Thoughts on the Market

Morgan Stanley Podcasts
Morgan Stanley Podcasts
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Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

  1. 14h ago

    AI’s Next Winners: Signals From Private Markets

    With AI startups scaling at record speed, our analysts Sabrina Hao, Adam Wood and Brian Nowak share takeaways from Morgan Stanley's Spark Conference on AI returns, competitive moats and implications for public markets.  Read more insights from Morgan Stanley. ----- Transcript -----    Sabrina Hao: Welcome to Thoughts on the Market. I'm Sabrina Hao, Morgan Stanley's AI and Tech Thematic Equity Strategist.  Adam Wood: And I'm Adam Wood, Head of U.S. Software Research at Morgan Stanley.  Brian Nowak: And I'm Brian Nowak, Head of U.S. Internet Research.  Sabrina Hao: Today, what private companies are telling us about the AI opportunity and what it means for public markets.  It's Tuesday, October 20th, at 10am in New York.  Last week, we were at our Spark Private Company conference in California, bringing together more than a hundred startups across software, robotics, AI infrastructure, and beyond. There was even a company helping to manufacture pharmaceuticals in space.  It was a really interesting week to be at the conference given everything that was happening in the market. But really, we came away feeling even more positive about the AI cycle.  While public market investors are waiting for returns to justify trillions of dollars in AI spending, we're already seeing that pay off in private markets. AI demand is real, companies are delivering tangible returns for customers, and startups are scaling faster than ever.  Adam, let's start with growth. We heard from startups scaling at extraordinary speeds. One was approaching [$] 4 billion in annual recurring revenue in two years, another reaching a billion in under a year.  What really stood out to you about the pace of AI adoption, and why aren't we necessarily seeing that same growth at established software companies?  Adam Wood: So yeah, absolutely, the pace was remarkable. And clearly one of the standouts from the conference when we used to discuss how quickly a company could get to a $1 billion so-called unicorn valuation. And now we're discussing how quickly they can get to a unicorn revenue run rate of a billion dollars, which for me is quite incredible.  But I think I wouldn't make the debate simply about private versus public companies. I'd make the distinction between two different types of software.  I think we have to make a distinction between largely coding and inference tools. There were a number of coding and inference software companies at the conference, and application software. And I think there's a big difference in terms of time and complexity to bring these products to market.  I think the coding and inference, which tends to be the building blocks, as I would call them, underneath the application layer, they can be constructed much more quickly. And I think because we can adopt when we're still building bespoke, which I think is a lot of the phase we're in today, we're still building bespoke software rather than buying off the shelf. They can be adopted earlier as well.  So, we've got faster time to build and faster time to adopt by companies. So, I think it's natural you can see very fast growth in those types of businesses very quickly.  I think in the application landscape, it's a little bit different because those applications have to deliver complete business solutions for customers. In finance and customer service, that means integrating data, understanding workflows, and putting controls in place.  There's much more to build and much more to implement, and generally, the adoption of those tools takes place a little bit later. After we've gone from the bespoke phase where companies are building themselves, we go to a phase where companies see that there are off-the-shelf packages that are available, that companies have built out.  So, I think it's both a complexity of build debate and also, a time in terms of where we are in the software adoption cycle.  The second thing I'd say is, you know, in public software companies that have a big incumbent existing business, sometimes there can be that big incumbent business that's not growing very quickly. And a very fast-growing AI business in there as well. And that very fast AI growth business can be hidden a little bit by that large public software company that exists.  So, I don't think it's as straightforward as just saying, you know, private's growing very quickly, public not. I think there's a couple of layers of complexity in there in terms of what type of software you're dealing with. And then how big the existing kind of business is in a software company and what is kind of existing software growing a little bit less quickly. And then the AI bit that could potentially be growing very fast.  Sabrina Hao: Absolutely. It makes a ton of sense. Maybe on this theme of full stack solutions, you know, Brian, we heard about the shift from AI assistants to agents that can actually execute work. You've done a lot of work on this, both across consumer and enterprise.  