Thoughts on the Market

As European markets price in slowing growth, increased inflation and geopolitical tensions, pricing power is a potential focus for European investors looking to weather the storm.-----Transcript-----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impacts of recent geopolitical developments on European markets and why rising stagflation pressures point towards owning companies with good pricing power. It's Tuesday, March the 8th at 1:00 pm in London.Since our last podcast on European equities, the backdrop has changed considerably, with an escalation in geopolitical tensions putting upward pressure on inflation, downward pressure on growth and generally raising European risk premia as uncertainty spikes. Last week my colleague Jens Eisenschmidt, our Chief European Economist, cut his forecasts for European GDP growth for this year and next, while also raising his projections for inflation on the back of higher energy costs. While Jens is not predicting a European recession at this time, investors are becoming incrementally more worried about this possibility as geopolitical tensions extend and oil and gas prices continue to rise. Even if Europe does manage to avoid falling into an outright recession, the stagflationary conditions that are building in the region, namely slowing growth and rising inflation, have important implications for investors. Across the broader market it points to a more challenging backdrop for corporate profits as slowing top line momentum coincides with growing margin pressures from higher input costs. At the same time, heightened geopolitical uncertainty is putting downward pressure on equity valuations as investors rotate out of the region, thereby lowering the price to earnings ratio at the same time as profit expectations retrench. After a near 20% decline from their January highs, it's fair to say that European stocks are pricing in quite a lot of bad news here, with equity valuations now below long run averages and close to record lows vs. U.S. stocks. While we think this provides an attractive entry point for longer term investors, European markets will likely remain tricky in the short term as investor sentiment oscillates between hope and fear. Our experience suggests that markets rarely trough on valuation grounds alone, instead requiring a backdrop of broad capitulation, coupled with a more positive turn in the news flow - conditions that have not yet fallen into place. In many respects stagflation is the worst environment for asset allocators, as slow growth weighs on stocks at the same time as high inflation potentially undermines the case for bonds. Thankfully such an environment has been rare over the last 50 years, however we can still construct a ‘stagflation playbook’ for equity markets when it comes to picking stocks and sectors. Specifically, we identify prior periods when inflation was rising at the same time as growth indicators were falling. We then analyze performance trends over those periods. When we do this, we find that a stagflationary backdrop tends to favor commodity and defensive oriented stocks at the expense of cyclical and financial companies - a trend that has repeated itself over the last month here in Europe. An alternative strategy is to focus on companies that have strong pricing power, as they should have more ability to raise prices to offset higher input costs than other stocks. In a European context, sectors that are currently raising prices to expand their margins, even in the face of rising input costs, include airlines, brands, hotels, metals and mining companies, telecoms and tobacco. To be clear, not every stock in these sectors will enjoy superior pricing power, but we think these areas are a good place to start the search. 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. 

The year of the stock picker is in full swing as investors look towards a future of Fed tightening and geopolitical uncertainty, where some individual stocks will fare better than others.-----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, March 7th at 11:00 a.m. in New York. So let's get after it. Since publishing our 2022 outlook in November, we've taken a more bearish view of stocks for reasons that are now more appreciated, if not fully. First was the Fed's pivot last fall, something most suggested would be a small nuisance that stocks would easily navigate. Part of this complacency was understandable due to the fact that the Fed had never really administered tough medicine in the past 20 years. Furthermore, when things got rough in the markets, they often pivoted back - the proverbial Fed “Put”, or the safety net for markets. We argued this time was different, just like we argued back in April 2020 that this quantitative easing program was different than the one that followed the Great Financial Crisis, or GFC. In short, printing money after the GFC didn't lead to the inflation many predicted, because it was simply filling the holes created on bank and consumer balance sheets that were left over from the housing collapse. However, this time the money printing was used to massively expand the balance sheets of consumers and businesses, who would then spend it. We called it helicopter money at the time. In short, the primary difference between the post GFC Fed money printing and the one that followed the COVID lockdown, is that the money actually made it into the real economy this time and drove demand well above supply. This imbalance is what