In the first of a two-part episode, Lisa Shalett, our Wealth
Management CIO, and Andrew Sheets, our Head of Corporate Credit
Research, discuss whether the era of “American Exceptionalism” is
ending and how investors should prepare for a global market
rebalancing.
Read more insights from Morgan
Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley.
Lisa Shalett: And I'm Lisa Shalett, Chief
Investment Officer for Morgan Stanley Wealth Management.
Andrew Sheets: Today, the first of two
episodes tackling a fascinating and complex question. Is American
market dominance ending? And what would that mean for investors?
It's Wednesday, July 30th at 4pm in London.
Lisa Shalett: And it's 11am here in New
York.
Andrew Sheets: Lisa, it's so great to talk
to you again, and especially what we're going to talk about over
these two episodes. , a theme that's been coming up regularly on
this podcast is this idea of American exceptionalism. This
multi-year, almost multi-decade outperformance of the U.S.
economy, of the U.S. currency, of the U.S. stock market.
And so, it's great to have you on the show, given that you've
recently published on this topic in a special report, very
topically titled American Exceptionalism: Navigating the
Great Rebalancing.
So, what are the key pillars behind this idea and why do you
think it's so important?
Lisa Shalett: Yeah. So, I think that that
when you think about the thesis of American exceptionalism and
the duration of time that the thesis has endured. I think a lot
of investors have come to the conclusion that many of the
underpinnings of America's performance are just absolutely
inherent and foundational, right?
They'll point to America as a, economy of innovation. A market
with regulation and capital markets breadth and depth and
liquidity a market guided by, , laws and regulation, and a market
where, heretofore, we've had relatively decent population
growth.
All things that tend to lead to growth. But our analysis of the
past 15 years, while acknowledging all of those foundational
pillars say, ‘Wait a minute, let's separate the wheat from the
chaff.’ Because this past 15 years has been, extraordinary and
different. And it's been extraordinary and different on at least
three dimensions.
One, the degree to which we've had monetary accommodation and an
extraordinary responsiveness of the Fed to any crisis. Secondly,
extraordinary fiscal policy and fiscal stimulus. And third,
the peak of globalization a trend that in our humble opinion,
American companies were among the biggest beneficiaries of
exploiting, despite all of the political rhetoric that considers
the costs of that globalization.
Andrew Sheets: So, Lisa, let me go back
then to the title of your report, which is the Great Rebalancing
or navigating the Great Rebalancing. So, what is that
rebalancing? What do you think kind of might be in store going
forward?
Lisa Shalett: The profound out performance,
as you noted, Andrew, of both the U.S. dollar and American stock
markets have left the world, , at an extraordinarily overweight
position to the dollar and to American assets.
And that's against a backdrop where we're a fraction of the
population. We're 25 percent of global GDP, and even with all of
our great companies, we're still only 33 percent of the profit
pool. So, we were at a place where not only was everyone
overweight, but the relative valuation premia of American equity
assets versus equities outside or rest of world was literally a
50 percent premium.
And that really had us asking the question, is that really
sustainable? Those kind of valuation premiums – at a point when
all of these pillars, fiscal stimulus, monetary stimulus,
globalization, are at these profound inflection points.
Andrew Sheets: You mentioned monetary and
fiscal policy a bit as being key to supercharging U.S. markets.
Where do you think these factors are going to move in the future,
and how do you think that affects this rebalancing
idea?
Lisa Shalett: Look, I mean, I think we went
through a period of time where on a relative basis, relative
growth, relative rate spreads, right? The, the dispersion between
what you could earn in U.S. assets and what you could earn in
other places, and the hedging ratio in those currency markets
made owning U.S. assets, just incredibly attractive on a relative
basis.
As the U.S. now kind of hits this point of inflection when the
rest of the world is starting to say, okay, in an America first
and an America only policy world, what am I going to do?
And I think the responses are that for many other countries, they
are going to invest aggressively in defense, in infrastructure,
in technology, to respond to de-globalization, if you will.
And I think for many of those economies, it's going to help
equalize not only growth rates between the U.S. and the rest of
the world, but it's going to help equalize rate differentials.
Particularly on the longer end of the curves, where everyone is
going to spending money.