What did you learn about how quickly agents are advancing? And how does it shape the outlook for the internet names that you cover?  Brian Nowak: This is a very exciting time for agentic adoption on both the consumer side and the enterprise side. You know, we've sized potential addressable markets of $30 to $40 trillion of spend on both the consumer side and the enterprise side that we think can be addressed by agentic tools. On the consumer side, people are shopping, they are planning their travel, they're planning their holiday shopping. On the enterprise side, we're seeing both vertical specific agents start to emerge. So, agents within the legal area or agents within the healthcare area. And then we're also seeing broad-based agents from some of the larger private companies also start to bud through.  So, there is a smattering of agents that are popping through. On the consumer side, Muse is your early leader, and we do expect more to come in 2027. And then I think on the enterprise side, they're both vertical specific as well as broader based agents expected to grow.  Sabrina Hao: Agents really raise an important question around disruption. Maybe for Adam, you've written about the moat and the journey in software. It's not just about if a company has a competitive advantage, but how it navigates that transition to an AI-driven world.  Did Spark change your thinking about which software incumbents are best positioned to defend their businesses or capture new growth?  Adam Wood: So, I think Spark really confirmed a lot of our views on that moat and journey framework that we've put forward. The moat protecting the existing business that you have and the journey turning AI into new growth opportunities. And in some ways, the deeper the moat for businesses, the longer that journey can be.  An incumbent embedded in complex mission-critical workflows is hard to replace because of the data integrations and customer trust it has by definition. But those same requirements can make introducing AI into its platform more demanding. You can't compromise the reliability of that work.  So that's why we've separated the durability of the business from the speed of its AI transition.  For some of the coding inference businesses we heard from – again, these incredibly fast run rate, fast growth businesses, the monetization has obviously moved very, very quickly. And I think there the investor debate's going to be a little bit the opposite way around. How durable and how big a competitive advantage have these companies built on that very fast-growing revenue base?  And that's not to say these businesses can't have moats. They can. You know, performance, model customization, and integration can create real differentiation. But I think there is a big difference to be made between rapid growth and defensibility.  And, you know, to give a couple of examples here in terms of the moat that some of these AI native vertical and business software companies are leveraging. You know, there's a legal AI company that's hiring former lawyers to become forward deployed lawyers.  We had forward deployed engineers, now we've got forward deployed lawyers. But the reason there is they bring that understanding of legal workflows to the product and its implementation.  So, the value isn't just access to the model. It's making the model and the technology work in the customer's business and understanding in depth those business workflows.  Sabrina Hao: And we've talked about this theme of AI adopters, and really what we need to get this trade to work are those quantifiable benefits from AI. So open weights are a key part of that.  Maybe to pull on another thread, and you, kind of, alluded to this, the models themselves are increasingly becoming table stakes rather than moats. And the value is shifting to everything around the model – whether that's your data, your workflows, the tools that make AI useful.  So where did you see this most clearly at Spark? And does it change your view on where durable value will accrue in software?  Adam Wood: So again, I mean, I think I'd come back to the growing importance of open weight models. I mean, it was a recurring theme at the conference. Almost every company spoke to us and spoke to, you know, the implementation. And again, it reinforces that view of a multi-model world.  You’ve got the inference companies talking about bringing down the costs of using the models. Again, that diffusion concept we talk about. At the application layer, a legal software company said it benchmarks 18 models across 200 criteria to decide which model should run the task. So, you know, you're getting incredible gains in efficiency.  I think there are two implications for public software vendors. I think, you know, first of all, there's an opportunity here for software companies to help their customers with orchestration. So, there's going to be a layer around how do we get the right task to the

