Our Chief Cross-Asset Strategist Serena Tang and senior leaders
from Investment Management Andrew Slimmon and Jitania Kandhari
unpack new investment trends from supportive monetary and fiscal
policy and shifting market leadership.
Read more insights from Morgan Stanley.
----- Transcript -----
Serena Tang: Welcome to Thoughts on the
Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset
Strategist. Today we're revisiting the 2026 global equity outlook
with two senior leaders from Morgan Stanley Investment
Management.
Andrew Slimmon: I am Andrew Slimmon, Head
of Applied Equity Team within Morgan Stanley Investment
Management.
Jitania Kandhari: And I'm Jitania Kandhari,
Deputy CIO of the Solutions and Multi-Asset Group, Portfolio
Manager for Passport Strategies and Head of Macro and Thematic
Research for Emerging Market Equities within Morgan Stanley
Investment Management.
It's Tuesday, February 3rd at 10 am in New York.
So as investors are entering in 2026, after several years of very
strong equity returns with policy support reaccelerating. As
regular listeners have probably heard, Mike Wilson, who of course
is CIO and Chief Equity Strategist for Morgan Stanley – his view
is that we ended a three-year rolling earnings recession in last
April and entered a rolling recovery and a new bull market.
Now, Andrew, in the spirit of debate, I know you have a different
take on valuations and where we are at in the cycle. I’d love to
hear how you're framing this for investment management
clients.
Andrew Slimmon: Yeah, I mean, I guess I
focus a little bit more on the behavioral cycle. And I think that
from a behavioral cycle we're following a very consistent
pattern, which is we had a bad bear market in 2022 that bottomed
down 25 percent. And that provided a wonderful opportunity to
invest. But early in a behavioral cycle, investors are very
pessimistic. And that was really the story of [20]23 and really
2024, which were; investors, you know, were negative on equities.
The ratios were all very negative and investors sold out of
equities. And that's consistent with a early cycle.
And then as you move into the third-fourth year, investors tend
to get more optimistic about returns. Doesn't necessarily mean
the market goes down. But what it does mean is the market tends
to get more volatile and returns start to compress, and
ultimately, bull markets die on euphoria. And so, I think it's
late cycle, but it's not end of cycle. And that's my theme; is
late cycle but not end of cycle.
Serena Tang: And I think on that point, one
very unusual feature of this environment is that you have both
monetary and fiscal policy being supportive at the same time,
which, of course, rarely happens outside of recession. So how do
you see those dual policy forces shaping market behavior and
which parts of the market tend to benefit?
Andrew Slimmon: Well, that's exactly right.
Look, the last time I checked, page one of the investment
handbook says, ‘Don't fight the Fed.’ And so, you have monetary
policy easing. And what we; remember what happened in 2021? The
Fed raised rates and monetary policy was tightening. Equities do
well when the Fed is easing, and that's one of the reasons why I
think it's not end of cycle. And then you layer in fiscal policy
with tax relief coming, it is a reason to be relatively
optimistic on equities in 2026. But it doesn't mean there can't
be bumps along the way – and I think a higher level of optimism
as we're seeing today is a result of that.
But I think you stick with those more procyclical areas: Finance,
Industrials, Technology, and then you move down the cap curve a
little bit. I think those are the winning trades. They really
started to come to the fore in the second half of last year, and
I think that will continue into 2026.
Serena Tang: Right. And we've definitely
seen some bumps recently, but I think on your point around
yields. So, Jitania, I think that policy backdrop really ties
directly to your idea of the age of capped real rates. In very
simple terms, can you explain what that means and what's behind
that view?
Jitania Kandhari: Sure. When I say age of
real rates being capped, I mean like the structural template
within which I'm operating, and real rates here are defined by
the 10-year on the Treasury yield adjusted for CPI.
Firstly, I'd say there was too much linear thinking in markets
post Liberation Day. That tariffs equals inflation equals higher
rates. Now, tariff impacts, as we have seen, can be offset in
several ways, and economic relationships are rarely linear.
So, inflation may not go up to the extent market is expecting. So
that supports the case for capped rates. And the real constraint
is the debt arithmetic, right? So, if you look at the history of
public debt in the U.S., whenever there was a surge in public
debt during the Civil War, two World Wars, Global Financial
Crisis, even during COVID. In all these periods, when debt
spiked, real rates have remained negative.
So, there can be short term swings in rates, but I believe that
markets not necessarily central banks will even enforce that
cap.
Serena Tang: You've described this moment, as
the great broadening of 2026. What's driving this and what do you
think is happening now after years of very
narrow concentration?
