Transcript
A (0:00)
Welcome to Thoughts on the Market. I am Vishy Tirupator, Morgustani's Chief Fixed Income Strategist. Today I'll be discussing the policy changes that we have the highest conviction in terms of their market impact. It's Wednesday, December 18th at 10am in New York. As our regular readers are aware, Morgan Stalini strategists and economists around the globe came together to formulate our outlook for 2025 across the wide range of markets and economies Cover A key aspect of this year's outlook is the potential for policy changes ahead. From the incoming administration, the substance, severity and sequencing of policies will matter and will have an important bearing on how markets perform over the course of 2025. We would put the potential range of policy changes into four broad categories tariffs and trade policy, immigration controls, tax cuts and fiscal policy, and finally, deregulation. In terms of sequencing, our central case is for tariffs to go first and tax cuts to be last. As our public policy team sees it, the incoming administration will see fast announcements but a slow implementation of policy, especially in terms of tariffs and immigration. Slower implementation will mean that the changes will also be slow and the impacts on the economy and markets likely to be a lot more gradual. That said, it is in the area of deregulation that we expect to see the highest impact on markets, even though precise measurement of these impacts in terms of macroeconomic indicators such as growth and inflation is hard to come through. So with deregulation we expect an environment in support of bank activity. As our bank equity analysts have noted, banks in their coverage area currently are sitting on record levels of excess capital, $177 billion of excess capital and a weighted average CET1 ratio of 12.8%, which is 140 basis points higher than pre Covid levels of 11.4%. If Basel III endgame is reproposed in a more capital neutral MANNER, we expect U.S. banks will begin deploying their excess capital into lending, supporting clients in trading and underwriting, increasing their securities purchases, as well as increasing buybacks and dividends. Changes to the existing baseline endgame proposal will also make US Banks more competitive globally. We also believe all global banks with significant capital markets businesses will benefit from the return of the ma, another byproduct of Basel III endgame being reproposed in a capital neutral way pertains to what banks do in their securities portfolios. In the last few years, in the anticipation of higher capital requirements, US Banks have not been very active in deploying their capital in securities purchases, particularly Asian CMBS and CLOaaS with the deregulation focus we expect that banks will revert to buying the assets that they have stayed away from in particular agency MBS and CLO aaas. The return of bank demand for CLO AAAS will have a bearing on the underlying broadly syndicated loan market and even more broadly on credit formation and sponsor activity which will be supportive of a stronger return of M and A that our credit strategists have been expecting. So in fixed income if you pardon the pun, we are really banking on the impact of deregulation which supports our view on the range of relative value opportunities in spread products, especially in securitized products. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.