Podcast Summary: "The Other Policy Choices That Matter"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode: The Other Policy Choices That Matter
• Release Date: March 12, 2025

Introduction

In the March 12, 2025 episode of Thoughts on the Market, Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy, delves into the often-overlooked US policy decisions that influence market dynamics beyond the frequently discussed tariff wars. Zezas sets the stage by acknowledging the dominance of tariffs in current market conversations but shifts focus to other significant policy areas affecting various sectors.

Tariffs: A Persistent Concern

Zezas begins by addressing the ongoing turbulence surrounding US tariffs. Highlighting recent developments, he notes, “This week we heard the US Commit to raising tariffs and work out a resolution this time, all within the span of a workday” (00:00). He emphasizes that while tariffs continue to be a volatile factor, investors might benefit from adjusting their focus towards sector-specific impacts of broader US policy choices.

Clean Energy Sector Under Scrutiny

One of the critical sectors discussed is clean energy. Andrew Percoco, leader of Morgan Stanley’s Clean Energy Equity Research team, provides insights into the current market sentiment surrounding clean energy stocks. Percoco warns that these stocks may be “pricing in too high a probability of an Inflation Reduction Act repeal” (00:00). He references a letter signed by 18 Republicans urging the Speaker of the House to safeguard certain energy tax credits within the Inflation Reduction Act (IRA).

Zezas concurs with Percoco's assessment, pointing out the precarious balance within the Republican slim majority: “Republican slim majority means only a handful need to oppose a legislative action in order to block its enactment” (00:00). This political fragility suggests that the IRA's future remains uncertain, potentially impacting investor confidence in clean energy equities.

Managed Care: Resilience Amid Policy Shifts

Shifting to the healthcare sector, Aaron Wright, head of Morgan Stanley’s Healthcare Services Research, examines the potential ramifications of proposed cuts to the Medicaid program. Contrary to concerns, Wright finds the sector's bottom line impact to be “manageable” (00:00). He maintains that, similar to the IRA scenario, the likelihood of Republicans securing enough votes to implement significant Medicaid cuts is low.

Zezas reinforces this optimistic outlook: “We do not expect there to be sufficient Republican votes to enact the cuts” (00:00). This suggests that managed care companies are likely to withstand the proposed policy changes without substantial negative effects on their financial performance.

Medtech: Navigating Regulatory Hurdles

Patrick Wood, leader of the Medtech team at Morgan Stanley, sheds light on the challenges facing the medical technology sector. In discussions with a former FDA director, Wood highlights concerns about staffing cuts within the FDA, predicting “delays in approvals of new medical technologies” (00:00).

The most significant risks appear in advanced areas such as neurology and brain-computer interfaces, where skilled FDA personnel are scarce. Zezas notes, “Neurology and brain computer interfaces stand out as areas of development that might slow in this market sector” (00:00). These delays could hinder innovation and slow the introduction of cutting-edge technologies to the market, potentially affecting the growth trajectory of Medtech companies.

Reiterating Tariff Concerns and Economic Outlook

Despite the broadened focus, Zezas doesn't dismiss the ongoing tariff issues. He reiterates, “Tariffs are likely going up even if the precise path is uncertain” (00:00), cautioning investors about the associated costs and execution risks tied to the administration's tariff strategies. This uncertainty is compounded by Morgan Stanley’s US Economics team, which has recently downgraded the US growth outlook for the current and next year, reflecting concerns over the economic impact of these policy maneuvers.

Conclusion

In summary, this episode of Thoughts on the Market provides a comprehensive analysis of US policy impacts beyond the headline-grabbing tariffs. By dissecting sector-specific implications in clean energy, healthcare, and medical technology, Michael Zezas and his colleagues offer valuable insights for investors navigating a complex policy landscape. The discussion underscores the significance of understanding nuanced policy shifts and their potential ripple effects across different market segments.

Notable Quotes:

• Michael Zezas (00:00): “If tariffs are dominating your attention, we sympathize again.”
• Andrew Percoco (00:00): “Clean energy stocks may be pricing in too high a probability of an Inflation Reduction Act repeal.”
• Michael Zezas (00:00): “Republican slim majority means only a handful need to oppose a legislative action in order to block its enactment.”
• Aaron Wright (00:00): “The impact to their sector's bottom line is manageable.”
• Patrick Wood (00:00): “Expect delays in approvals of new medical technologies.”
• Michael Zezas (00:00): “Tariffs are likely going up even if the precise path is uncertain.”

This summary is intended to provide a comprehensive overview of the podcast episode for those who have not listened. It distills the key discussions, insights, and conclusions presented by Morgan Stanley's experts.