  2. 1d ago

    A Narrower Path for Growth and Stability

    Higher rates can take time to filter through the economy, making their full impact difficult to judge. Arunima Sinha from our U.S. and Global Economics teams considers where the pressure may emerge next and how policymakers could navigate the competing risks. Read more insights from Morgan Stanley. ----- Transcript -----  Welcome to Thoughts on the Market. I'm Arunima Sinha, from the Morgan Stanley’s U.S. and Global Economics teams.  Today, I'll talk about what rising rates mean for economic activity, inflation, and the policy path.   It’s Monday, October 19th, at 10am in New York.  The FOMC raised rates in September. But expectations for future hikes remain volatile. Within hours of the latest CPI print, markets round-tripped, pushing the probability to even for an October hike before retreating.  Now, consistent with our baseline forecast, the market assigns December the highest likelihood for the next hike. But moves further along the U.S. curve matter even more; notably the 10-year yield shifted.  One question that arises, taking a step back is – how much we should worry that broad-based inflation upside means tighter policy is required to push down inflation and, therefore, growth? Or have financial conditions tightened enough on their own that the central bank has less, not more work to do?  The calibration of monetary policy has always been difficult, and now it is becoming urgent. Economists try to put the level of interest rates into the context of where they stand relative to the economy's natural rate. Stronger productivity growth and investment demand should mean a higher natural rate, so a given level of rates is less restrictive. The rise in long-term treasury yields alongside still firm growth and earnings expectations is an indication that the neutral rate may indeed be higher. When yields rise because growth prospects are improving, expected returns rise and the demand for capital strengthens. In that setting, higher rates are not necessarily contractionary. But there is a less benign alternative.  Yields have also risen because inflation has been hot, fiscal concerns are intensifying, and investors are demanding more compensation for holding duration. The question that Chair Warsh has posed – are financial conditions restrictive – is starting to get a different answer.  Calibration will be key to how the economy evolves. For the U.S. so far, even the most recent upside inflation surprise pointed to resilient demand rather than energy-driven stagflation. The simple explanation is that many firms still see returns well above their cost of capital. Recent work from our U.S. economics team supports such a view.  Where there may be a contrast is at the sector level, and that seems to be becoming more apparent. If activity is concentrated in sectors driven by innovation, productivity, and strategic investment, the economy may be less rate sensitive than in past cycles.  Calibrating policy amid these opposing forces is no easy task. The fact that we're seeing the biggest spread widening in the lowest quality part of the credit spectrum and the fact that housing activity is at recessionary levels are some tells in the U.S. that policy and financial conditions are restrictive.  The signs of tighter financial conditions are somewhat more visible in Europe, in part because the AI CapEx spend is less of a factor. Growth has been resilient, but not sufficiently so to offset rising fiscal concerns from higher rates.  The French OAT sell-off shows how quickly the balance of risks shifts. Globally, financial conditions are introducing tougher questions to the macro landscape.  Until recently, the economy's message had been clear. Higher rates were restraining some sectors, but without meaningfully altering the expansion's trajectory. As long as expected returns rise alongside borrowing costs, then yields can remain high – without becoming decisively restrictive. But as our rate strategy colleagues have noted, inflationary pressures have pushed up real rates, not break evens.  So, the market is telling us that policy is getting tighter to restrain growth and eventually pull-down inflation. The latest inflation print in the U.S. reinforces this debate. Are financial conditions restrictive? With several catalysts ahead, Q3 earnings, hyperscaler CapEx credit spread widening, and U.S. elections, the Fed meeting coming up, markets will need to shift to assessing growth risks as central banks try to recalibrate.  Thanks for listening. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