triggered the Fed to pivot so aggressively on policy. In fact, Chair Powell has admitted that one of the Fed's miscalculations was thinking supply, including labor, would be able to adjust to the higher levels of demand making this inflation transitory. This has not been the case, and now the Fed must be resolute in its determination to reduce money supply growth. Nowhere was this resolve more clear than during Chair Powell's congressional testimony last week, when he was asked if he would be willing to take draconian steps, as Paul Volcker did in the early 1980s to fight inflation. Powell confidently answered, "Yes". To us this suggests the Fed "Put" on stocks is well below current levels, and investors should consider this when pricing risk assets. The other reason most investors and strategists have remained more bullish than us is due to the path of earnings. So far, this positive view has been correct. Earnings have come through, and it's the primary reason why the S&P 500 has held up better than the average stock. Therefore, the key question continues to be whether earnings growth can continue to offset the valuation compression that is now in full swing. We think it can for some individual stocks, which is why the title of our outlook was the year of the stock picker. As regular listeners know, we have been focused on factors like earnings, stability and operational efficiency when looking for stocks to own. Growth stocks might be able to do a little better as earnings take center stage from interest rates, but only if the valuations have come down far enough and they can really deliver on growth that meets the still high expectations. The bottom line is that the terribly unfortunate events in Ukraine make an already deteriorating situation worse. If we achieve some kind of cease fire or settlement that both Russia and the West can live with, equity markets are likely to rally sharply. We would use such rallies to lighten up on equity positions, however, especially those that are vulnerable to the earnings disappointment we were expecting before this conflict escalated. More specifically, that would be consumer discretionary stocks and the more cyclical parts of technology that are vulnerable to the payback in demand experienced over the past 18 months. Another area to be careful with now is energy, with crude oil now approaching levels of demand destruction. On the positive side, stick with more defensively oriented sectors like REITs, healthcare and consumer staples. 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.

While the U.S. continues to see high valuations, rising inflation, and slow policy tightening, the story is quite different for many markets outside the U.S.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----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, March 4th at 3 p.m. in London. While Russia’s invasion of Ukraine has implications for financial markets, it has  bigger implications for people. Hundreds of thousands have already been displaced, numbers which are likely to grow in the coming weeks. These refugees deserve our compassion, and support. To those impacted by this tragedy, you have our sympathies. And to those helping them, our admiration.Our expertise, however, is in financial markets, and so that’s where we’ll be focusing today. For those that are most negative on the market right now, the refrain is pretty simple and pretty straightforward. Assets are still expensive relative to historical valuations. Inflation is still high and it's still rising. And central banks are still behind the curve, so to speak, with lots of interest rate increases needed to bring monetary policy back in line with the broader economy. What I want to discuss today, however, was how different some of these concerns can look when you move beyond the United States. Let's start with the idea that assets are expensive. Now, this clearly applies to some markets, but less to others. Stocks in Germany, for example, trade at less than 12 times next year's earnings, Korean stocks trade at 10 times next year's earnings, Brazil, it's 8 times. And many currencies trade at historically low valuations relative to the U.S. dollar. Next up is inflation. While inflation is high in the U.S. and Europe, it's low in Asia, a region that does account for roughly 1/3 of the entire global economy. What do I mean by low? U.S. consumer prices have increased 7.5% Relative to a year ago. Consumer prices in China and Japan, in contrast, are up less than 1%. My colleague Chetan Ahya, Morgan Stanley's Chief Asia Economist, notes that these differences aren’t just some mathematical illusion, but rather reflect real differences in Asia's economy and policy response. Finally, there's the idea that central banks are behind the curve, so to speak. Now, the hindsight here is a little tricky, as the Federal Reserve and the ECB were dealing with enormous uncertainty around the scope of the pandemic for much of last year. But what's notable is that not all central banks took that path. Central banks in Chile, Brazil, Poland and Hungary, just to name a few, have been raising interest rates aggressively for the better part of the last 12 months. In times of crisis, markets often try to simplify the story. But the challenges facing global markets, from valuations, to inflation, to monetary policy, really are different. As events unfold, it will be important to keep these distinctions in mind.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.

