On the first part of a two-part roundtable, our panel discusses
why the US is likely to see a slowdown and where investors can
look for growth.
----- Transcript -----
Vishy Tirupattur: Welcome to Thoughts on
the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed
Income Strategist. Today in the podcast, we are hosting a special
roundtable discussion on what's ahead for the global economy and
markets in 2025.
I'm joined by my colleagues: Seth Carpenter, Global Chief
Economist; Mike Wilson, Chief US Equity Strategist and the firm's
Chief Investment Officer; and Andrew Sheets, Global Head of
[Corporate] Credit Research.
It's Monday, November 18th, at 10am in New York.
Gentlemen. Thank you all for taking the time to talk. We have a
lot to cover, and so I'm going to go right into it.
Seth, I want to start with the global economy. As you look ahead
to 2025, how do you see the global economy evolving in terms of
growth, inflation and monetary policy?
Seth Carpenter: I have to say – it's always
difficult to do forecasts. But I think right now the uncertainty
is even greater than usual. It's pretty tricky. I think if you do
it at a global level, we're not actually looking for all that
much of a change, you know, around 3-ish percent growth; but the
composition is surely going to change some.
So, let's hit the big economies around the world. For the US, we
are looking for a bit of a slowdown. Now, some of that was
unsustainable growth this year and last year. There's a bit of
waning residual impetus from fiscal policy that's going to come
off in growth rate terms. Monetary policy is still restrictive,
and there's some lag effects there; so even though the Fed is
cutting rates, there's still going to be a little bit of a
slowdown coming next year from that.
But I think the really big question, and you alluded to this in
your question, is what about other policy changes here? For
fiscal policy, we think that's really an issue for 2026. That's
when the Tax Cut and Jobs Act (TCJA) tax cuts expire, and so we
think there's going to be a fix for that; but that's going to
take most of 2025 to address legislatively. And so, the fiscal
impetus really is a question for 2026.
But immigration, tariffs; those matter a lot. And here the
question really is, do things get front loaded? Is it everything
all at once right at the beginning? Is it phased in over time a
bit like it was over 2018? I think our baseline assumption is
that there will be tariffs; there will be an increase in tariffs,
especially on China. But they will get phased in over the course
of 2025. And so, as a result, the first thing you see is some
increase in inflation and it will build over time as the tariffs
build. The slowdown from growth, though, gets backloaded to
the end of 2025 and then really spills over into to 2026.
Now, Europe is still in a situation where they've got some
sluggish growth. We think things stabilize. We get, you know, 1
percent growth or so. So not a further deterioration there; but
not a huge increase that would make you super excited. The ECB
should probably keep cutting interest rates. And we actually
think there's a really good chance that inflation in the euro
area goes below their target. And so, as a result, what do we
see? Well, the ECB cutting down below their best guess of
neutral. They think 2 percent nominal is neutral and they go
below that.
China is another big curveball here for the forecast because
they've been in this debt deflation spiral for a while. We don't
think the pivot in fiscal policy is anywhere near sufficient to
ward things off. And so, we could actually see a further slowing
down of growth in China in 2025 as the policy makers do this
reactive kind of policy response. And so, it's going to take a
while there, and we think there's a downside risk there.
On the upside. I mean, we're still bullish on Japan. We're still
very bullish on India and its growth; and across other parts of
EM, there's some bright spots. So, it's a real mixed bag. I don't
think there's a single trend across the globe that's going to
drive the overall growth narrative.
Vishy Tirupattur: Thank you, Seth. Mike,
I'd like to go to you next. 2024 has turned out to be a strong
year for equity markets globally, particularly for US and
Japanese equities. While we did see modest earnings growth,
equity returns were mostly about multiple expansion. How do you
expect 2025 to turn out for the global equity markets? What are
the key challenges and opportunities ahead for the equity markets
that you see?
Mike Wilson: Yeah, this year was
interesting because we had what I would say was very modest
earnings growth in the US in particular; relative to the
performance. It was really all multiple expansion, and that's
probably not going to repeat this year. We're looking for better
earnings growth given our soft landing outcome from an economic
standpoint and rates coming down. But we don't think multiples
will expand any further. In fact, we think they'll come down by
about 5 percent. But that still gets us a decent return in the
base case of sort of high single digits.
You know, Japan is the second market we like relative to the rest
of the world because of the corporate governance story. So there,
too, we're looking for high single digit earnings growth and high
single digits or 10 percent return in total. And Europe is when
we're sort of down taking a bit because of tariff risk and also
pressure from China, where they have a lot of export business.
