Our Chief Fixed Income Strategist takes listeners behind the
curtain on Morgan Stanley’s expectations for markets over the
next 12 months.
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupathur, Morgan
Stanley's Chief Fixed Income Strategist. Along with my colleagues
bringing you a variety of perspectives, today I'll be talking
about the key debates we engaged in during the mid-year outlook
process.
It's Tuesday, June 4th at 1pm in New York.
Over the last few episodes, you've been hearing a lot about
Morgan Stanley's midyear outlook, where our economists have
forecasted a sunny macro environment of decelerating growth and
inflation, and policy easing in most developed market economies,
leading to a positive backdrop for risk assets in the base case,
especially in the second half of the year.
But beyond the year end, many uncertainties -- uncertainties of
outcomes and uncertainties of the consequences of those outcomes
-- point to a wider range of outcomes, driving a wider than
normal bull versus bear skew in our expectations for markets over
the next 12 months.
As always, these outlooks are the culmination of a process
involving much deliberation and spirited debate among economists
and strategists across all the regions and asset classes we
cover. I thought it might be useful to detail some of these
debates that we've had during the process to shed a better light
on the forecast in our outlook.
First, given the many changes to market pricing of Fed's rate
cuts year to date, driven by higher-than-expected inflation, the
path ahead for US inflation was heavily debated. Our economists
argued that the acceleration in goods and financial services
prices, which explains a substantial portion of the upside in the
first quarter inflation data should decelerate from here. And
also that leading indicators point to a weaker shelter inflation
ahead. Their analysis also showed that residual seasonality
contributed to the unexpected strength in first quarter [20]24
inflation data, suggesting a payback has to happen in the second
half of 2024.
The outlook for China economy and our cautious stance on the
market was another point of debate, mainly because China's growth
has surprised to the upside relative to our 2024 year ahead
outlook. Our economists argued that while there are a few policy
positives on housing and green products mitigating the debt
deflation spiral, growth remains unbalanced and subpar. So, we
discussed our cautious stance on China equity markets against
this backdrop and concluded that the equity market recovery is
still very challenging in China.
Third, given the combination of favorable technicals, solid
fundamentals, and a relatively benign economic outlook, we
debated whether corporate credit, on which we are constructive,
should we be even more constructive in our forecasts. After all,
the setup for corporate credit has many elements similar to those
during the mid 1990s, when, for example, US IG index spreads were
about 30 basis points tighter versus the current spread
targets.
Our strategist highlighted the significant differences in the
market structure, the composition of the index, and the duration
of the underlying bonds that make up this index today, versus
1990s -- all of which put a higher floor on spreads, which
explains our spread targets.
The debates notwithstanding, we cannot argue with the benign
macro backdrop and what that means for the second half of 2024.
We turn overweight in global equities and overweight in a range
of spread products within fixed income, most notably agency MBS,
EM Sovereign credit, leveraged loans, securitized credit,
especially CLO equity tranches.
Thanks for listening. If you enjoyed the podcast, please leave us
a review wherever you listen and share Thoughts on the Market
with a friend or colleague today.
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