to the year in decades. The repricing in markets ultimately came as a result of central banks surprising expectations among economists and market participants alike. Heading into the year, our economists thought that the Federal Reserve would continue to buy bonds well into 2022 and that it wouldn't be ready to raise policy rates until 2023. Since then, however, the Fed has stopped its asset purchases, announced plans to shrink its balance sheet starting in June and has hiked short term rates by 75 basis points already. Our economists now expect the Fed to deliver two more 50 basis point rate hikes this year, then downshift to a series of 25 basis point moves. At the end of the year, they see the Fed funds target range at 2.5% to 2.75%, and the Fed's balance sheet on its way to $6.5 trillion. However, investors should note that the outlook for government bonds depends on more than just central bank policies. For example, projected government deficits and related financing needs will decline substantially this year, and more fully in 2023. In addition, risks to global growth skew to the downside already. And as monetary policies tighten, downside risks to growth, and eventually inflation, will increase. These conditions, which traditionally support government bonds, factor into our view for how yields will evolve over the next 12 months. We expect U.S. Treasury yields to move higher through 2023, but not materially so. A continued focus on above target inflation should keep the Fed marching towards a neutral level for policy this year. Our economists anticipate a front loaded hiking cycle, with early increases in the Fed funds rate being more important than the potential for later ones. With this Fed forecast, we expect front end yields to trace market implied forward yields, largely consistent with two year Treasury yields reaching 3.25% by the end of the year. In contrast, demand from investors looking to hedge risks to a weaker outcome for global growth will likely show up in the longer end of the Treasury curve. We think the ten year yield will end the year near 3%, which is a level we were at not that long ago. As a result, we're forecasting an inverted yield curve at year end. With inflation remaining high and growth slowing, discussions of stagflation or outright recession should continue to lead investor debate this year. And ultimately, that should limit the degree to which Treasury yields rise into year end. 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 find the show.

Stress on supply chains has driven a slowdown in globalization, but there are also investment opportunities emerging, particularly in Asia. Head of Public Policy Research and Municipal Strategy Michael Zezas and Asia and Emerging Markets Equity Strategist Daniel Blake discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Daniel Blake: And I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy Team. Michael Zezas: And on this episode of Thoughts on the Market, we'll continue our discussion of a theme that's been rightfully getting a lot of attention - "slowbalization", slowing globalization within an ever more multipolar world. It's Wednesday, May 25th, at 8 a.m. in New York. Michael Zezas: So Daniel, over the last few years, Morgan Stanley Research has published a lot of collaborative work across regions and sectors on the increasingly important themes of slowbalization and the multipolar world. But while in the past we focused more on the costs and challenges of this transition, today we want to put a greater emphasis on the opportunities from this theme, particularly in Asia. Investors are acutely aware that one of the key drivers behind this slowbalization trend is the tremendous disruption to the supply chain. You've been publishing a supply chain choke point tracker tool, so maybe let's start there with an update on the current state of supply chains in Asia and what your most recent tracker is indicating. Daniel Blake: Thanks, Mike. In short, this is showing that the supply chain in general remains very stressed. And in aggregate, we have not seen any material improvement over the last six weeks. Now, when we look at the aggregate measure put together by our economists, the Morgan Stanley Supply Chain Conditions Index, we are seeing that conditions are still slightly better than the peak of the disruptions and backlogs that occurred in late 2021, particularly around the delta wave in South East Asia. But we haven't seen much further improvement beyond that. Our checkpoint tracker does go down to the individual component or service level, and it shows that supply of certain auto and industrial semis and advanced packaging remains a constraint on downstream production. And we are seeing that show up in corporate results in the tech sector as well as the broader impact on margins that we're seeing into the consumer space. Michael Zezas: And one of the pressing issues that investors have been paying attention to is the new shocks to supply chains from China's COVID containment policy. Can you give us an update on the current impact of this policy?Daniel Blake: Now, so far, this is having a more noticeable impact on the domestic Chinese economy rather than on export markets, with policymakers trying to prioritize industrial output through systems such as closed loop management, which sees workers living on site for extended periods to maintain as much production as possible. The challenge has been most acute where mobility is needed, including in the transportation of raw materials and industrial production within China. Geographically, we've seen the impact on the Pearl River Delta around Shenzhen, the Yangtze River Delta around Shanghai and neighboring provinces, and more recently the capital, Beijing, is seeing an outbreak. So progress has been made on reopening from full