The Other Policy Choices That Matter

Summary

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

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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.”

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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.

Transcript

[Michael Zezas]

Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's global head of fixed income research and public policy strategy. Today we'll be talking about US Policy impacts on the market that aren't about tariffs. It's Wednesday, March 12th at 10:30am in New York. If tariffs are dominating your attention, we sympathize again. This week we heard the US Commit to raising tariffs and work out a resolution this time, all within the span of a workday. These twists and turns in the tariff path are likely to continue, but in the meantime it might make sense for investors to take some time to look away, instead focusing on some key sectoral impacts of US Policy choices that our research colleagues have called out. For example, Andrew Percoco, who leads our clean energy equity research team, calls out that clean energy stocks may be pricing in too high a probability of an inflation Reduction act repeal. He cites a letter signed by 18 Republicans urging the speaker of the House to protect some of the energy tax credits in the ira. That's a good call out in our view, Republican slim majority means only a handful need to oppose a legislative action in order to block its enactment. Another example is around managed care companies. Aaron Wright, who leads our health care services research effort, analyzed the impact to companies of cuts to the Medicaid program and found the impact to their sector's bottom line to be manageable. So, keeping an in line view for the sector, we think the sector won't ultimately face the risk. As like with the ira, we do not expect there to be sufficient Republican votes to enact the cuts. Finally, Patrick Wood, who leads the Medtech team, caught up with a former FDA director to talk about how staffing cuts might affect the industry. In short, expect delays in approvals of new medical technologies. In particular, it seems the risk is most acute in the most cutting edge technologies where skilled FDA staff are hard to find. Neurology and brain computer interfaces stand out as areas of development that might slow in this market sector. All that said, if you just can't turn away from tariffs, we reiterate our guidance here. Tariffs are likely going up even if the precise path is uncertain. And whether or not you're constructive on the goals the administration is attempting to achieve, the path to achieving them carries costs and execution risk. Our US Economics team's recent downgrade of the US Growth outlook for this and next year exemplifies this. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market 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.