  3. 4d ago

    AI Boom Faces a Higher-Yield Roadblock

    Our ABS Strategist Carolyn Campbell explains how rising borrowing costs are slowing the AI data center boom and what could drive a rebound in financing. Read more insights from Morgan Stanley. ----- Transcript -----     Carolyn Campbell: Welcome to Thoughts on the Market. I'm Carolyn Campbell, Morgan Stanley's Asset-Backed Securities Strategist. Today, why the AI boom is running into an unexpected obstacle: the cost of borrowing money. It's Friday, October 16th, at 10am in New York. Demand for data center facilities is booming. Yet even as companies race to build more capacity, the financing for them is becoming increasingly expensive. And that tension is creating an interesting story in credit markets. Since January, five-year Treasury rates have climbed more than one percentage point, and spreads for data center assets have also gone wider. At the beginning of 2026, the highest-rated data center bonds offered yields below 5 percent. Today, similar bonds are yielding closer to 7 percent, and that increase matters enormously for companies trying to finance multi-billion-dollar facilities. Many operators turn to the securitized credit markets to raise money. Essentially, they issue bonds backed by the income generated by their data centers. By the time these bonds are issued, construction on the data center is complete, the power is secured, and the rent is already being paid. So, on the one hand, cash flows are stabilized – but there is a catch. These facilities often sign long-term leases well before they seek financing in the securitized credit market. By the time they're ready to issue these bonds, rental income is already locked in. And so, when interest rates rise quickly, as we've seen this year, and these borrowing costs increase, revenues aren't necessarily keeping pace. Our analysis suggests that when borrowing costs approach 8 percent, issuing these bonds becomes significantly more challenging under these current financing terms. And we're already seeing the effects in the market. So far in 2026, data center operators have issued around [$] 15 billion in ABS and another [$] 7 billion in the CMBS markets. That's roughly in line with last year's pace, but it's below what we'd expect given the extraordinary growth in data center demand this year. Still, we believe the slowdown in supply is temporary. Our forecast suggests that U.S. data center power capacity could grow from roughly 60 gigawatts today to 150 gigawatts by 2028; although there are some constraints on power availability that could leave capacity 30 percent to 40 percent below these projections. Regardless, much of the lease capacity that comes online will require debt financing, and these operators have ambitious growth plans. So, they have some options to navigate these higher rate environments. They might borrow less against their properties. They might accept lower investment returns in the near term. Or they can turn to different credit channels that offer more flexible financing structures. So, where does this leave the market? To take into account the higher rate environment, we've lowered our forecast slightly for 2026 and 2027 for securitized credit data center issuance. But the amount of lease capacity that's set to come online in 2028 is so high that we've actually held those numbers steady. All told, we now expect around a [$] 120 to a [$] 150 billion of supply over the next couple of years. That's substantial financing activity, even with the higher interest rates creating near-term challenges. The higher cost of borrowing may slow the pace of data center financing for now, but the scale of the build-out ahead suggests that this market still has plenty of room to grow. And there are pockets within the market that we do like. We've talked a lot about the hyperscaler data centers, which are big campuses leased to one or two hyperscaler tenants, often with 10- or 15-year leases. But the other part of the market, the colocation data center market, is where we see a lot of value today. These campuses have many different types of tenants, many different industries represented, and they often have shorter leases. Given the sharp increase in data center rental rates and vacancy rates around 1 percent, these data center operators are more quickly able to monetize the changes that we're seeing in the industry. That flexibility could prove particularly valuable when borrowing costs remain elevated. 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.