lockdowns in Shenzhen and Shanghai gradually, but our China economics team still estimate that about 25% of national GDP is being subject to some additional COVID restrictions. And again, we need to watch out for the progression of the outbreak closely.Michael Zezas: When do you expect to see an easing of supply chain choke points and what factors could drive that easing? Daniel Blake: One of the points in the blue paper from late 2021 was the role on the demand side, the generous stimulus and acute shifts in spending patterns from COVID had in driving demand well above the world's productive capacity, even before you consider the supply disruptions we're seeing. So heading into summer 2022, we get the flip side, which is what our consumer analysts call the great reversion. Stimulus rolls off, fiscal spending does taper, and we see spending returning to categories like travel and tourism and leisure, as opposed to demand for goods and electronics. That may mean we get an outright contraction in some product segments. Now, this downturn may not be the best way, but it's the probably quickest way to get to an easing of supply chain choke points. And we are getting more evidence of this in order cuts across PC and smartphone in Asia. On the more constructive side, we're also seeing CapEx coming into areas like driving edge semiconductor foundry. But we'll also need to watch commodity markets, particularly as we've got agricultural trade channels into the European summer looking highly stressed. And we're seeing policy responses in some markets that are looking to prioritize domestic demand for industrial output and for agricultural output over export markets. So we don't think we're through the worst of this just yet. So we really need to watch for conditions to improve potentially later in 2022. Michael Zezas: Now let's zero in for a moment on some sector level observations. Semiconductors, for example, has been one of the sectors most in focus in the context of slowbalization. Can you talk about some of the particular challenges semis are facing in East Asia? Daniel Blake: There really are two dimensions, I think to this. One is the centrality of semiconductor companies at the leading edge and the concentration of global production in several key markets, and in particular in Taiwan and Korea. Now, when we look at the challenges here we can see policymakers in major capitals, in D.C. and Beijing, looking to try to encourage more localization, more internalization of supply chains. And that's putting some pressure, but also creating incentives for companies to add new capacity into the U.S., and we're seeing capacity coming into the Japanese market as well. So the challenge and opportunity I think for these leading companies is to try to manage those pressure points and protect return on invested capital as much as possible in the face of the need to strengthen and secure additional capacity in supply chains. The other element, which is important in terms of the challenges for semis, is more cyclical and we have seen a surge in demand, we've seen a build up of margins in the industry as it has benefited from this pull forward, from the work from home spending. And on the other side of that, we are going to see a downturn which is potentially exacerbated by the inventory buildup that has happened across the board in semis. Some semiconductor components are still in acute supply, but there are many that are not so disrupted, and when we look at the outlook we have seen inventory build up across the board. The risk is in the downturn, we start to see deeper order cuts because the inventory in aggregate is actually higher than what we've seen historically. Michael Zezas: Now shifting towards some macro level takeaways. The dynamic between the U.S. and China could be challenging, but is also creating potential opportunities for other countries such as Vietnam, India and Indonesia. Can you walk us through the tailwinds as well as the headwinds for these countries and what they're doing to take advantage of the situation? Daniel Blake: Yes, in Asia-Pacific, we have seen Vietnam already playing an important role for corporates as a complement to Chinese supply chains. It's smaller, but it's a natural extension of existing production facilities in China. But we've also seen policy and corporate momentum, the reform story, improving most notably in India, but also improving in Indonesia. And both markets have enacted quite deep and broad reform programs to lower corporate tax rates, to liberalize foreign direct investment rules, to invest in infrastructure and generally to make their market more attractive for multinational corporates as they're reassessing their supply chain strategy and looking to diversify. In terms of our preferences we are currently overweight Indonesia right now in our Asia Pacific, ex-Japan and Emerging Markets rankings. It benefits from strong commodity export dynamics and we also see long term opportunities coming through in terms of supply chain investments in Indonesia. But India has a very attractive long run story. If we can see continued execution, this market will present both domestic and export opportunities, and the production linked incentives being offered have been taken up by corporates and are helping to drive this foreign direct investment cycle. Michael Zezas: Daniel, thanks for taking the time to talk. It was great to have you here in person. Daniel Blake: Great speaking with you, Michael. Michael Zezas: And thanks for listening. For a look inside some of the human impacts of the recent supply chain disruptions, and how people are trying to resolve them, check out the latest season of Morgan Stanley's podcast "Now, What's Next?" on your podcast app of choice. If you enjoyed this 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. 

