Rewiring Global Trade

Thoughts on the Market vor 1 Jahr

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3:58

While policy noise continues to dominate the headlines, our
Global Head of Fixed Income Research and Public Policy Strategy
Michael Zezas points out a key theme: a transition toward a
multipolar world.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income Research and Public Policy
Strategy. Today we’ll be discussing what investors need to focus
on amidst all the U.S. policy headlines.

It’s Friday, March 7th, at 12:30 pm in New York.

In recent weeks the news flow on tariffs, immigration, and
geopolitics has been relentless, culminating in this week’s state
of the union address by President Trump and, if headlines hold, a
partial reversal in course on Mexico and Canada tariffs that were
just levied earlier this week. Understandably, measures of policy
uncertainty, such as the Baker, Bloom, and Davis index, have
reached all time highs. And this tracks with the confusion
expressed by investing and corporate clients.

In our view, this policy noise is going to continue. But, there
is an important signal. These developments track with one of our
four key themes of 2025. The transition toward a multipolar
world. The tense White House meeting between Presidents Trump and
Zelensky, played out live in front of the news cameras, was
another reminder that the U.S. is evolving its role in driving
international affairs. And tariffs on Mexico, Canada, and China
are a reminder of the U.S.’s interest in rewiring global trade.
The reasons behind this are myriad and complex, but in the near
term it's about the U.S. looking more inward. Economic populism
is, well, popular with voters in both parties.

There’s a few net takeaways for investors here. One is a positive
for the European defense sector. The combination of tariffs and
the evolving U.S. posture on global security has long been
part of our thesis on why Europe would eventually chart a
new path and step up to spend more on defense. The current
situation in Russia and Ukraine underscores this,
with potential for another $0.9-$2.7 trillion in
defense spending through 2035. Germany’s new ‘whatever it takes’
approach to defense spending is a key signpost in this trend, per
our colleagues in European economics, equities, and foreign
exchange.

Another critical takeaway is around the effects of U.S. trade
realignment on both macro markets and equity sector preferences.
Whether these trade policy changes play out well over time or
not, the attempt costs something in the near term. Tariffs are
part of that cost. And while the precise path of tariff increases
is unclear, what is clear is that they’re headed higher in the
aggregate, a tactic in service of the administration’s goal of
reducing trade deficits and creating reciprocal trade barriers in
order to incentivize greater production in the U.S.

Over the next year, our economists expect that those tariff costs
will crimp economic activity. That slower growth should
eventually feed through into a more dovish monetary policy. Both
factors, in the view of our U.S. rates strategy team, should
continue pushing yields lower – good news for bond investors, but
more challenging posture for equity investors, and a key reason
our cross asset team is currently flagging a preference for fixed
income.

That tariff activity should also drive supply chain realignment.
But, going forward, changing those supply chains may now be more
costly. Per work from our Global economics team, the supply
chains that need to be moved now are complex and concentrated in
geopolitical rivals. That’s a challenge for certain sectors,
like U.S. IT hardware and consumer discretionary. But the
investment to make it happen creates demand and is a benefit for
the capital goods and broader industrials sector.

Bottom line, the policy noise will continue, as will the market
cross currents it’s driving. We’ll keep you informed on it all
here.

Thanks for listening. If you enjoy the show, please leave us a
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