  4. 5d ago

    The Missing Piece in Latin America’s Bull Case

    Our Chief Latin America Equity Strategist Nikolaj Lippmann explains why Brazil’s election, the cost of capital, AI investment and geopolitics could help unlock a new era of growth across Latin America. Read more insights from Morgan Stanley. ----- Transcript -----     Welcome to Thoughts on the Market. I'm Nikolaj Lippmann, Morgan Stanley's Chief Latin America Equity Strategist.  Today – why Brazil could be the missing piece of what we call LatAm Spring, and what AI has to do with it.  It’s Thursday, October 15th, at 10am in New York. Brazilian equities rallied sharply last week after a surprising first-round presidential election result. Flávio Bolsonaro finished ahead of President Lula, setting up a runoff later this month. The outcome remains uncertain. But for investors, I think there’s a bigger question. Can Brazil approach a policy shift that unlocks something the country has lacked for years: investment.  We've long argued that Latin America is moving from a consumption-led economy towards an investment-led cycle, thanks to: 1. Changing geopolitics; 2. investment-friendly policies; and 3. The potential for lower interest rates. What's more, this fits into the framework of the AI CapEx cycle, driving the global and especially the U.S. economy that has moved from consumption to CapEx, as argued by Mike Gapen, our U.S. economist. We're already seeing signs of this LatAm Spring in Argentina, Chile, Peru and Colombia. Brazil could be the largest missing piece. And there are three reasons why.  First, the cost of capital. Brazil remains one of the world's most expensive places to invest. High government debt and elevated interest rates have made fixed income investment more attractive than equities or entrepreneurial risk-taking. But credible fiscal reform could change that equation. Lower government spending could reduce borrowing costs, strengthen the currency, and encourage private investment. Which means capital could shift from sitting in fixed-income assets toward funding growth.  Second, AI. AI might seem unrelated to Brazilian politics, but we see an important connection. Our global framework suggests that annual capital spending could rise from roughly $2.5 trillion to about $5 trillion - $6 trillion as companies build out global AI infrastructure. And Latin America has a critical role to play.  Data centers need electricity. Electricity requires energy infrastructure. And the infrastructure requires copper, lithium, and other critical minerals. Latin America as a whole supplies roughly 10 percent of the world's energy, holds about 20 percent of global energy reserves, about 30 percent of global copper, and approximately 60 percent of the world's lithium resources.  So, we've argued that Brazil and Argentina look increasingly like Texas, with exports of energy and of agriculture. And one other area around politics where Brazilians could perhaps learn or be inspired from peer Latin American countries and gather some inspiration from Texas could be around deregulation. For Brazil, lower interest rates and greater policy credibility could make participating in this investment boom considerably easier.  And that brings me to the third factor: geopolitics. Brazil has strengthened its economic ties with the East, while remaining deeply connected to Western capital markets and U.S. technology. A more balanced relationship could improve access to capital markets and support long-term investments. Of course, an election result alone doesn't guarantee change. Fiscal discipline, policy execution, and global financing conditions remain critical. Higher U.S. Treasury yields are an especially important risk for a region carrying substantial debt.  But consider what's already happening elsewhere. Mexico contributes hardware to the AI supply chain. Chile is rebuilding its investment pipeline. And Peru is benefiting from mining activity. Argentina is attracting capital after significant policy changes.  As Latin America's largest economy, Brazil could have substantial regional implications if it moves in the same direction. That's ultimately our LatAm Spring thesis: a shift away from consumption toward investment, entrepreneurship, and capital formation.  There's still a long road ahead, but Brazil could be the most important test of whether that spring truly takes hold. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

