Thoughts on the Market

While the market waits for the incoming Trump administration to present its policy agenda, our Global Head of Fixed Income and Thematic Research Michael Zezas maps out some areas of early investor interest, including regulation and the US Treasury market.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today on the podcast we’ll be talking about key themes coming out of the US election.It’s Thursday, Nov 14 at 10am in New York.The US election is over, and now the work begins for President Trump and Republican leaders in Congress. They’ll continue to focus in the coming weeks on staffing key roles in the government and fleshing out the policy agenda. When it comes to the economic and markets outlook for 2025, those details will matter a lot – particularly the sequencing and severity of changes to tariffs, immigration, and tax policy. That means for us the next few weeks will be key to learning what next year will look like. But there are still some areas where there’s already some signal for investors to lean on. One is in the financial sector and relates to regulation. A potentially delayed or diluted approach to bank regulation resulting from the policies of the new administration is one reason that our Banks Analyst Betsy Graseck is flagging a more bullish outcome and substantial outperformance potential for the sector. Similarly, our global head of credit research, Andrew Sheets, notes this election outcome should boost M&A activity, where an expected 50 percent pick-up in volumes next year could reach 75 percent or more. Another area is industrials, a sector where companies tend to spend a lot on capital. The Republican sweep substantially increases the chances that key tax benefits reducing the cost of capital expenditures are extended in a timely fashion. And in the U.S. treasury market, there’s signs that the most volatile part of the increase in yields is behind us. While it's true that extending expiring tax cuts means deficits will be higher next year than they otherwise would have been, it's basically just an extension of current policy – so any incremental impact to growth and inflation expectations being priced into this market is still an open question. This should be helpful to fixed income markets finding their footing into year end. But, as we started off with, there’s a lot to be learned in the coming weeks, and we’ll flag here what you need to know and how it may impact the direction of markets. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

As President-Elect Trump’s new administration takes shape, all eyes are on fiscal policy that may follow. Our Global Chief Economist Seth Carpenter uses the United Kingdom’s recent election as a guide for how markets could react to a policy shift in the US. ----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about the US election and fiscal policy and what lessons we might be able to draw from the fiscal experience in the UK. It's Wednesday, November 13th at 10am in New York. In a lot of our recent research, the US election has figured prominently, and we highlighted three key policy dimensions that the US administration is going to have to confront. Immigration, tariffs, and, of course, fiscal policy. We're going to keep elections as a theme, but it might be useful to draw some comparisons to the UK to see what lessons we might have for the US. We think the experience in the UK, which recently proposed a new fiscal budget months after an election, is relevant mostly because of the time between taking power and the budget being presented. While markets are in the business of anticipating changes, the process of actually creating policy is a lot more cumbersome and time consuming. In this week, where we've seen lots of expectations already being priced in, it's probably useful to try to think about that process of forming policy in the UK and see what lessons it implies for the US. Back in May, the UK elected a new government, changing party control after 14 years. A key moment for markets came just over a week ago, though, when the new government's presentation of their budget for the next fiscal year came up. Now, we should remember, the trust government had faced a market test when the announcement of their budget proposals led to a big sell off in interest rates. As a result, markets were keenly attuned this time to the new labor government's budget, particularly because the US fiscal position requires a primary balance to stabilize the debt to GDP ratio. And in particular, when their debt costs rise, when interest rates go up, the primary balances that are needed keep increasing if they want to keep the debt stable. Now, the new labor government proposed to fill a funding gap through tax increases while simultaneously increasing Government investment spending. To manage some of the communication challenges here, many of these proposals, especially about the tax increases, they were made public in advance. The likelihood of additional government spending was also well known, and UK rates had moved higher for months leading up to the formal presentation of the budget. But, markets reacted on the day of the budget reveal, despite all of that prelude. The degree of front loading of the investment spending was seen as a surprise in markets, as was the Office of Budget Responsibility's concurrent assessment that the policy would lead to higher growth, higher inflation, and as a result, a need for higher interest rates. Now, conversations with clients have brought up the similarities of the US and the UK. US interest costs are steadily rising as the cost of the debt reprices to the current yield curve. And, over time, the ratio of interest expense on the debt relative to, say, the GDP of the country, well, that's going to continue to rise as well, and it will very soon eclipse its previous all time high. So, fiscal consolidation would be needed in the United States if we really want to see a stabilized debt to GDP ratio. Markets will need to assess the credibility of fiscal policy and the scrutiny will increase the higher the interest burden gets. The budget process for the US is much less clear cut than that in the UK and deliberations and debates will likely happen over most of 2025. And there's an additional question of how much revenue tariffs might be able to generate on a sustained basis. History suggests that trade diversion tends to limit those revenue gains. All of these facts taken together suggest that the outlook for US fiscal policy will continue to evolve for quite some time. Well, thanks for listening, and if you enjoy this show, please leave us a review wherever you listen to podcasts and share thoughts on the market with a friend or a colleague today.