So far this year cryptocurrencies have been on a swift downturn, increasingly in line with equity market moves. What's behind this correlation? And what should investors watch out for next?Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets.Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.-----Transcript-----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Strategist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, today I will be talking about the crypto bear market. It's Tuesday, May 24th, at 2 p.m. in London. Bitcoin is down 55% from its November 2021 high, and currently trades at around $30,000. Over that same period, crypto market capitalization has lost over $1 trillion. All the while, Bitcoin's correlation with the equity markets has risen to new highs. So what is going on? Who is selling and what should we watch out for next? In 2018, retail investors were dominant in crypto markets, participating in 80% of trading volumes on Coinbase, the large crypto exchange. Today, the story couldn't be more different, with only 1/4 of trading volumes on Coinbase being with retail investors. Institutions, and more specifically crypto institutions, appear to have taken over, many of which are simply trading with each other. We think retail investors are more likely to buy and hold, but institutional investors are willing to both buy and sell crypto, if it means they can make a return. And because institutional investors are sensitive to the availability of capital and therefore interest rates, they trade crypto somewhat in sympathy with the way equities are traded. This shift in the type of market participant is key to understanding why crypto markets are selling off at the same time as the equity markets are experiencing a downturn. Cryptocurrency prices rose rapidly in 2020 and 2021, attracting a new set of investors. Bitcoin rose 10x from March 2020 to its first peak in April 2021. Ether, the second largest crypto, rose even more, over 40x in a similar period. The stimulus provided by central banks and governments throughout the pandemic was the key driver of the crypto bull market. As the Federal Reserve indicated late last year that it plans to raise interest rates and reduce the size of its balance sheet, crypto markets began to weaken. The downturn is now starting to have a broader impact on the crypto ecosystem. In mid-May a stablecoin called Terra Dollar, or UST, lost its peg to the U.S. dollar, which meant it was no longer trading at $1 USD and instead trades closer to $0 USD. UST lost its peg as it was backed by cryptocurrencies, which themselves were losing value, and because market makers no longer trusted the ability of the stablecoin to retain its dollar peg. There was a negative spillover into Bitcoin and other cryptos, with the largest stablecoin called Tether briefly losing its dollar peg intraday. Tether is the other side of half of all bitcoin traded on exchanges, so its stability is extremely important for the broader crypto market. The dollar asset reserves that backed Tether will continue to be scrutinized and questioned by market participants. Stablecoins are used to create leverage in decentralized finance crypto systems, and that leverage is now falling as crypto traders, that may have bought Bitcoin or other cryptos, have faced margin calls. In general, the elevated prices were traded on speculation, with limited real user demand. NFT and digital land prices are next areas to watch. Of course, many are looking for signs of a market turnaround. The retail investors may have been outnumbered by institutions, but they haven't gone away. The downturn may continue if central banks persist in their policy of tightening, but the strong hands of these retail investors have historically served as a support to falling prices. Thank you for listening. If you enjoy thoughts on the market, share this and other episodes with a friend or colleague today. 