  5. 6d ago

    What to Expect From the UK Budget

    The UK budget arrives later this month amid competing predictions about growth, inflation and public finances. Andrew Sheets and Bruna Skarica examine how the country’s economy defies expectations.  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. Bruna Skarica: And I'm Bruna Skarica, Morgan Stanley's Chief UK Economist.  Andrew Sheets: Today, the UK makes a budget. Why it matters? And more generally, what we've gotten right and wrong about the country.  It's Wednesday, October 14th, at 2pm in London.  Bruna, it's great to be here talking with you, and I'd like to get into a bigger discussion on the UK and what we've gotten right and wrong about the direction of the country this year. But more immediately, it has a very big event coming up.  What is the budget, and why is there so much focus on it?  Bruna Skarica: The budget is the UK's key fiscal event. It is the time of year when the Chancellor receives a refresh of economic forecasts and decides whether he needs to respond to these, whether there's any spending cuts or increases that are required, and whether there's any tax hikes or potentially tax cuts that are required too. All with the view of ensuring fiscal consolidation and executing on what is a self-imposed fiscal framework.  Here in the UK, the main target for the Treasury is to achieve current budget balance in year three of the forecast. The fiscal watchdog forecasts five years of economic variables, and the idea is, by the third year, we ought to be spending outside of investment expenditure as much as we're receiving in tax receipts.  So, all of that happens once a year in the budget.  Andrew Sheets: Now, I might just stop you there [be]cause in the context of these other budget pictures that we see around the world – the U.S. is running a large budget deficit, France is running a large budget deficit, Japan's increasing its budget deficit. That actually seems like a quite ambitious goal within the next three years; to balance that outside of the interest expenses.  Can you just talk maybe a little bit more about that process and the thinking behind it?  Bruna Skarica: Yeah, sure. The idea really is to ensure that over the next five years, not only do we get the current budget balanced while allowing for borrowing for investment, which is, of course, a favorable way to borrow because it boosts growth.  But also, that within the five-year period, we're able to get debt-to-GDP ratio down. In order for that to happen, we need to be running a primary surplus around 1.5 percent of GDP.  Now, very often in UK macro, we tend to look at three-year forecasts, five-year forecasts. We talk about medium-term headrooms. But I think it's important here to take stock of where we are at this moment in time.  We think that in this fiscal year, [20]26-[20]27, primary deficit – our entire expenditure outside debt servicing costs minus tax receipts – we see that at just under 1 percent of GDP. The IMF is a little bit above 1 percent of GDP for UK. But for example, the IMF sees French primary deficit at 2.9 percent this year, with the U.S. measure forecast at 4.9 percent.  So already, UK has actually made a lot of progress in its consolidation path.  Andrew Sheets: And Bruna, talking about this announcement specifically, could you maybe talk about just one or two items that you'd be on the watch for as potential surprises? Or decisions that the market is really focused on?  Bruna Skarica: Sure. So, we do know that the Treasury is looking at ways of alleviating some of the pressures stemming from higher inflation, higher energy inflation in particular. So, the scale of support that will be provided to households and the scale of reduction in headline inflation, I do think will be in focus on the day.  We're expecting a relatively low-key budget, so the scale of measures at around £10 billion, which is much more moderate than what we saw in October 2024 and in November 2025.  However, we do think there is scope for some, let's say, higher level announcements. For example, Prime Minister Burnham is particularly focused on devolution in the UK, decentralization. And there might be a roadmap ahead for how different mayors and different regions in the UK get to keep their portion of income tax revenues and what they might do with it in order to boost regional growth.  UK does stand out as the country in G7 space that has the most centralized fiscal system, and this might start to be changed from this fiscal event onwards.  Andrew Sheets: Okay, so now I'd like to take a step back and do a little marking to market.  You know, you and I on this program, a couple of different times this year, have been talking about the UK, and those conversations have generally been upbeat. I think both of us were of the view that the UK could actually be a bit better of a story than expected. And maybe we start with the good news.  What do you think has been going right?  Bruna Skarica: So, for one, growth has outperformed in the first half of the year. In line with our long-standing thesis that UK ought to be a beneficiary of the global AI boom, the main driver of the upside surprise has been the tech sector. It's running at 8 percent year-on-year, this year.  We have also seen a bit stronger consumer spending growth than anticipated. And again, this reflects, we think, our long-standing thesis on fairly clean household. But also corporate balance sheets, I should mention, that tend to provide a fairly big buffer in one of energy shocks.  UK consumers have elevated savings, also elevated savings stocks, and so in energy shocks such as the one we've seen in the first half of the year, perhaps there is some reduction in desired level of savings, which allows consumers to support their spending habits.  All of this means that this year we see UK growth at 1.3 percent. Now, our U.S. colleagues are looking for 2.3 percent. Still, U.S. growth looks relatively stronger than any European country, including the UK.  However, I would say that 1.3 percent is about 30 basis points higher than where we were a couple of months ago when the energy shock started, so it is important to take that into account.  Andrew Sheets: And I'd also note that UK stocks are up about 10 percent this year, and its currency, the pound, is materially outperformed the euro or the Japanese yen.  But Bruna, I think it's pretty safe to say that sentiment towards the UK feels pretty downbeat. I think it's probably gotten worse as the year has gone on.  So, what's gone wrong and what's been worse than we were expecting?  Bruna Skarica: Yeah. So, while I do think that in the U.S. there is a lot of focus on the benefits from the AI boom and the AI build-out, in Europe, we're still waiting to see the sentiment shift towards how much growth and potential growth in particular can benefit from adopting AI.  We're more constructive, I would say, than probably the average forecaster here. We're pointing to healthy productivity growth performance in the UK private sector, printing productivity growth at 1.8 percent; whereas in the U.S. this figure is a bit above 2 percent over the second quarter this year. So, not too different, I would say.  So, I think the pessimism around potential GDP growth is really what's driving the view that whenever an external energy shock tends to hit, such as the one we've seen this year with higher oil and natural gas prices, it'll be embedded in the economy for a longer period of time. Because ultimately a spare capacity is very tight. And so businesses and consumers will try and preserve their real purchasing power, and inflation will remain elevated for a longer period of time.  Again, we tend to be a bit more constructive on this. We think the economy has enough spare capacity for this energy shock to come and go without material adjustments in the bank rate. We're expecting two hikes. But the market is still pricing four hikes. And certainly in conversations with investors, we are more and more talking about the scenarios in which these could be delivered.  So that, of course, means higher gilt yields, which means higher debt servicing costs, and that overall, I do think tends to dampen sentiment.  Andrew Sheets: Well, Bruna, a lot to watch in the days and weeks ahead. And thank you so much for taking the time.  Bruna Skarica: Thank you, Andrew.  Andrew Sheets: And thank you as always for listening. If you find Thoughts on the Market useful, let us know by leaving a review wherever you hear us. And also tell a friend or colleague about us today.

