Lisa Shalett is a member of Morgan Stanley’s Wealth Management
Division and is not a member of Morgan Stanley’s Research
Department. Unless otherwise indicated, her views are her own and
may differ from the views of the Morgan Stanley Research
Department and from the views of others within Morgan Stanley.
Our CIO for Wealth Management, Lisa Shalett, and our Head of
Corporate Credit Research continue their discussion of the impact
of interest rates on different asset classes, the high
concentration of value in equity markets and more.
----- Transcript -----
Welcome to Thoughts on the Market, and to part two of a
conversation with Lisa Shalett, chief investment officer for
Morgan Stanley wealth management.
I'm Andrew Sheets, head of corporate credit research at Morgan
Stanley.
Today, we'll be continuing that conversation, focusing on how
higher interest rates could impact asset classes, and also some
recent work about the unusually high concentration of stocks
within the equity market.
We begin with Lisa's very topical question about how higher
interest rates might impact credit.
Lisa Shalett: So, Andrew, let me ask you
this. From your perspective as the Global Head of Corporate
Credit Research, what happens if we're, in fact, in this new
regime of rates being higher for longer?
Andrew Sheets: Yeah, thanks, Lisa. It seems
more topical by the day as we see yields continuing to march
higher. So I think like a lot of things in the market, it kind of
depends a little bit on what the fundamental backdrop is that's
driving those interest rates higher. Because if I think about the
modern era for credit, which I’ll define as maybe the last 40
years, the tightest that we've ever seen corporate credit spreads
was not when the Fed or the European central bank was buying
bonds. It was not when you had lots of leverage building up in
the financial system prior to the financial crisis.
It was in the mid 90s when the economy was pretty good. The Fed
had hiked rates a lot in [19]94 and then it cut them a little.
And, you know, the mid nineties, I think, are one of the poster
children for, kind of, a higher for longer rate environment
amidst a pretty strong economy.
So, if that is what we're looking at, we're looking at rates
being higher for longer because the economic output of the US and
other regions is generally stronger. I think that's an
environment where you can have the overall credit market
performing still pretty well. You'll certainly have dispersion
around that as not every balance sheet, not every capital
structure was planned, was created with that sort of rate
environment in mind.
Overall, if you had to say, is credit more afraid of a kind of
higher for longer scenario or is it more afraid of, growth being
a lot weaker than expected, but that would bring low rates. I
actually think a lot of credit investors would much rather have a
more stable growth environment, even if that brings somewhat
fewer rate cuts and higher for longer rates.
Lisa Shalett: One other thing, I know that
the Global Investment Committee has been debating is this idea
between the haves and the have nots that's been somewhat unique
to this business cycle where, there's been a portion of the mega
cap and large cap universes who have demonstrated, quite
frankly, total insensitivity to interest rates because of
their cash balances. Or because of their lack of need for actual
borrowing. And then there's smaller midsize companies, these
smaller cap or unprofitable tech companies, some of the companies
that may have been born in the venture capital boom of the early
2020s.
How is this have, have not, debate playing out in the credit
markets? Are there parts of the credit markets that are starting
to worry that there's a tail?
Andrew Sheets: Yeah, I think that's just a
fascinating question at the moment because we’ve lived in this
very macro world where it seemed like big picture questions about
central banks: Will we go into recession? What will commodity
prices do is driving everything. And even this week, questions
about interest rates are dominating the headlines on TV and on
the news.
But I think if you peel things back a little bit, this is an
incredibly micro market, you know, we're seeing some of the
lowest correlations and co-movement between individual stocks in
the US and Europe that we haven't in 15 years. If I think
about the credit market, the credit market is not just sailing
into this environment, happy go lucky, no risk on the horizon.
It's showing some of the highest tiering that we've seen in a
very long time between CCC rated issuers, which is the lowest
rated, main part of performing credit and Single-B issuers, which
are still below investment grade rated, but are somewhat better.
Market is charging a very high price premium between those two,
which suggests that it is exactly as you mentioned,
differentiating based on business model strength and level of
leverage and the likes.
So, this environment of differentiation -- where the overall
market is kind of okay, but you have lots of churning below the
surface -- I think it's a very accurate description of credit. I
think it's a very accurate description of the broader market, and
it's certainly something that we're seeing investors take
advantage of we see it in the data.
Andrew Sheets: Lisa, you recently published
a special report on the consequences of concentration, which
focuses on some of these mega cap stocks and how they may present
underappreciated risks for investors. What were the key takeaways
from that that we should keep in mind when it comes to market
concentration and how should we think about that?
Lisa Shalett: The fundamental point we were
trying to make -- and it really has to do with some of the
unintended risks potentially that passive investors may be
embracing that they don't fully appreciate -- is really through
the end of 2023, US equity indices became extraordinarily,
concentrated; where the top 10 names were accounting for greater
than, a third of the market capitalization. And history has shown
that such high levels of concentration are rarely sustainable.
But what was particularly unique about the era of the Magnificent
Seven or these top 10 mega cap tech stocks is not only were they
a huge portion of the whole index, but in many ways they had
become correlated to one another, right? Both, in terms of their
trading dynamics and their valuations, but in terms of their
factor exposures, right?
They were all momentum oriented. They were all tech stocks. They
were all moving on an AI, narrative. In many cases, they had
begun competing with each other; one another directly in
businesses, like the cloud, like streaming services and media, et
cetera.
Andrew Sheets: And Lisa, kind of further on
that idea, I assume that one counterpoint that you get to this
work is that some of these very large mega cap names are just
great companies. They've got strong competitive positions;
they've got opportunities for future growth. As an investor, how
do you think about how much you are supposed to pay up for
quality, so to speak? And, you know, maybe you could talk just a
little bit more about how you see the valuations of some of these
larger names in the market.
Lisa Shalett: What we always remind clients
is, there is no doubt that, these are great companies and they
have cash flows, footprints, dominant positions, and markets that
are growing. But the question is twofold. When is that story
fully discounted, right?
And when do great companies cease to be great stocks? And if you
look back in history, history is littered with great companies
who cease to be great stocks and very often, clients quote
unquote never saw it coming because they hung their hat on this
idea, but it's a great company.
Andrew Sheets: Any parting thoughts as we
move closer to the midpoint for 2024?
Lisa Shalett: The line that I'm using most
with clients is that, I fundamentally believe that uncertainty in
terms of the economic scenarios that could play out from here.
Whether we're talking about a no landing, we're talking about a
hard landing, we talk about a stagflation. And the policy
responses to that, whether it's the timing of the Fed, and what
they do. And what's their mix between balance sheet and rates,
and then what happens post the presidential elections in the US.
And is there a policy change that shifts some of the growth
drivers in the economy.
I just think overall uncertainty is rising through the end of the
year, and that continues to argue, for a position as we've noted,
where clients and their advisors are particularly active towards
risk management, and where the premium to diversification is
above average.
Andrew Sheets: Lisa, thanks for taking the
time to talk. Hope we can have you back again soon.
Lisa Shalett: It's great to speak with you,
as always, Andrew.
Andrew Sheets: As a reminder, if you enjoy
Thoughts in the Market, please take a moment to rate and review
us wherever you get your podcasts. It helps more people find the
show.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.