Our CIO and Chief US Equity Strategist Mike Wilson takes a closer
look at the potential ramifications of the sharp central bank
policy shifts in the U.S., Japan and China.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief US Equity Strategist. Along with my
colleagues bringing you a variety of perspectives, today I'll be
talking about what to expect from the sharp pivot in global
monetary and fiscal policy.
It's Monday, Sept 30th at 11:30am in New York.
So let’s get after it.
Over the past few months, Fed policy has taken on a more dovish
turn. To be fair, bond markets have been telling the Fed that
they are too tight and in many respects this pivot was simply the
Fed getting more in line with market pricing. However, in
addition to the 50 basis point cut from the Fed, budget deficits
are providing heavy support; with August’s deficit nearly $90b
higher than expected. Meanwhile, financial conditions
continue to loosen and are now at some of the most stimulative
levels seen over the past 25 years.
Other central banks are also cutting interest rates and even the
Bank of Japan, which recently raised rates for the first time in
years, has backed off that stance – and indicated they are in no
hurry to raise rates again. Finally, this past week the People’s
Bank of China announced new programs specifically targeting
equity and housing prices. After a muted response from markets
and commentators, the Chinese government then followed up
with an aggressive fiscal policy stimulus. Why now?
Like the US, China is highly indebted but it has entered full
blown deflation with both credit and equity markets trading
terribly for the past several years. There is an old adage that
markets stop panicking when policy makers start panicking. On
that score, it makes perfect sense why China equity and
credit markets have responded the most favorably to the
changes made last week. European equity markets were also
stronger than the US given European economies and companies have
greater exposure to China demand. On the other hand, Japan
and India traded poorly which also makes sense in my view since
they were the two largest beneficiaries of investor outflows from
China over the past several years. Such trends are likely
to continue in the near term.
For US equity investors, the real question is whether China’s
pivot on policy will have a material impact on US growth. We
think it’s fairly limited to areas like Industrial spending and
Materials pricing and it’s unlikely to have any impact on US
consumers or corporate investment demand. In fact, if commodities
rally due to greater China demand, it may hurt US consumer
spending.
As usual, oil prices will be the most important commodity to
watch in this regard. The good news is that oil prices were down
last week due to an unrelated move by Saudi Arabia to no longer
cap production in its efforts to get oil prices back to its $100
target. If prices reverse higher again and move toward $80/bbl
due to either China stimulus or the escalation of tensions in the
Middle East, it would be viewed as a net negative in my view for
US equities.
As discussed last week the most important variables for the
direction of US equities is the upcoming labor market data
and third quarter earnings season. Weaker than expected data is
likely to be viewed negatively by stocks at this point and good
news will be taken positively. In other words, investors should
not be hoping for worse news so the Fed can cut more
aggressively.
At this point, steady 25 basis point cuts for the next several
quarters in the context of growth holding up is the best outcome
for stocks broadly. Meanwhile individual stocks will likely
trade as much on idiosyncratic earnings and company news rather
than macro data in the absence of either a hard landing or a
large growth acceleration; both of which look unlikely
in the near term. In such a scenario, we think large cap
quality growth is likely to perform the best while there
could be some pockets of cyclical strength in companies that can
benefit from greater China demand. The best areas for cyclical
outperformance in that regard remain in the Industrial and
materials sectors.
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.
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