  6. Oct 13

    Asia Fixed Income Needs a Bigger Map

    Our Head of Asia Credit Strategy Kelvin Pang explains why investors would benefit from a broader fixed income market in Asia, with opportunities across more countries, local-currency credit and dollar-denominated bonds. Read more insights from Morgan Stanley. ----- Transcript -----  Welcome to Thoughts on the Market. I’m Kelvin Pang, Head of Asia Credit Strategy [at] Morgan Stanley.  Today – why the challenge in Asia fixed income may not be the region at all, but the way investors have traditionally looked at it.  It’s Tuesday, October 13th at 8am in Hong Kong. Picture this. You’re shopping in a supermarket. As you walk down the aisles, you notice half of them are off limits. It’s unexpected.  Something similar has happened in Asia fixed income. The region’s fundamentals remain supportive, but the traditional investment universe has become increasingly constrained.  The pressure began in early 2023, when U.S. policy rates rose above those in much of Asia for the first time since before the Global Financial Crisis. The environment that had supported Asian bond markets for years turned upside down.  Consider Asia-dollar credit. Issuers have increasingly turned to cheaper local-currency financing, which is shrinking dollar-bond supply. Asia-dollar credit is now on track for a fifth straight year of negative net supply. At the same time, investment-grade spreads have tightened to 55 basis points. That makes Asia investment-grade credit the most tightly valued major credit market globally.  And investors have taken notice of this. Assets in dedicated Asia credit and high-yield funds have fallen 62 percent from their 2021 peak – from roughly $75 billion USD to around $29 billion USD.  But we feel Asia itself is not the problem. In fact, Asia Pacific nominal GDP could rise from $41 trillion USD in 2025 to [$]54 trillion by 2031. That would account [for] roughly one-third of global nominal GDP growth over that period.  And most importantly investment is also accelerating. Asia’s capital spending could rise from $11 trillion to [$]16 trillion by 2030. That would mark the strongest industrial cycle since the mid-2000s. And we think this extends well beyond AI, with energy, defense, and broader industrial investment all playing major roles.  The key issue here is how investors have traditionally looked at Asia. They basically need a bigger map.  That broader map is what we call APAC fixed income. Traditional Asia fixed income has largely focused on U.S.-dollar credit and local-currency government bonds across emerging Asia. APAC fixed income adds convertible bonds and local-currency corporate credit. It also brings Japan and Australia into the mix.  So, what’s the advantage of this broader map? You see, each of these pieces behaves differently. Convertible bonds let investors participate in regional growth through their equity link. APAC dollar credit plays a more defensive role, with a mostly investment-grade, U.S.-dollar-denominated profile. Local-currency rates provide exposure to interest rates, currencies and the economic cycle. At the same time, local-currency corporate credit broadens credit and sector exposure.  Together, they create a more flexible mix of risks across changing economic conditions. For example, when growth and inflation rise together, convertible bonds can benefit from their equity link. In a recession, currency-hedged local bonds can benefit from falling rates while limiting foreign-exchange risk. During stagflation, dollar credit can offer more defensive characteristics.  Our portfolio analysis since 2023 suggests a diversified APAC fixed-income portfolio could target a 7.5 percent return with a vol[atility] of roughly 4 percent, depending on allocation constraints. Investors also increasingly need to manage currency exposure as the dollar cycle shifts.  For years, investors could navigate Asian bonds with a relatively narrow toolkit. Today’s market demands more flexibility. The opportunity in Asia has not disappeared. The better question may be whether investors are looking at enough of it.  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.

  7. Oct 12

    The Politics of Powering AI

    Energy costs are a key election issue and AI data centers are adding to the debate. Our Head of Public Policy Research Ariana Salvatore looks at policy discussions in Washington that could determine how the U.S. powers its next technological boom. Read more insights from Morgan Stanley. ----- Transcript -----    Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.  Today, I'll discuss the growing energy demands of AI and what the government can do in response.  It's Monday, October 12th at 10am in New York.  Markets and policymakers are preparing for a potentially important debate following the November elections. The future of American energy infrastructure. And at the center of that debate is an increasingly urgent question: How can the U.S. build enough power infrastructure to support the AI investment cycle – without passing the costs on to everyday electricity consumers?  Late last month, lawmakers in Congress introduced the bipartisan American Affordability and Jobs Act. That legislation represents a significant effort to reform federal permitting. But importantly, it also includes provisions that require data centers to cover the transmission costs associated with their projects.  We think that's a notable development, particularly as we think about the legislative agenda after the November elections. Of course, the path forward still remains uncertain given substantial policy differences and a limited legislative calendar after the elections.  But why might this matter for markets?  Well, first, it's worth considering the scale of the energy challenge. My colleague Stephen Byrd and his team recently updated their projections for the U.S. data center power shortfall. They now see a potential 57-gigawatt gap through 2028, and that's before accounting for new solutions that could accelerate access to power. That's up from their previous estimate of 38-gigawatts.  And that's why the permitting proposal is so important. There are two elements that I'd highlight.  First is the effort to accelerate infrastructure development. The bill would reform federal environmental reviews and provide greater certainty for projects that have already received approvals. We think that can help reduce delays and uncertainty around new energy projects, although permitting reform alone won't resolve constraints involving equipment, labor, or grid capacity.  The second element is the growing focus on who pays for the infrastructure, and here the proposal actually builds on an existing policy initiative. Earlier this year, a number of hyperscalers signed on to the Ratepayer Protection Pledge.  That's a voluntary agreement under which companies commit to securing the electricity needed for their data centers and pay for associated power infrastructure upgrades rather than passing the costs on to residential consumers. The pledge was subsequently expanded to include a broader group of utilities, developers, and state participants.  Now, what's different about the permitting reform bill is its potential shift from voluntary commitments toward federal requirements. In particular, the proposal would require data centers to cover their associated transmission costs.  That's an area where we think policymakers from both parties appear to share concerns about electricity affordability, even though they may disagree over the broader approach to energy policy. Looking beyond the elections, we think that creates two related policy catalysts for investors to watch.  The first is whether Congress can reach an agreement on permitting reform that helps accelerate the construction of energy infrastructure. And second, whether lawmakers move to establish a more formal cost-sharing requirement for data centers.  The eventual policy mix, we think, could influence both the timing and the economics of new projects. Faster approvals could make some investments more attractive. But requiring developers to absorb additional transmission costs could also change where projects are built and which power solutions they pursue. A changing policy framework could also reinforce the importance of alternatives.  Of course, legislation is far from guaranteed. The elections will shape the political environment in which these negotiations continue, and any final agreement could differ substantially from the current proposal.  But stepping back, I think there's a broader takeaway.  For much of the AI investment cycle, the focus has been on the pace of technological innovation and capital spending. Increasingly, though, policy decisions around electricity infrastructure, permitting, and affordability could become just as important in determining how quickly that investment translates into operational capacity.  The permitting bill is an early indication of how D.C. may approach those challenges after the elections. And for investors, the central question may be less about how much companies are willing to spend on AI and more about how quickly and at what cost they can secure the power needed to support it.  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.

