Our Global Head of Fixed Income Andrew Sheets discusses key
market metrics indicating that valuations should stay higher for
longer, despite some investors’ concerns.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Global Head of Fixed Income Research
at Morgan Stanley.
Today I'm going to talk about key signposts for stability – in a
world that from day to day feels anything but.
It's Friday, January 30th at 2pm in London.
A core theme for us at Morgan Stanley Research is that easier
fiscal, monetary, and regulatory policy in 2026 will support more
risk taking, corporate activity and animal spirits. Yes,
valuations are high. But with so many forces blowing in the same
stimulative direction across so many geographies, those
valuations may stay higher for longer.
We think that the Federal Reserve, the Bank of England, the
European Central Bank, and the Bank of Japan, all lower interest
rates more, or raise them less than markets expect. We think that
fiscal policy will remain stimulative as governments in the
United States, Germany, China, and Japan all spend more. And as I
discussed on this program recently, regulation – a sleepy but
essential part of this equation – is also aligning to support
more risk taking.
Of course, one concern with having so much stimulative sail out,
so to speak, is that you lose control of the boat. As
geopolitical headwinds swirl and the price of gold has risen a
100 percent in the last year, many investors are asking whether
we're seeing too much of a shift in both government and fiscal,
monetary, and regulatory policy.
Specifically, when I speak to investors, I think I can paraphrase
these concerns as follows: Are we seeing expectations for future
inflation rise sharply? Will we see more volatility in government
debt? Has the valuation of the U.S. dollar deviated dramatically
from fair value? And are credit markets showing early signs of
stress?
Notably, so far, the answer to all of these questions based on
market pricing is no. The market's expectation for CPI inflation
over the next decade is about 2.4 percent. Similar actually to
what we saw in 2024, 2023. Expected volatility for U.S. interest
rates over the next year is, well, lower than where it was on
January 1st. The U.S. dollar, despite a lot of recent headlines,
is trading roughly in line with its fair value, based on
purchasing power based on data from Bloomberg. And the credit
markets long seen as important leading indicators of risk, well,
across a lot of different regions, they've been very well
behaved, with spreads still historically tight.
Uncertainty in U.S. foreign policy, big moves in Japanese
interest rates and even larger moves in gold have all contributed
to investor concerns around the potential instability of the
macro backdrop. It's understandable, but for now we think that a
number of key market-based measures of the stability are still
holding.
While that's the case, we think that a positive fundamental
story, specifically our positive view on earnings growth can
continue to support markets. Major shifts in these signposts,
however, could change that.
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.
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