As the Fed continues to signal coming rate hikes this year, the housing market will face implications across home sales, mortgage rates, and fundamentals.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this edition of the podcast, we'll be talking about changes in the Fed policy and what the possible implications are for mortgages and the housing market more broadly. It's Thursday, March 3rd at 11:00 a.m. in New York. Jim Egan: Okay, Jay, we've talked about affordability pressures as mortgage rates have moved higher a couple of other times in the past on this podcast, and we would encourage listeners to go back and listen to those prior podcasts for a deeper dive on affordability. But Jay Powell just testified this week that he'll support a 25 basis point hike in March. Furthermore, if inflation pressures are persistent, then he's gonna raise Fed funds by more than 25 basis points at later meetings. The markets priced in six hikes this year. What does that mean for mortgage rates going forward? When I think about affordability, am I gonna have to think of another 150 basis point increase in mortgage rates? Jay Bacow: No. So you saying the market has priced in six hikes is really important, because mortgage rates are based on generally sort of the belly of the Treasury curve. And the belly of the Treasury curve is effectively a function of what the market's expecting the Fed to do, along with how much risk premium there is. And if the market's expecting the Fed to hike six times this year, then if the Fed hikes six times this year and there's no change in risk premium, then mortgage rates aren't really going to move very much from where they are right now. Now, Powell said that he's worried about inflation and so if inflation comes in higher than expected or the market changes their demand for risk premium, then mortgage rates are gonna move. Jay Bacow: But Jim, mortgage rates have already moved a lot, they've gone up 100 basis points this year in just two months. What does this mean for affordability? Jim Egan: From the affordability perspective, it's a problem. But that also really depends on how we define what a problem is. The housing market's been doing very, very well. But when we think about this kind of move in mortgage rates, existing home sales, transaction volumes, they're going to have to fall. Jay Bacow: But haven't existing home sales gone up a lot already? Jim Egan: Yes, and that's where we think it's important to really look at historical experiences during times like this. If we look back to mortgage rates to 1990 we have five other instances of this kind of increase in mortgage rates. Now, one of those was during the housing crisis, so we're going to remove the experience there, but if I look at the other four instances existing home sales climbed very sharply during that first 6 month period, while mortgage rates were climbing by 100 basis points. That's where we are right now, we're seeing that climb. The 12 months after, the subsequent year, which we're going to start to enter March of this year going forward, that's where existing home sales tend to plateau and in a lot of instances come down. And they tend to come down further if mortgage rates continue to climb during that year, which is what we just discussed. So we think it's very likely, and if historical precedent holds, then we've already seen the peak of existing home sales for at least the next 12 months. Jay Bacow: What about home prices? Powell was asked if he thinks that home prices are going to fall and go back to pre-COVID levels, and he said he thought that raising mortgage rates would just slow down home prices, and he doesn't want to see home prices fall. What do we think? Jim Egan: Well, I'd like to believe he's reading our research because that's very much in line with how we think about things right now. We think that home price appreciation at a 19% rate right now is going to have to slow. And as we've said on this podcast before, affordability pressures are really one of, if not the key reason that the rate of HPA has to come down. Simply put, potential homebuyers cannot continue to afford to buy homes, at prices that would allow HPA to continue to climb at almost 20% year over year levels. However, if we think about the other factors that would come into play to bring home prices from a positive level to a negative level, we just do not see those characteristics in the market right now. Supply conditions are very constrained. We think they'll be alleviated somewhat this year, but that's not enough for there to be an overhang of supply that would weigh on home prices. We think that the credit availability in the market has been very conservative. We don't think we're at a risk of increased defaults and foreclosures. What we think happens is that transaction volumes fall, as we've stated, as home buyers aren't willing to pay the prices that home sellers want to sell at. But those sellers are not forced. And so you end up with a market that kind of doesn't trade, home price growth slows and we see it bottoming out kind of in a positive 5-6% percent range from here. So, long story short, we agree with that assessment from Jay Powell. Jim Egan: Now, the other side of the equation, mortgages. With rates backing up by that much, Jay, what do we think about the mortgage market here? Jay Bacow: So rates backing up means that there's going to be less people refinancing. And you said that there's going to be a slowdown in existing