You know, the challenges I think going forward is that growth
continues to be below trend in many regions. The second challenge
is that, you know, high quality assets are expensive everywhere.
It's not just the US. It's sort of everywhere in the world. So,
you get what you pay for. You know, the S&P is extremely
expensive, but that's because the ROE is higher, and growth is
higher.
So, you know, in other words, these are not well-kept secrets.
And so just valuation is a real challenge. And then, of course,
the consensus views are generally fairly narrow around the soft
landing and that's very priced as well. So, the risks are that
the consensus view doesn't play out. And that's why we have two
bull and two bear cases in the US – just like we did in the
mid-year outlook; and in fact, what happened is one of our bull
cases is what played out in the second half of this year.
So, the real opportunity from our standpoint, I think this is a
global call as well – which is that we continue to be pretty big
rotations around the macro-outlook, which remains uncertain,
given the policy changes we're seeing in the US potentially, and
also the geopolitical risks that still is out there.
And then the other big opportunity has been stock picking.
Dispersion is extremely high. Clients are really being rewarded
for taking single stock exposures. And I think that continues
into next year. So, we're going to do what we did this year is
we're going to try to rotate around from a style and size
perspective, depending on the macro-outlook.
Vishy Tirupattur: Thank you, Mike. Andrew,
we are ending 2024 in a reasonably good setup for credit markets,
with spreads at or near multi-decade tights for many markets. How
do you expect the global credit markets to play out in 2025? What
are the best places to be within the credit spectrum and across
different regions?
Andrew Sheets: I think that's the best way
to frame it – to start a little bit about where we are and then
talk about where we might be going. I think it's safe to say that
this has been an absolutely phenomenal backdrop for corporate
credit. Corporate credit likes moderation. And I think you've
seen an unusual amount of moderation at both the macro and the
micro level.
You've seen kind of moderate growth, moderating inflation,
moderating policy rates across DM. And then at the micro level,
even though markets have been very strong, corporate
aggressiveness has not been. M&A has been well below trend.
Corporate balance sheets have been pretty stable.
So, what I think is notable is you've had an economic backdrop
that credit has really liked, as you correctly note. We've pushed
spreads near 20-year tights based on that backdrop. But it's a
backdrop that credit markets liked, but US voters did not like,
and they voted for different policy.
And so, when we look ahead – the range of outcomes, I think
across both the macro and the micro, is expanding. And I think
the policy uncertainty that markets now face is increasing both
scenarios to the upside where things are hotter and you see more
animal spirits; and risk to the downside, where potentially more
aggressive tariffs or action on immigration creates more kind of
stagflationary types of risk.
So one element that we're facing is we feel like we're leaving
behind a really good environment for corporate credit and we're
entering something that's more uncertain. But then balancing that
is that you're not going to transition immediately.
You still have a lot of momentum in the US and European economy.
I look at the forecasts from Seth's team, the global economic
numbers, or at least kind of the DM economic numbers into the
first half of next year – still look fine. We still have the Fed
cutting. We still have the ECB cutting. We still have inflation
moderating.
So, part of our thinking for this year is it could be a little
bit of a story of two halves that we titled our section, “On
Borrowed Time.” That the credit is still likely to hold in well
and perform better in the first half of the year. Yields are
still good; the Fed is still cutting; the backdrop hasn't changed
that much. And then it's the second half of the year where some
of our economic numbers start to show more divergence, where the
Fed is no longer cutting rates, where all in yield levels are
lower on our interest rate forecasts, which could temper demand.
That looks somewhat trickier.
In terms of how we think about what we like within credit, we do
think the levered loan market continues to be attractive. That's
part of credit where spreads are not particularly tight versus
history. That's one area where we still see risk premium. I think
this is also an environment where regionally we see Asia
underperforming. It's a market that's both very expensive from a
spread perspective but also faces potentially kind of outsized
economic and tariff uncertainty. And we think that the US might
outperform in context to at least initially investors feeling
like the US is at less relative risk from tariffs and policy
uncertainty than some other markets.
So, Vishy, I'll pause there and pass it back to you.
Vishy Tirupattur: Thanks, Mike, Seth, and
Andrew.
Thank you all for listening. We are going to take a pause here
and we'll be back tomorrow with our year ahead round table
continued, where we'll share our forecast for government bonds,
currencies and housing.
As a reminder, if you enjoy the show, please leave us a review
wherever you listen and share Thoughts on the Market with a
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