As we enter the second half of 2022, the market is signaling a continued de-rating of equities, lingering challenges for consumers, and an increased bearishness among equity investors.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, May 23rd at 9 a.m. in New York. So let's get after it. As we’ve discussed our mid-year outlook the past few weeks, I'd like to share some key takeaways on today's podcast. First, the de-rating of equities is no longer up for debate. However, there is disagreement on how low price earnings multiple should fall. We believe the S&P 500 price earnings multiple will fall towards 14x, ahead of the oncoming downward earnings revisions, which is how we arrive at our near-term overshoot of fair value of 3400 for the S&P 500. Second, the consumer is still a significant battleground. While COVID has been a terrible period in history, many U.S. consumers, like companies, benefited financially from the pandemic. Our view coming into 2022 was that this tailwind would end for most households, as we anniversaried the stimulus, asset prices de-rated and inflation in non discretionary items like shelter, food and energy ate into savings. Consumer confidence readings for the past six months support our view. Yet many investors have continued to argue the consumer is likely to surprise on the upside with spending, as they use excess savings to maintain a permanently higher plateau of consumption. Third, technology bulls are getting more concerned on growth. This is new and in stark contrast to the first quarter when tech bulls argued work from home benefited only a few select companies, while most would continue to see very strong growth from positive secular trends for technology spend. Some bulls have even argued technology spending is no longer cyclical but structural and non-discretionary, especially in a world where costs are rising so much. We disagree with that view and argue technology spending would follow corporate cash flow growth and sentiment. We have found many technology investors are now on our page and more worried about companies missing forecasts. While some may view this as bullish from a sentiment standpoint, we think it's a bearish sign as formerly dedicated tech investors will be more hesitant to buy the dip. In short, we believe technology spending is likely to go through a cyclical downturn this year, and it could extend to even the more durable areas like software. Finally, energy is the one sector where a majority of investors are consistently bullish now. This is not necessarily a contrarian signal in our view, but we are a bit more concerned about the recent crowding as energy remains the only sector other than utilities that is up on the year. With oil and gasoline prices so high, there is a growing risk we have reached a level of demand destruction. We remain neutral on energy with a positive bias for the more defensive names that pay a solid dividend.Bottom line, equity clients are bearish overall and not that optimistic about a quick rebound. While this is a necessary condition for a sustainable low in equity prices, we don't think it's a sufficient one. While our 12 month target for the S&P 500 is 3900, we expect an overshoot to the downside this summer that could come sooner rather than later. We think 3400 is a level that more accurately reflects the earnings risk in front of us, and expect that level to be achieved by the end of the second quarter earnings season, if not sooner. Vicious bear market rallies will continue to appear until then, and we would use them to lighten up on stocks most vulnerable to the oncoming earnings reset. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

2022 is off to a rocky start for markets, but there is an organization to this downturn that is unlike recent episodes of market weakness, meaning investors can use tried-and-true strategies to bring order to the chaos.-----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, May 20th, at 3 p.m. in London. There are a lot of ways to describe the market at the moment. One that I'm increasingly fond of is "organized chaos". Chaos because, well, the year is off to a historically bad start. Year to date, the S&P 500 is down about 20%. The U.S. aggregate bond index is down about 9%. And almost every asset class that isn't commodities has posted negative returns. This weakness has been both large and relentless. For the stock market, it's been seven straight weeks of losses. Yet all of this weakness has also been surprisingly organized. The worst performing parts of the stock market have been the most expensive, least profitable parts of it. After being unusually low for a long time, bond yields and credit spreads have risen. After outperforming to an extreme degree, growth stocks and U.S. equities are now lagging. Indeed, if you don't know how a particular asset class has done this year, "moving closer to its long run valuation average" is a pretty good guess. So as difficult as 2022 has been, many tried and true strategies are working. Rules based approaches, also known as systematic strategies, have in some cases been performing quite well. Relative value strategies, which trade within an asset class based on relative valuation, yield, momentum or fundamentals, have been working unusually well. That's different from four prior episodes that saw similar or greater weakness than we see today. Those episodes being the global financial crisis of 2007 to 2009, the European sovereign crisis of 2011 and 2012, the volatility shocks of 2018 and Covid's emergence in 2020. Each of these four instances were notable for being disorganized, stressed, with very unusual movements below the market surface. Why does this matter? First, it suggests that investors should move toward relative value in this environment, which has been working, rather than taking large directional positions. Second, it suggests that this downturn is different from those that we've known since 2008. It is still difficult, but it is more gradual, less stressed, and more about specific debates around growth and risk premiums, than existential questions such as whether the banking system or the European Union will survive. While that difference has many potential implications, one specific one is that it’s less problematic for high quality credit, which did unusually poorly during these more recent crises, but which we think will do better this time around. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you.