home sales as well. But, we're still worried about the supply to the agency mortgage market. And that's because the supply that we care about the most is the new supply coming from new home sales. And the thing about new home sales is that it's about an 8-month period from the time that the homebuilder gets the permit to start building the house, to when it actually gets sold. So we're going to have about 6 more months of supply from people that started to build their house when mortgage rates were a lot lower. And that's going to weigh on the market, particularly given that Powell said during his testimony that they're going to start balance sheet normalization in the coming months. So, we've got supply coming and we've got the biggest buyer stepping away from the market. Now, mortgage rates have gone up and mortgage spreads have widened, but we think there's a little bit more room for mortgages to underperform given the supply that's coming, and the lack of demand coming from the Fed. Jim Egan: Certainly interesting times. Jay, thanks for taking the time to talk today. Jay Bacow: Always great speaking with you, Jim. Jim Egan: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

The recent crisis in Ukraine has caused a great deal of uncertainty in the economy and markets. To cut through the noise, we take a look at the three key questions we are hearing from investors.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bring you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 2nd at 3pm in New York. As an analyst focusing on the interaction between geopolitical events and financial markets, I'm accustomed to dealing with uncertainties evolving at a rapid pace. But even by those standards, nothing in my career compares to the events of the past two weeks: the Russian invasion of Ukraine and the sanctions response by the US, the UK and Europe. To help cut through the noise, here's answers to the three most frequently asked questions by our investor clients. First, do sanctions mean higher energy costs? In the short term, the answer is likely yes. While sanctions on Russian banks currently permit payments for various energy commodities, there's still restrictions on, and disruptions to, their transportation. With Russia being a key producer of several commodities, including 10% of the world's oil, it's not surprising that global oil inventories have declined and the price of a barrel of oil is sitting above $100. This dovetails with the second question. Should we expect the Fed will shy away from hiking rates? In short, we don't think so, at least at the Fed's March meeting, but it certainly creates substantial uncertainty in the outlook. This conflict seems to be affecting both parts of the Fed's dual mandate in opposite directions. It risks dampening economic growth, but for the reasons we just described, it can also boost inflation. Accounting for both, our economists still expect the Fed to hike 0.25% in March but the conflict adds another layer to an already unprecedented level of complexity for the Fed. This is actually the key point for fixed income markets, in our view, where investors should prepare for ongoing volatility in Treasury and credit markets as the Fed may have to regularly tinker with their own assessment of growth and inflation. Finally, what are the long-term implications for investors? To answer this question, we refer you back to our framework for 'Slowbalization,' or the idea that companies will have to, in certain industries, spend more to adjust supply chains and exit certain businesses as governments create policies that prioritize economic and national security over short term profits. You can see how this trend may already be accelerating after the onset of the Ukraine crisis, with several multinational companies announcing they'll sell stakes in, exit joint projects with or pause sales to Russian companies. But some equity sectors may see upside. Defense and software, for example, could see bigger spending as governments reorient their budgets towards these efforts, most notably Germany announcing it will boost its defense spending to 2% of GDP. Of course, the situation remains fluid, and we'll continue to track it and keep you in the loop on what it means for the economy and markets. 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 the conflict between Russia and Ukraine continues to unfold, implications for the oil and gas sector in Europe are beginning to take shape.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Martijn Rats, Global Commodity Strategist and Head of the European Energy Research Team for Morgan Stanley. Along with my colleagues bringing you a global perspective, I'll be talking about developments in the oil and gas sector amidst geopolitical tensions. It's Tuesday, March 1st at 2:00 p.m. in London. As the situation between Russia and the Ukraine continues to develop, implications for commodity markets are beginning to take shape. Russia is a major commodity producer, playing in an especially important role in providing energy for Europe through oil and natural gas imports. With a new round of sanctions announced over the weekend, the precise impact on prices remains to be seen, but we can begin to forecast the direction. First, there is no sign at this stage that, at least at the aggregate level, the flow of commodities has been impacted yet. All of the pipeline and tanker tracking data that we've seen suggests that they continue to be shipped. That shouldn't