Jitania Kandhari: Yes. I think like if last
decade was about concentration, now it's going to be about
breadth. And if you look at where the concentration was, it was
in the [Mag] 7, in the AI trade. We are beginning to see some
cracks in the consensus where adoption is happening, but
monetization is lagging. But clearly the next phase of
value creation could happen from just the model building to the
application layer, as you guys have also talked about – from
enablers to adopters.
The other thing we are seeing is two AI ecosystems evolve
globally. The high cost cutting edge U.S. innovation engine and
the lower cost efficiency driven Chinese model, each of them have
their own supply chain beneficiaries. And as AI is moving into
physical world, you're going to see more opportunities. And
then secondly, I think there are limitations on this tariff
policies globally; and tariff fears to me remain more of an
illusion than a reality because U.S. needs to import a lot of
intermediate goods And then lastly, I see domestic cycles
inflecting upwards in many other pockets of the world. And you
add all this up; the message is clear that leadership is
broadening and portfolio should broaden too.
Serena Tang: And I want to sort of stay on
this topic of broadening. So, Andrew, I think, you've also
highlighted, you know, this market broadening, especially beyond
the large cap leaders, even as AI investment continues, I think,
as you touched on earlier.
So why does that matter for equity leadership in 2026? And can
you talk about the impact of this broadening on valuations in
general?
Andrew Slimmon: Sure. So I think, you know,
I've been around a long time and I remember when the internet
first rolled out, the Mosaic browser was introduced in 1993. And
the first thing the stock market tried to do is appoint winners –
of who was going to win the internet, you know, search race. And
it was Ask Jeeves and it was Yahoo and it was Netscape. Well,
none of those were the winners. We just don't know who's
ultimately going to be the tech winner. I think it's much safer
to know that just like the internet, AI is a technology
productivity enhancing tool, and companies are going to embrace
AI just like they embraced the internet. And the reason the stock
market doubled between 1997 and the dotcom peak was
that productivity margins went up for a lot of companies in a lot
of industries as they embraced the internet.
So, to me, a broadening out and looking at lower valuations, it
is in many ways safer than saying this is the technology winner,
and this is technology loser. I think it's all many different
industries are going to embrace and benefit from what's going on
with AI.
Serena Tang: You don't want to know where I
was in 1993. And I don't recognize most of those names.
Andrew Slimmon: Sorry. I was 14!
Serena Tang: [Laughs] Ok. Investors often
hear two competing messages now. Ignore the macro and buy great
companies or let the big picture drive everything. How do you
balance top-down signals with bottom-up fundamentals in your
investment process?
Andrew Slimmon: Yeah, I think you have to
employ both, and I hear that all the time; especially I hear, you
know, my competitors, ‘Oh, I just focus on my stock picks, my
bottom up.’ But, you know, look statistically, two-thirds of a
manager's relative performance comes from macro. You know, how
did growth do? How did value do? All those types of
things that have nothing to do with what stock picks... And
likewise, much of a return of an individual stock has to do with
things beyond just what's happening fundamentally.
But some of it comes from what's happening at the company level.
So, I think to be a great investor, you have to be aware of the
macro. The Fed cutting rates this year is a very powerful tool,
and if you don't understand the amplifications of that as per
what types of stocks work, because you're so focused on the
micro, I think that's a mistake.
Likewise, you have to know what's going on in your company
[be]cause one third of term does come from actual stock
selection. So, I'm a big believer in marrying a top down and a
bottom up and try to capture the two thirds and the one third.
Serena Tang: Since that 2022 bear market
low that you talked about earlier. I mean, your framework really
favored growth and value over defensives. But I think more
recently you've increased your non-U.S. exposure. What changed in
your top-down signals and bottom-up data to make global
opportunities more compelling now? Is it the narrative of the end
of U.S. exceptionalism or something else?
Andrew Slimmon: No, I really think it's
actually something else, which is we have picked up signals from
other parts of the world, Europe and Japan. That are different
signals than we saw really for the last decade, which is namely
that pro-cyclical stocks started to work. Value stocks started to
work in the first half of 2025. And you look at the history of
when that happens, usually value doesn't work for a year and
peter out.
So that's been a huge change where I would say, a safer
orientation has shown the relative leadership, and we have to be
– recognize that. So, in our global strategies, we've been
heavily weighted towards, the U.S. orientation because we didn't
see really a cyclical bias outside. And now that's changing and
that has caused us to increase the allocation to non-U.S.
exposure. It's a longwinded way of saying, look, I think what the
story of last year was the U.S. did just fine. But there were
parts of the world that did better and I think that will continue
in 2026.
Serena Tang: Andrew, Jitania thank you so
much for taking the time to talk.
Andrew Slimmon: Great speaking with you,
Serena.
Jitania Kandhari: Thanks for having us on
the show.
Serena Tang: And thanks for listening. If
you enjoy Thoughts on the Market, please leave us a review
wherever you listen and share the podcast with a friend or
colleague today.
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