With rising prices already on the minds of investors and consumers, the outlook in Europe remains challenged across supply chains, inflation rates and energy markets. Chief European Economist Jens Eisenschmidt and Global Oil Strategist and Head of the European Energy Team Martijn Rats discuss.-----Transcript-----Jens Eisenschmidt: Welcome to Thoughts on the Market. I'm Jens Eisenschmidt, Morgan Stanley's Chief European Economist. Martijn Rats: And I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist and Head of the European Energy Research Team. Jens Eisenschmidt: And today on the podcast, we will be talking about the outlook for the European economy for the next 12 months in the very challenging context of rising energy prices and sustained inflationary pressure. It's Thursday, May 19, at 4 p.m. in London. Jens Eisenschmidt: So, Martin, I wanted to talk with you today about some burning issues that seem to be topmost on everybody's mind these days, namely rising energy prices and inflation. These challenges are affecting literally everyone. And Europe, in particular, is acutely feeling the impact from the war in Ukraine. Let's maybe pick up with a topic you discussed on this podcast back in January. So even prior to the war in Ukraine, you talked about five enduring tailwinds boosting commodities. So far in 22, commodities are on track to outperform equities for the second consecutive year. Now that we are approaching the mid-year mark, what's your outlook for the second half of 22 in terms of commodities and which ones are likely to outperform the most in the current environment? Martijn Rats: Some things have changed, but also a lot of things are still the same when it comes to the outlook for commodities. Commodities move in long cycles. The last decade was, on the whole, more challenging, but we think that we're still in the relatively early innings of what could be a long cycle ahead. You already mentioned the five enduring tailwinds that we've previously written about and discussed on podcasts like this. First of all, is inflation. Commodities often do well in inflationary periods, and the inflationary pressures are still there, that's one. Secondly, geopolitical risk. Thirdly, there's the energy transition. For a broad range of commodities the energy transition is a demand tailwind, but for a lot of others, it's basically a red flag not to invest in supply. Then fourthly, a lot of commodities have gone through a long period of very little investment. That sets up a tighter supply outlook. And then finally there's reopening. A lot of reopening has already played out, but there are still important pockets of reopening that have yet to fully materialize. A lot of that thesis is still the same. And I would expect that this will carry the commodity asset class for some time. Now, in terms of how things have changed at the start of the year, we were more optimistic about demand for a lot of commodities, and those expectations have come down a little bit because the economic slowdown, because of China. But we were also more optimistic about the supply for those commodities. We've seen a lot of headwinds in terms of the supply of a broad range of commodities, particularly because of the war in the Ukraine. So net net our balances are broadly still equally tight, if not slightly tighter, and that's to still set up the commodity asset class quite well. Also for the second half, the ones that we prefer the most, it's mostly the energy commodities. We think they'll do better than the metals. That is already happening as we speak, but there is more to come in that relative trade in the second half as well. Jens Eisenschmidt: Let's talk a little bit about oil. You've said that you continue to see upside to oil prices, even though the nature of your thesis has changed since the start of the year. Could you walk us through your thinking specifically around oil? Martijn Rats: Yes. At the start of the year, we were thinking that oil demand could grow this year by something like 3.5 to 4 million barrels a day, year over year compared to 2021. And that expectation had turned out to be too optimistic. There are basically two reasons for that. First of all, is China. The Zero-Covid policies in China and the stringent lockdowns that have come with that means that at the moment we're probably losing something like 1.5 to 2 million barrels a day of oil demand in China right now. Now, that might not last the entire year, but there is a material effect. And then also economic growth expectations have come down. And as a result, we also had to moderate our oil demand forecasts. But then on the supply side, we had to make even bigger changes. Russian production has fallen by broadly a million barrels a day already, and we think that that will continue to fall by another million barrels a day in the second half of the year. So when you add it all up, I'm sure our demand expectations have fallen, but they are already at a level that I would say is reflective of the current situation while there's still meaningful supply risks and when you put those two things combined, actually our balances are even slightly tighter than they were at the start of the year. Hence the call, as we've had it for a while, for $130 brent by the third quarter. Jens Eisenschmidt: Turning to the European gas markets. Gas prices in Europe are roughly