← Thoughts on the Market
Loading summary
Transcript18 lines
- [00:01]
A
Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.
- [00:05]
B
And I'm Serena Tang, Morgan Stanley's Chief Global cross Asset Strategist.
- [00:10]
A
Today we're going to pick up the conversation where we left it off, talking about our mid year outlook. But this time I get to ask Serena the questions. It's Thursday, May 22nd at 10:00am in New York. Serena, we're back for part two of this podcast. Let's jump in where we left off. We've seen a lot of policy surprises in the last six months. We've had a big sell off in the beginning of April, in part inspired by all of this uncertainty. What are you telling clients? What do you think investors should be doing? How should they be positioning their portfolios in the current circumstances?
- [00:43]
B
So we are recommending going overweight in US equities and going overweight in core fixed income like US Treasuries and like investment grade corporate credit. And we have a very strong preference for us over rest of the world assets except the dollar. Now I think for us the main message is that you have global growth slowing, which is what you talked about yesterday. But you know, risky assets can look past the low growth and do well, while Treasuries can look forward to the many Fed cuts you guys are expecting in 2026 and rally. But if I look at valuations that does suggest equities and credit have completely almost priced out growth slowdown odds, meaning that I think there is still some downside and we'd recommend quality across the board.
- [01:35]
A
In your judgment then looking around the world at all the different asset classes, how well or perhaps how poorly are those asset classes priced for the sort of macro views that we were just discussing?
- [01:47]
B
So I think the market that's probably least priced for the slowing economy that you and your team have been forecasting is really in the government bond space. I think the prospect of a lot more Fed cuts than what is currently priced into the market will lower government bond yields, particularly starting in 2026. As you know, our rates team has a target of 3.45% for US Treasury 10 year yields and 2.6% for US Treasury 2 year yields, meaning that we also get a steeper curve by this time next year and this translates to more than 10% of total returns for US treasuries. Very attractive in large part because the markets aren't priced for the Fed scenario that you and your team are forecasting.
- [02:35]
A
Let me then push a little bit on one of the things that I've been talking to clients about, or at least been asked about, which is the dollar, the role of the dollar, US Exceptionalism. Is it real?
- [02:46]
B
That's a great question because I think this is where we are the most out of consensus if the noticed. All of our views right now really line up as us being pretty constructive on US dollar assets. At a time when everyone's still really debating the end of US exceptionalism and we really push back against the idea that foreign investors would or should abandon US assets significantly. There are very few alternatives to US dollar assets right now. If you look at investable stock market cap, the US is nearly five times the size of the next biggest market, which is Europe. And in the fixed income side of things, more than half of liquid high grade fixed income paper is in US dollars. Now, even if there were significant outflows from US dollar assets, there are very few places that money can find a haven, safe or otherwise. This is not to say there won't ever be any other alternatives to US dollar assets in the future, but. But that shift in market size takes time, which means that Tina, there is no alternative remains a theme for now.
- [04:01]
A
That view on the dollar weakening from here, it's baked into my team's economic forecast, it's baked into the strategy team's forecast across research. So then let me take it one step forward. What does all this mean about portfolio preferences, about your recommendation for clients when they're investing in assets that are not US dollar denominated?
- [04:19]
B
You're right. If there's one US asset that we dislike, it's the US dollar. So you know, over the next 12 months we expect key factors which drove the dollar strength, you know, positive growth, yield differentials relative to other G10 economies. Those factors will fade substantially. And we also think because of the political uncertainty in the US currency, hedging ratios on exposure to US assets may increase, which could further pressure the US dollar. So our FX team sees EURUSD at 1.25 and USDJPY at 130 by the second quarter of 2026. Which means that we're really recommending non US dollar investors to buy US stocks and fixed income on an FX hedged basis.
- [05:10]
A
If we look forward but focus just on the next, call it three to six months. What asset classes or if you want, what regions around the world are best positioned and what would you say to investors?
- [05:22]
B
So you're right. There is a big difference between what we like over the next three to six months versus what we like over the next 12 months. Because if I look at US equities and US government bonds, both of which we're overweight on. Most of the gains probably won't happen until the first half of next year because you have to have US equities really feeling the tailwind of dollar weakness. You need to have US Government bond investors to grow more confident that we will get all of those Fed cuts next year. What we do like over the next three to six months and feel pretty highly convicted on is really US Investment grade corporate credit, which we think can do well in the second half of this year and do well in the first half of next year.
- [06:11]
A
But then let's take a step back because I think investors around the world are wrestling with a lot of the same issues. They're talking to, you know, strategists like us at lots of different places. What would you say are our most out of consensus views right now?
- [06:24]
B
I think we're pretty out of consensus on our preference for US And US Dollar assets. As I mentioned, there was still a huge debate on the end of US Exceptionalism. Now, the other place where I think it's notable is we're much more bullish on U.S. treasuries than what's being priced into markets and where consensus is. And I think that's really being driven, your economics team being much more convicted on many fed cuts in 2026. And the last thing I would point out here is again, we're more bearish than consensus on the dollar. If I look at the euro dollar, if I look at dollar yen, the kind of appreciation we're forecasting for at around 10% is higher than I think what most investors are expecting at the moment. Now back to you, Saf. Given all of the uncertainty around US fiscal trade and industrial policy, what indicators are you watching to assess whether global growth is becoming more fragile or more resilient?
- [07:32]
A
It's a great question. It's always difficult to monitor in real time how things are going, especially with these sorts of shocks. We are looking at a bunch of the shipping data to see how trade flows are going. There was clearly some front and running into the United States of imports to try to get ahead of tariffs. There's got to be some payback for that. I think the question becomes where do we settle in when it comes to trade? I'm going to be looking in the US at the labor market to see signs of reduced demand for labor, but also trying to pay attention to what's going on with the supply of labor from immigration restriction. And then there are all the normal indicators about spending, especially consumer spending. Consumer spending tends to drive a lot of the big developed market economies around the world, and how well that holds up or doesn't that's going to be key to the overall outlook.
- [08:17]
B
Thank you so much, Sev. Thanks for taking the time to talk.
- [08:19]
A
Serena. I could talk to you all day.
- [08:22]
B
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. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives, and may not be suitable for you.