Banking on Deregulation

Thoughts on the Market vor 1 Jahr

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Of all of the potential policy changes from the incoming U.S.
presidential administration, deregulation could have the most
significant impact on markets. Our Chief Fixed Income Strategist
explains what’s coming.

----- Transcript -----

Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan
Stanley's Chief Fixed Income Strategist. Today I'll be discussing
the policy changes that we have the highest conviction in terms
of their market impact.

It's Wednesday, December 18th at 10 a.m. in New York.

As our regular readers are aware, Morgan Stanley strategists and
economists around the globe came together to formulate our
outlook for 2025 across the wide range of markets and economies
we cover. A key aspect of this year's outlook is the potential
for policy changes ahead from the incoming administration. The
substance, severity, and sequencing of policies will matter and
will have an important bearing on how markets perform over the
course of 2025. We would put the potential range of policy
changes into four broad categories: Tariffs and Trade Policy;
Immigration Controls; Tax Cuts and Fiscal Policy; and finally,
Deregulation. In terms of sequencing, our central case is for
tariffs to go first and tax cuts to be last. As our public policy
team sees it, the incoming administration will see fast
announcements but a slow implementation of policy, especially in
terms of tariffs and immigration. Slower implementation will mean
that the changes will also be slow and the impacts on the economy
and markets likely to be a lot more gradual.

That said, it is in the area of deregulation that we expect to
see the highest impact on markets, even though precise
measurement of these impacts in terms of macroeconomic indicators
such as growth and inflation is hard to come through. So with
deregulation, we expect an environment in support of bank
activity. As our bank equity analysts have noted, banks in their
coverage area currently are sitting on record levels of excess
capital: 177 billion of excess capital and a weighted average
CET1 ratio of 12.8 percent, which is 140 basis points higher than
pre-COVID levels of 11.4 percent.

If Basel III Endgame is re proposed in a more capital neutral
manner, we expect U.S. banks will begin deploying their excess
capital into lending, supporting clients in trading and
underwriting, increasing their securities purchases, as well as
increasing buybacks and dividends. Changes to the existing Basel
III Endgame proposal will also make U.S. banks more competitive
globally.

We also believe all global banks with significant capital markets
businesses will benefit from the return of the M&A. Another
by-product of Basel III Endgame being reproposed in a capital
neutral way pertains to what banks do in their securities
portfolios. In the last few years, in anticipation of higher
capital requirements, U.S. banks have not been very active in
deploying their capital in securities purchases, particularly
Asian CMBS and CLO AAAs. With the deregulation focus, we expect
that banks will revert to buying the assets that they have stayed
away from, in particular, Asian CMBS and CLO AAAs.

The return of bank demand for CLO AAAs will have a bearing on the
underlying broadly syndicated loan market and even more broadly
on credit formation and sponsor activity, which will be
supportive of a stronger return of M&A than our credit
strategists have been expecting. So in fixed income, if you
pardon the pun, we are really banking on the impact of
deregulation, which supports our view on the range of relative
value opportunities and spread products, especially in
securitized products.

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