five times as high as in the U.S., reflecting the increased risk to Russian supply created by the war in Ukraine. What are your expectations in terms of Europe following through on its intent to phase out Russian gas? And what potential scenarios do you see playing out here? Martijn Rats: The story about European gas is is quite a bit different from what it is to oil. There is clearly heightened risk in the European gas market right now that is reflected in price. As a result, the price is well above historical levels, is well above the levels that prevail in the United States. But that also means that a lot of the world's seaborne gas, a lot of those cargoes of LNG at the moment are ending up in Europe. At the same time. Russian flows of natural gas into Europe are low, but they by and large continue. And when you put all of that together, actually, judging by, you know, the normal fundamental metrics that we look at, the European gas market right here, right now today is actually relatively soft. But all of that is, of course, drowned out by the risk that Russian supplies may be impacted. Now, that remains very difficult to call in the short run. That's also the reason why you see European gas prices being so volatile. What does strike us to be the case is that Europe will wean itself off Russian gas over the next sort of 5, 6, 7 years towards the end of the decade. That will require a lot of LNG to come to Europe and also a fair amount of demand erosion. Neither of these things will happen with low prices. We have low conviction on what happens to European natural gas prices in the short run, admittedly, but we have high conviction that gas prices will need to stay high, if not very high by historical standards for several years to come to allow the European gas markets to move away from Russian supplies.Jens Eisenschmidt: Maybe one last word on metals. What are your expectations for metals, especially vis a vis what you just said about energy? Martijn Rats: If you look at metals for most of the metals, practically all of them, China is a huge factor in setting the demand outlook. So where would we be cautious at the moment is in the precise trajectory of the demand recovery in China. At the same time, we are quite concerned about the supply outlook, particularly as of Russia. So if you put all of that together, the metals suffer much more from weak Chinese demand, whilst the energy commodities are much more impacted by tight supply because of the Russian situation. So our preference over the last couple of months, for some time already, to be honest, has been to prefer the energy commodities. Whilst we think that the metals will probably stay a little weaker for some time to come because of their dominant exposure to Chinese demands factors. So there is a strong story to be told about many of the metals over the next sort of 5, 6, 7 years around energy transition. But right here, right now, we're biding our time a little bit with the metals. Jens, the 1Q GDP and inflation numbers confirms that supply shocks are hitting hard on the European economy, even after its strong post-COVID recovery in 2021. In your mid-year outlook, you refer to the set of challenges facing Europe as a perfect storm. Tell us why the situation looks so challenging from where you stand. Jens Eisenschmidt: Yes, you're right, Martin. It's very difficult in these days to get very optimistic about the growth outlook. I mean, we started the year actually on a much brighter note with a growth outlook of 3.9% for 22 for the euro area and had to revise it consecutively down to 3 to 2.7 and now to 2.6. And this is all on the back of as you mentioned, supply side shocks. First of all, we would have, of course, a huge hit to disposable income through inflation. Also, as we don't really see the wage developments catching quite up to that number. We are facing here a shock to confidence that we have seen emanating from both the war, but also from more generally the developments surrounding us. We have recently seen news from increased chances for more supply chain issues coming our way, for instance, out of China. Plus, on the other side of the Atlantic, the Federal Reserve has started to aggressively rein into their inflation that has significant domestic demand component to it. Overall, it's very difficult to see really bright spots here. That's why we have arrived at 2.6% in our forecast, that is despite significant dynamics coming out from the reopening and fiscal stimulus being on the road. So overall, it's a very challenging environment we are in. Jens Eisenschmidt: Martijn, thanks for taking the time to talk. Martijn Rats: Thanks, Jens was great to speak with you. Jens Eisenschmidt: 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 we continue to track the trends of 'slowbalization' and the shift towards a multipolar world, Mexico stands out as an economy uniquely positioned to benefit from these changes. Head of Public Policy Research and Municipal Strategy Michael Zezas and Mexico Equity Strategist Nik Lippmann discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Nik Lippmann: I'm Nik Lippmann, Mexico Equity Strategist for Morgan Stanley. Michael Zezas: And on this episode of Thoughts on the Market, we'll be discussing the trend towards slowbalization within a multipolar world, a move that's been accelerated by recent