be too surprising, it's still early days and the sanctions that have been announced so far have been carefully crafted to reduce the impacts on energy flows from Russia. Second, trade patterns will nevertheless likely shift. We can already see this in the oil markets. European refiners are traditionally big buyers of Russian crudes, and even though technically they have continued to be able to buy these grades, they are increasingly reluctant to do so. There have been indications that ship owners are reluctant to send vessels to Russian ports, and that European buyers are uncertain about where sanctions will ultimately go. This is requiring increasingly large discounts. As many buyers already move away from Russian crudes, this also creates more demand for others, including North Sea crudes, which therefore drives up the price of Brent. Third, all of this is happening against the backdrop of tightness in both global oil markets and the European gas markets. We are seeing low and falling inventories, low and falling spare capacity and low levels of investment across both. At the same time, there is a healthy demand recovery ongoing as the world emerges from COVID. Given this tightness, even a modest disruption can have large price impacts. Now, with that in mind, risks to oil and gas prices are still firmly skewed higher, at least in the short term. Finally, I want to point at the growing tension in Europe between diversification and decarbonization. Several key politicians have said over the last several days that Europe should reduce its dependance on Russian oil and gas, and diversify its sources of supply. At the same time, Europe has set ambitious targets to decarbonize. Diversification requires investment in new supply, while decarbonization then requires that those supplies, in the end, will not be used. How that tension will be resolved is hard to know, but this is an issue that at some point will need to be addressed. Bottom line, there is still a lot of uncertainty for commodity markets in the coming weeks and months. We will keep you posted, of course, as new developments take shape. 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. 

Like many markets, Corporate Credit has faced a rocky start to 2022. For investors, understanding the difference between default and duration risk will be key to positioning for the rest of the year.-----Transcript-----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Global Director of Fixed Income Research. Along with my colleagues bringing you a variety of perspectives, I'll be talking about corporate credit markets against the background of policy tightening and heightened geopolitical tensions. It's Monday, February 28th at 10 a.m. in New York. It's been a rough start for the year for the markets. Central banks' hawkish shift towards removing policy accommodation, the significant flattening of yield curves that followed, rising geopolitical tensions, fading prospects for fiscal support, and growing concerns about stretched valuations have all combined to spawn jitters in financial markets. Corporate credit has been no exception. After two years of abundant inflows, the narrative has turned outflows from credit funds in conjunction with negative total returns. These outflows conjure up painful memories of 2018, the last time the credit markets had to deal with substantial policy tightening. Let us focus on the source - sharply higher interest rates and duration versus credit quality and default concerns. Consider leverage loans, floating rate instruments that have credit ratings comparable to high yield bonds which are fixed rate instruments. Since the beginning of the year, high yield bond spreads have widened almost three and half times more than leverage loan spreads. If you limit the comparison just to fixed rate bonds, the longer duration investment grade bonds have significantly underperformed the lower quality high yield bonds. Clearly, it is duration and not a fear of a spike in defaults that is at the heart of credit investor angst. My credit strategy colleagues, Srikanth Sankaran and Taylor Twamley, have analyzed the impact of rate hikes on interest coverage ratios for leveraged loan borrowers. This ratio is a measure of a company's ability to make interest payments on its debt, calculated by dividing company earnings by interest on debt expenses during a given year. The key takeaway from their work is this - What matters more for interest coverage is the point at which higher rates become a headwind for earnings growth. Loan interest coverage ratios have historically improved early in the hiking cycle as interest expenses are offset by growth in earnings. I draw comfort from the evidence that as long as earnings growth holds up and does not turn negative, corporate credit fundamentals measured in interest coverage ratios are positioned well enough to withstand our economists base case of six 25 basis point rate hikes in this year. While credit fundamentals look fine, valuations are not. Since the beginning of the year, we have seen spread widening, the pace of which has picked up in the last couple of weeks. So, we still prefer taking default risk over duration and spread risk. The risk to this view has increased in the last few weeks. Specifically, if central bank reaction to the heightened geopolitical risk is to control inflation at the expense of growth, lower quality credit may be more exposed. 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.