  8. Oct 9

    Will High Yields Crack the Market’s Resilience?

    Markets have remained resilient despite the prospect of higher-for-longer rates. Our Global Head of Fixed Income Research Andrew Sheets considers the risks building beneath the surface. 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, exploring further the question that seems to be on everyone's mind: At what point do higher rates become a problem for markets? It's Friday, October 9th, at 2pm in London. We recently hosted Morgan Stanley's ninth annual European Credit Conference here in London. Fifty companies, over a thousand investors, and to some extent, one dominating question. The market has been impressively resilient this year – but as yields rise, at what point does this change? I think a good place to start with this question is whether the current level of interest rates are obviously wrong. And I don't think it's clear that they are. Growth in the U.S., Europe, and Asia remains surprisingly robust and has for a lot of this year. Meanwhile, inflation across regions is still generally above central bank targets. Too high, and a sign that conditions are more likely too hot than too cold. That's the opposite of what the wrong level of rates would imply – as rates that were too high would be curtailing activity and pushing inflation down below target. Thanks in part to the scale of AI spending and how insensitive the spending has been to the level of interest rates; we're just not seeing this. I think the yield curve is also confirming this message that the level of rates for now is okay. In an environment where the market thinks that central banks have raised rates too much, it will often so-call invert the yield curve. Pushing short-term interest rates above longer-term ones on the belief that rates that are too high today will need to be lowered when conditions weaken in the future. We're not seeing that, and that is, I think, a pretty important indicator. At the risk of being pedantic, I think there's also the premise of the question around resilience. At one level, without a doubt, markets have been impressively solid given the large rise in yields this year. U.S. and European stocks have been posting double-digit gains. Credit spreads, a measure of risk premium, sit near multi-decade lows. But under the surface, that resilience isn't so apparent. Spreads on the lowest-rated credits, so-called triple CCCs, have increased significantly this year across both the U.S. and Europe. Publicly traded BDCs, which contain portfolios of lower-rated private credit, have traded at widening discounts to their book value. And even in the mighty U.S. stock market, my colleague Mike Wilson and our U.S. equity strategy team note that over half of the 3000 largest stocks have seen a drawdown of at least 20 percent since June, which happens to be the month that yields started to rise. 2026 may be showing that global growth overall is just less sensitive to higher rates than was initially expected. Large government deficits in the U.S., Europe, and Asia, and large spending on AI may be two reasons why. With growth strong and inflation still too high, rates may be simply seeking out a level that they think will keep things in balance. But the interest rate that helps balance – this technology and spending boom – are not the same rates that keep a smaller, weaker, or a more indebted company happy. If higher rates are needed to balance things overall, the weaker tails of the market can still suffer. We've seen this in the past, particularly 2005. Back then, a large U.S. government deficit, booming China CapEx, and significant U.S. housing wealth all helped push up rates. The overall econom y held up for several more years. But weaker parts of the credit market were challenged by those rates more quickly. We think the same may be true today and therefore favor an upper quality bias. We favor high-yield bonds over loans and decompression across credit indices. 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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