Andrew Sheets: That's actually a great
segue into this idea of globalization, which again was a major
tailwind for U.S. corporations and a pillar of this American
outperformance over a number of years.
It does seem like that landscape has really changed over the last
couple of decades, and yet going forward, it looks like it's
going to change again. So, with rising deglobalization with
higher tariffs, what do you think that's going to mean to U.S.
corporate margins and global supply chains?
Lisa Shalett: Maybe I am a product of my
training and economics, but I have always been a believer in
comparative advantage and what globalization allowed. True free
trade and globalization of supply chains allowed was for
countries to exploit what they were best at – whether it was the
lowest cost labor, the lowest cost of natural resources, the
lowest cost inputs. And America was aggressive at pursuing those
things, at outsourcing what they could to grow profit margins.
And that had lots of implications.
And we weren't holding manufacturing assets or logistical assets
or transportation assets necessarily on our balance
sheets. And that dimension of this asset light and optimized
supply chains is something in a world of tariffs, in a world of
deglobalization, in a world of create manufacturing jobs onshore,
where that gets reversed a bit. And there's going to be a
financial cost to that.
Andrew Sheets: It's probably fair to say
that the way that a lot of people experience American
exceptionalism is in their retirement account.
In your view, is this outperformance sustainable or do you think,
as you mentioned, changing fiscal dynamics, changing trade
dynamics, that we're also going to see a leadership rotation
here?
Lisa Shalett: Our thesis has been, this
isn't the end of American exceptionalism, point blank, black and
white. What we've said, however, is that we think that the order
of magnitude of that outperformance is what's going to close, ,
when you start burdening, , your growth rate with headwinds,
right?
And so, again, not to say that that American assets can't
continue to, to be major contributors in portfolios and may even,
, outperform by a bit. But I don't think that they're going to be
outperforming by the magnitude, kind of the 450 - 550 basis
points per year compound for 15 years that we've seen.
Andrew Sheets: The American exceptionalism
that we've seen really since 2009, it's also been accompanied by
really unprecedented market imbalances. But another dimension of
these imbalances is social and economic inequality, which is
creating structural, and policy, and political challenges.
Do these imbalances matter for markets? And do you think these
imbalances affect economic stability and overall market
performance?
Lisa Shalett: People need to understand
what has happened over this period. When we applied this degree
of monetary and fiscal, stimulus, what we essentially did was
massively deleverage the private sector of America, right?
And as a result, when you do that, you enable and create the
backdrop for the portions of your economy who are less interest
rate sensitive to continue to, kind of, invest free money. And so
what we have seen is that this gap between the haves and the have
nots, those who are most interest rate sensitive and those
who are least interest rate sensitive – that chasm is really
blown out.
But also I would suggest an economic policy conundrum. We can all
have points of view about the central bank, and we can all have
points of view about the current chair. But the reality is if you
look at these dispersions in the United States, you have to ask
yourself the question, is there one central bank policy that's
right for the U.S. economy?
I could make the argument that the U.S. GDP, right, is growing at
5.5 percent nominal right now. And the policy rate's 4.3 percent.
Is that tight?
Andrew Sheets: Hmm.
Lisa Shalett: I don't know, right? The
economists will tell me it's really tight, Lisa – [be]cause
neutral is 3. But I don't know. I don't see the constraints. If I
drill down and do I say, can I see constraints among small
businesses?
Yeah. I think they're suffering. Do I see constraints in some of
the portfolio companies of private equity? Are they suffering?
Yeah. Do they need lower rates? Yeah. Do the lower two-thirds of
American consumers need lower rates to access the housing market.
Yeah.
But is it hurting the aggregate U.S. economy? Mm, I don't know;
hard to convince me.
Andrew Sheets: Well, Lisa, that seems like
a great place to actually end it for now and Thanks as always,
for taking the time to talk.
Lisa Shalett: My pleasure, Andrew.
Andrew Sheets: And that brings us to the
end of part one of this two-part look at American exceptionalism
and the impact on equity and fixed income markets. Tomorrow we'll
dig into the fixed income side of that debate.
Thank you as always, for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen, and also tell a friend or colleague about us today.
*****
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.
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