As markets react to the conflict between Russia and Ukraine, price moves for corn, wheat, oil and metals may mean new inflationary pressures for central banks to contend with in the coming months.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.This recording references actual or potential sanctions, which may prohibit U.S. persons from buying certain securities, making certain investments and/or engaging in other activities in or pertaining to Russia.The content of this recording is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or will become subject to sanctions. Any references in this presentation to entities, debt or equity instruments that may be covered by such sanctions should not be read as recommending or advising as to any investment activities in relation to such entities or instruments. Audience members are solely responsible for ensuring that their investment activities in relation to any sanctioned entities and/or securities are carried out in compliance with applicable sanctions.-----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, February 25th at 3 p.m. in London. Russia's invasion of Ukraine has grabbed the headlines. There are other commentators and podcasts that are far more knowledgeable and better placed to comment on that conflict. Rather than offer assessment on geopolitics, I want to try to address one small tangent of these developments- the potential impact on prices and inflation. Russia and Ukraine are both major commodity producers. Russia produces about 10% of the world's oil, and Russia and Ukraine together account for 1/3 of the world's wheat and 1/5 of the world's corn production, according to the U.S. Department of Agriculture. So, if one is wondering why the price of wheat is up about 18% since the end of January, look no further. These commodities are traded around the world, but specific exposure can be even more acute. Morgan Stanley analysts estimate that Russia supplies roughly 1/3 of Europe's natural gas, while analysis by the Financial Times estimates that Ukraine supplies roughly 1/3 of China's corn. There are also second order linkages. Russia produces about 40% of the world's palladium, a key component for catalytic converters, and about 6% of the world's aluminum. But because Russia also provides the energy for a good portion of Europe's aluminum production, the impact could be even larger on aluminum prices than Russia's market share would indicate. Central banks will need to look at these changing prices and weigh how much they should factor into their medium term inflation outlook, which ultimately determines their monetary policy. For now, we think three elements will guide central bank thinking, especially at the U.S. Federal Reserve. First, higher policy rates are still necessary, despite international developments, given how low interest rates in the U.S. and Europe still are relative to the health of these economies. Slowing demand, which is the point of interest rate hikes, is still important to contain medium term inflationary pressures. Second, these developments may reduce the odds of an aggressive start to central bank action. A few weeks ago, markets implied that the Fed would begin with a large .5% interest rate increase. Our economists did not think that was likely, and continue to believe that the Fed will hike by a smaller .25% at its March meeting. Third and finally, the duration and scale of these commodity price impacts are uncertain. Indeed, I haven't even mentioned the prospect of further sanctions or other interventions that could further impact commodity prices. In the view of my colleagues who forecast interest rates, that should mean higher risk premiums, and therefore higher interest rates on government bonds in the U.S. and Europe. 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. 

Water scarcity brings unique challenges in the path to a more sustainable future. Solving for them will mean both risk and opportunity for governments, corporates, and investors.-----Transcript-----Jessica Alsford Obviously, everyone's minds today are rightly on news out of Europe. We will have an episode to cover this in the coming days, but today we are thinking more long term on sustainability. Jessica Alsford Welcome to Thoughts on the Market. I'm Jessica Alsford, Global Head of Sustainability Research at Morgan Stanley, Connor Lynagh And I'm Connor Lynagh, an equity analyst covering energy and industrials here at Morgan Stanley. Jessica Alsford And on this episode of the podcast, we'll be discussing one of the leading sustainability challenges of the near future, water scarcity, as well as potential solutions that are likely to emerge. It's Thursday, February, the 24th at 3 p.m. in London, Connor Lynagh and it's 10:00 am in New York. Connor Lynagh So Jess, we recently collaborated on the report, 'Changing Tides, Investing for Future Water Access.' Maybe the best place to start here is the big picture. Can you walk us through the demand picture and how challenges are expected to change in the industry? Jessica Alsford So the key issue really is that water is a critical but finite resource, and there's already huge inequality in access to water globally. So over the last century, we've seen water use rising about six fold, and yet there are still around 2 billion people without access to safely managed drinking water and around 3.6 billion without safely managed sanitation. Then add to this the fact that demand is likely to increase by around