Our Chief Asia Economist Chetan Ahya discusses the potential impact of tariffs on China and other Asian countries following the US election.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today on the podcast – with a Republican White House now in place, tariffs are the key issue that will matter to Asia.It’s Tuesday, November 12, at 2 PM in Hong Kong. With the US election results in, the question now is not if there will be tariff hikes, but when and how much. Will China alone see rising tariffs, or will there be universal tariff imposed on all imports to the US? The previous president Trump administration imposed several tariffs on Chinese imports beginning in 2018. And looking back, our learning is that weaker corporate confidence weighed more heavily on Asia’s growth outlook than the direct effect of tariffs on exports. Just to elaborate on the point on direct impact of tariffs: Despite the tariffs imposed on China during that period, what we observed is that China’s market share in global goods exports improved after the US started to impose tariffs on imports from China. Looking forward, let’s consider a scenario of 50 per cent tariffs on China alone. The hit to global and China corporate confidence may not be as large as it was in 2018 and 2019. This is in part because US-China trade tensions have persisted for several years now. Companies have invested in diversifying their supply chains since then, and the US share in China's exports has declined since 2017. Given all this, the drag on China’s exports may be less than the 1 percentage point that we saw last time. The rest of Asia would also experience a slowdown, but we think the overall drag on growth would be less significant this time. The effects on individual economies would differ based on their exposure to China. We think Australia and Indonesia will be more exposed. Korea, Taiwan, Malaysia, and Thailand would be moderately exposed. And India and Japan would be less exposed given a low share of export to China. But what happens if the US imposes 50 per cent tariffs on China and a 10 per cent universal tariff on the rest of the world? In this scenario, the damage to corporate confidence and the global capex and trade cycle would be much larger. The drag could be similar or greater than what we saw in 2018 and 2019. Asia excluding China has now become more dependent on the US as a source of end-demand. Global supply chains might have to be rewired yet again. This would cause a significant disruption to the corporate sector and a material impact on Asia’s growth trajectory. Of course, the final effect of US tariffs on Asia growth would also depend on the scale of policy support. Asia’s policy makers could allow their currencies to depreciate in response to a strong dollar. Then, against a backdrop of weaker currencies, Asia’s central banks could be constrained in their ability to cut rates immediately – similar to what happened in 2018-[20]19. Hence, they would prefer to take a fiscal easing first. Back in 2017-[20]19, Asia's fiscal deficit widened in aggregate by 1.1 percentage point as policymakers sought to provide some cushion to growth downside. Once currencies stabilize, they will take up monetary easing.Things may move quickly once Trump takes office in January, and we will continue to keep you updated. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

With the Republican party poised to clinch control of the White House and Congress, our CIO and Chief US Equity Strategist says markets are readying for a lighter regulatory environment, supportive tax policy and a possible rebound in investor enthusiasm.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I'll be talking about the results of last week’s election and its impact on equity markets.It's Monday, Nov 11th at 11:30am in New York.So let’s get after it.Our work leading up to the election showed that stocks likely to benefit from a Republican sweep did not actually see material outperformance up and through November 5th. In other words, this political outcome was not fully priced. As a result, this allowed for significant outperformance of Financials, Industrials, and other cyclicals last week. We see further follow through to the upside in quality cyclicals as prospects for a lighter regulatory environment, supportive tax policy and a potential rebound in animal spirits should rise following the election outcome. These developments came on the back of a macro backdrop that was already becoming more supportive of cyclical outperformance – and why we upgraded this cohort to overweight in early October. We continue to be sellers though of tariff-exposed consumer stocks and renewable energy stocks. Our upgrade to Financials in early October was rooted in our view that expectations were low going into earnings season while positioning remained light. Our work since then showed that the majority of the group's outperformance into the election could be explained by strong earnings revisions as opposed to rising odds of a Trump win in prediction markets. Now that we have the election results in hand, it appears that expectations for de-regulation are also driving performance upside in addition to improving fundamentals. While the 2016 playbook would suggest small caps and lower quality equities could see a period of outperformance following the election, there are a couple of important differences worth considering. First, several of these areas of the market are exhibiting a negative correlation to interest rates today whereas they were showing a positive correlation in 2016. In other words, in today's later cycle environment, these cohorts' adverse sensitivity to rising rates is greater than it was in that period. Should rates see more upside post the election, there is likely less upside this time for small caps and lower quality cyclicals. Furthermore, relative earnings revisions breadth for small cap cyclicals is negative today, whereas it was positive in 2016. Finally, even with the increase in animal spirits following the 2016 election, small caps' relative performance peaked in early December of that year, just one month after the election.While the momentum remains to the upside for US equity markets led by quality cyclicals, it's worth considering the potential risks. The first one is a material move higher in interest rates driven by a rising term premium. The 50 basis point rise in term premium so far has not been enough to worry equity investors yet. However, should the term premium accelerate materially from here driven by fiscal sustainability concerns, equity valuations would likely face headwinds. Second, one of the more popular views in the macro community is for a stronger dollar. If such strength continues into year-end, it could provide a headwind to multinationals' Earnings growth for 2024 and 2025. A final risk to the positive price momentum is simply price itself. Over the past several months, the price change of the S&P 500 has distanced itself from the fundamentals. More specifically, the year-over-year change in the S&P has rarely been this disconnected from earnings revision breadth and business confidence surveys. However, given the positive reaction to the election so far in markets and from many business leaders, perhaps animal spirits can take earnings guidance higher – which is necessary to maintain the current trajectory in equity markets, especially since that is now expected by stock prices. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.