Lessons to Take Into 2025

Thoughts on the Market vor 1 Jahr

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4:13

With the start of the new year, our Head of Corporate Credit
Research Andrew Sheets looks back to look ahead at trends for
credit and other markets in 2025.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Today I’ll be
discussing the lessons we can learn from 2024 – a remarkable year
that also may be easily forgotten.

It's Friday January 3rd at 2pm in London.

In 2024 I celebrated my 20th year with Morgan Stanley. Among my
regrets over this time was not keeping a better journal. It’s
notable how quickly events in the market that seemed large and
remarkable at the time can fade in one’s memory as the years
merge together. How markets that seem easy or obvious in
hindsight were anything but.

I say this because many years from now, 2024 may end up being one
of those relatively forgettable years. Another year where – as
usually happens – the stock market went up. Another year where
stocks outperformed bonds, the US dollar strengthened, and US
stocks beat those abroad.

Yet what is significant about 2024 is the scale of all these
trends. For anyone managing money, the question of “stocks versus
bonds”, “US versus rest-of-world”, “large versus small” or
“growth versus value” are some of the most fundamental strategic
questions one faces.

These calls don’t always matter. But last year, they did – to a
very large degree. Global stocks outperformed bonds by about
20 percent. Growth outperformed Value by practically the same
amount. US stocks beat their global peers by 13 per cent. In
short, one’s experience in 2024 and relative performance could
have varied significantly, based on just a few relatively simple
decisions.

Related to that is the second lesson. 2024 was the reminder that
while Valuation is a powerful long-term force, it can be a much
more frustrating 12-month guide. All of those relative
relationships I just mentioned – stocks versus bonds, growth
versus value, US versus International – all worked in favor of
the market that was historically richer entering last year.

For our third lesson from last year, we’ll focus on Credit, where
investors earned a premium over safer government bonds by lending
to riskier corporate borrowers. Notable for this asset class in
2024 was, for the most part, it did its own thing; showing some
encouraging independence from other markets and highlighting the
value of digging into a borrower’s details.

Specifically, I think this independence showed up in a few
different ways. Credit showed low correlation to government
bonds, for example, delivering good excess returns despite very
large swings in yields or central bank expectations. It also,
even more impressively, bucked some of 2024’s biggest
trends.

For example, while the outperformance of the US economy and US
assets was one of the biggest stories of 2024, that wasn’t the
case in Credit – where Europe and Asia credit actually did
marginally better. In contrast to the equity market, smaller
companies and Credit outperformed, as spreads and higher yielded
loans outperformed larger Investment Grade spreads, even after
adjusting for risk.

And this was true even at a more granular level. Rising corporate
activity, alongside more aggressive strategies for companies to
deal with their own borrowing created very dispersed outcomes
driven by bond-level documentation; far removed from the macro
machinations of politics and monetary policy.

This somewhat weaker connection to the broader world is central
to how we think about Credit looking ahead. While big economic
and political questions certainly loom in 2025, we think that
Credit, for now, will be driven more by more micro, company level
trends, and show somewhat lower correlation to other assets – at
least through the first half of this year.

From all of us at Thoughts on the Market, we wish you a very
Happy New Year, and all the best for 2025.

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