another 30% by 2050, about 70% of total demand comes from agriculture withdrawals, and clearly we need to increase the amount of food we're producing due to growing population, and there's also going to be incremental water needs from industry and municipalities. A third element to also think about is that this is all happening at the same time that climate change is going to alter the hydrological cycle. And so, this is going to increase the risk of floods in some areas and drought in others. Eight of the 10 largest economies actually have either the same or higher water risk scores than the global average. And so clearly what is already a challenge in terms of providing access to water is only going to become more complicated going forward. Connor Lynagh So Jess, water is pretty unique when you look at the different challenges that the sustainability community is facing. What do you think is particularly unique and noteworthy about the challenge we're facing here? Jessica Alsford So the three really big sustainability megatrends that we look at our climate, food and then water. They're all interrelated and they're all really tricky to solve for. But I think there are some unique characteristics about water that do add some complexities to it. First of all, it is finite. So, in theory, we can produce more food, but it's very difficult to make more water. In addition, it's incredibly difficult and costly to transport water around. So, if you think about energy and food, these can be moved over pretty large distances, but water is really a regionally specific commodity. And then the third element really is that water is underpriced if you compare to the actual cost of providing it. There aren't any free markets really to set prices according to supply and demand and because water is essential to life, it's really not straightforward when it comes to thinking about pricing. Jessica Alsford So Connor, from your perspective, covering some of the stocks exposed to the water theme, what are your thoughts on how water might be priced going forward? Connor Lynagh Yeah, I mean, I think you really hit on a lot of the big issues, which is that pricing is very heavily regulated relative to a lot of commodities out there. You know, a lot of utilities are not really able to cover their costs without subsidies from the government. And so, you know, I think as a base case, there does need to be an increase in pricing to solve for some of this shortfall that we see out there. But that has to be done delicately. We can't disadvantage members of society that are already struggling. And so, I think what we're going to need to see is some sort of market-based pricing, but in select instances. So, Australia already has a relatively well-developed water market. You're seeing some moves in that direction in California as well. But I think as a first step, I think there's going to be increased focus on larger industrial users paying more than their share and allowing consumers to have a relatively advantaged position on the cost structure. Jessica Alsford So pricing is clearly one issue, but we also need to see huge investment in global water infrastructure. What are your thoughts on how this develops over the next few years? Connor Lynagh It’s interesting if you look at a cross-section of countries globally, we tend to spend about 1% of GDP on our water resources. So, I think it's a fair starting point to say that water spending is going to grow in line with GDP. But, as we look at the world today and as you've covered previously, the spending is already not sufficient. It's probably hard to quantify exactly how much we, quote, 'should' spend. But I'll point out a couple of data points here. So globally, we spend about $300 billion per year on water capex. In order to get global water access to those that currently don't have it, this would cost an incremental $115 billion a year. And even in countries like the U.S., where our infrastructure is relatively well developed, we are currently facing a spending shortfall of about $40 billion per year. So, we do think this is going to need to rise significantly. Jessica Alsford So if we look at climate, for example, we have seen a really big step up in terms of regulation and policy support to really try to drive investment into green infrastructure. And so just picking up on that, for investors who are looking at this theme, where can capital be deployed to help solve this issue? Connor Lynagh I think that there's obviously just a major infrastructure investment need, but I think that absent major changes in policy, there's a few areas that we still think are relative areas of excess spending growth, if you will, within the sector. So, the first is emerging markets. As countries climb the wealth curve, we do think that their investment is going to increase significantly. I'd point to areas like India and China as areas of significant growth over the next few years. Wastewater management globally I really think that there is going to be increasing regulation and corporate-level focus on this. And then the final thing is applying digital technologies. So, as it stands right now, only about 70% of water globally is connected to a meter. So first and foremost, we need to get a better sense of how we're using our water, where we're using our water. But we can also use cellular technology, digital technologies to better monitor who's using this water in real time, and I think that's going to be a major