geopolitical events, and in particular, the opportunity for Mexico and global investors. It's Wednesday, May 19th, at 1 p.m. in New York. Michael Zezas: So we've talked a lot on this podcast about the trends of slowbalization and the shift to a multipolar world. It's basically the idea that the globe is no longer solely organizing around the same political economy principles. And that, for example, the rise of China as an economic power with a political system that's distinctly different from the West, creates some barriers to economic interconnectedness. And we've talked a lot about how that can create new costs for Western companies and inflationary pressures, as all of a sudden you need to make investments, for example if you're Europe, to build an infrastructure to import natural gas from the U.S. so you don't have to buy it from Russia anymore. But this trend isn't all about creating headwinds and costs for the economy, we think there's opportunity, too. And there's regions that we think stand to benefit from an uptick in investment as American and European companies need to recreate that labor and market access in other parts of the globe. Mexico is one country that stands out to us, and so we want to speak with Nik Lippmann. Nik, can you tell us why you think Mexico is poised to benefit here? Nik Lippmann: So I'm sitting down in Mexico watching all this stuff play out from a number of different angles. And it's clear to me that Mexico will play a role. It's right next to the U.S., you have trade tariff protection, and multiple levels of rights are protected by the USMCA. And Mexico has advanced tremendously in terms of advancing the value chain and moving up in terms of complexity. So it's come a long way over the last sort of two decades. And today what we see in Mexico is really a strong ecosystem for electronics and cars and even some aerospace. When I look at this recovery, post-COVID in Mexico, I see kind of an average recovery, to be honest. But right below the headline number, we see something else going on. We see electronics growing 40%. Michael Zezas: So you mentioned a lot has changed in Mexico recently that makes this possibility more likely. What is it that changed? Why couldn't this have been a greater opportunity for Mexico earlier? Nik Lippmann: I think that after the trade tensions with China, the pandemic, we've just been getting, you know, higher freight costs. We've been getting a number of obstacles to the existing trade framework. So there are certain external policy factors that clearly play in and it's clear that the chip has kind of changed over the course of the beginning of this year and opened the eyes to some of the risks that could be emerging in other parts of the world. It's clear that Mexico's able and fairly high quantities of labor. There will be needs to educate and develop further infrastructure. But Mexico's position and its proven track record in terms of making electronics and cars. I think that can be expanded into other things. And we're seeing the early stages of that on the ground already today.Michael Zezas: So geopolitics is an obvious catalyst for Mexico to be a beneficiary generally. Specifically, what sectors of the economy in Mexico stand out to you as an opportunity? Nik Lippmann: So when we look at what Mexico does today, it makes cars and refrigerators and microwave ovens and stationary computers. It doesn't make laptops, tablets, and I don't think it will ever make tablets, mobile phones. I would imagine that we start seeing ecosystems and I always focus on ecosystems rather than individual companies, that you start having an emergence of some of the low tech health care, aerospace is growing tremendously, even pharma. And I think one of the things that I would expect to happen and it's difficult to have clear evidence today, but I would expect some corporates to at least diversify their existing supply chains rather than just relying on one country. I think Mexico just tends to benefit in that process. Michael Zezas: And so as a market strategist, what do you expect to see or how do you expect to see this play out in Mexico's equity markets? Nik Lippmann: By and large, I think this is a 3 to 5 year system or thesis or theme that will have a tremendous impact on potentially improving the narrative of Mexico. And it's going to impact a wide range of their corporates that would come on the U.S. side of the border. From the car space to electronics and machinery and what have you. And it doesn't happen from one day to another. But the country's fairly well positioned. I think in terms of the investability impact, clearly a couple of sectors stand out, such as real estate. This is a more than a near-term in theme that would cause us to change the recommendation from here till the year end 22. I think it's a key fact in terms of how we suggest investors to have allocation within Mexico focus on industrials, external sectors and real estate with exposure to the U.S.. And I think for a lot of investors in U.S. corporates, in manufacturing and out of the auto space and other sectors, this is a super important longer term theme that can affect and maybe redevelop to some degree in Mexico investment narrative. Michael Zezas: Nik, thanks for taking the time to talk. Nik Lippmann: Thanks, Mike, for inviting me. 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.