area of investment, particularly in the US and Europe. Connor Lynagh So, Jess, obviously there's opportunities for companies that can offer solutions to the water industry, but water access is also a risk for many companies around the world. How should investors think about this? Jessica Alsford Absolutely. Energy and power generation are the most water intensive sectors. But actually, what's really critical with this theme is access to water on a local level. So actually, our analysis has shown that companies across a wide variety of sectors can really be impacted, whether that be datacenters, pharmaceuticals, apparel or beverages. One of the sectors most at risk is actually copper. So copper is a very water intensive commodity, and a lot of copper just happens to be mined in Chile, which is a country unfortunately already suffering from water scarcity. Now, desalination plants are becoming the norm in Chile as there are competing demands for water between copper mines and also the local population. If we look ahead, we actually think that demand for copper could increase by around 25% per annum. And this is due to the vital role that it's playing in the energy transition, whether it be for renewables or EVs, for example. And with this incremental demand for copper comes incremental demands for water. I'd also point to hydrogen, again, a key piece of the decarbonization puzzle. So, water is needed for hydrogen, whether for cooling, for gray or blue hydrogen, or for the electrolysis process with green hydrogen. And our analysis suggests that almost 60% of future hydrogen projects are located in countries with water stress. So again, this is going to require inventive solutions to ensure that there really is sufficient access to water for all users. Connor Lynagh Jess, thanks for taking the time to talk.Jessica Alsford Great speaking with you too Connor. Jessica Alsford And as a reminder, if you enjoy Thoughts on the Market, please do take a moment to rate and review on the Apple Podcasts app. It helps more people to find the show. 

While geopolitical tensions currently weigh on markets, investors should look to the fundamentals in order to anticipate the depth and duration of the ongoing correction.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----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 Wednesday, February 23rd at 11 a.m. in New York. So let's get after it. This past week tensions around Russia/Ukraine dominated the headlines. When unpredictable events like this occur, it's easy to simply throw up one's arms and blame all price action on it. However, we're not so sure that's a good idea, particularly in the current environment of Fed tightening and slowing growth. From here, though, the depth and duration of the ongoing correction will be determined primarily by the magnitude of the slowdown in the first half of 2022. While the Russia/Ukraine situation obviously can make this slowdown even worse, ultimately, we think that preexisting fundamental risks we've been focused on for months will be the primary drivers, particularly as geopolitical concerns are now very much priced. While most economic and earnings forecasts do reflect the slowdown from last year's torrid pace, we think there's a growing risk of greater disappointment in both. We've staked our case primarily on slowing consumer demand as confidence remains low thanks to the generationally high inflation in just about everything the consumer needs and wants. Many investors we speak with remain more convinced the consumer will hold up better than the confidence surveys suggest. After all, high frequency data like retail sales and credit card data remain robust, while many consumer facing companies continue to indicate no slowdown in demand, at least not yet. However, most of our leading indicators suggest that the risk of consumer slowdown remains higher than normal. Secondarily, but perhaps just as importantly, is the fact that supply is now rising. While this will alleviate some of the supply shortages, it could also lead to a return of price discounting for many goods where inflationary pressures have been the greatest. That's potentially a problem for margins. It's also a risk to demand, in our view, if the improved supply reveals a much greater level of double ordering than what is currently anticipated. In short, the order books - i.e. the demand picture - may not be as robust as people believe. Overall, the technical picture is mixed also within U.S. equities. Rarely have we witnessed such weak breath and havoc under the surface when the S&P 500 is down less than 10%. In our experience, when such a divergence like this happens, it typically ends with the primary index catching down to the average stock. In short, this correction looks incomplete to us. Nevertheless, we also appreciate that equity markets are very oversold and sentiment is bearish even if positioning is not. With the Russia Ukraine situation now weighing heavily on equity markets, relief would likely lead to a tactical rally, but we acknowledge that uncertainty remains extremely high. The bottom line for us is that we really don't have a strong view on the Russia/Ukraine situation as it relates to the equity markets. However, we think a lot of bad news is priced at this point. Therefore, we would look to sell strength into the end of the month if markets rally on the geopolitical risk failing to escalate further. 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.