Thoughts on the Market

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. 2d ago

    Inside the AI Debt Surge

    As AI investment keeps growing, our strategists Carolyn Campbell and Vishwas Patkar discuss the many ways tech infrastructure gets financed and the opportunities for investors. 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.  Vishwas Patkar: And I'm Vishwas Patkar, Morgan Stanley's Head of U.S. Corporate Credit Strategy.  Carolyn Campbell: Today, how fixed income markets are helping fund the AI build-out.  It's Thursday, June 18th, at 10am in New York.  Let's get right into it, Vishwas. We've both come on this podcast before to talk about how credit markets are financing the AI build-out. And over the last ten months, I think it's fair to say that things are faster, broader, deeper than we perhaps expected initially.  This investment now spans investment-grade corporate bonds, high yield loans, and a range of securitized products. From your seat in corporate credit, why does AI infrastructure matter so much, to investors right now?  Vishwas Patkar: This is a big talking point in our client discussions. it's also telling that less than a year ago, we wrote about this topic for the first time, identifying a $1.5 trillion financing gap that credit markets could help bridge. At that time, data center debt was not something that investors were really focused on. Yet less than 12 months forward, this, I think, is the number one theme dominating both your and my market.  And why it's important, I would say, is across, three key vectors. First, just the scale. So, if you look at overall AI-related debt issuance so far this year, we're close to $250 billion. For the balance of the year, we expect that number to double, so about $500 billion of total AI debt financing for 2026.  Increasingly the second vector, I think, is around the complexity of deals. So initially, while AI financing was dominated by vanilla investment-grade corporate bond deals, we are now seeing that broaden out into project finance style deals in the high-yield market. We have seen an uptick in chip financing across the different credit silos.  And that's important for investors, as identifying value across these different options does require deep credit expertise. And third, as this investment cycle rolls along, it's also important to be cognizant of risks that are building. Not just from a very broad top-down sense around the demand for compute. But also, what are some of the nuances in these different structures – whether it is in data center construction or is in chip financing that investors will need to monitor.  So, it's across these three themes that we think data center debt financing is gaining importance.  Carolyn Campbell: Now, the underlying demand for AI infrastructure is very strong. That doesn't necessarily mean that every bond tied to this theme is automatically going to be attractive. And as you mentioned, [$]500 billion of supply for the year; a large amount of complexity between those structures. How should credit investors think about the various risks within these different structures?  Vishwas Patkar: So, in investment grade, the story is a bit simpler. So, we have had unsecured hyperscaler bond issuance. We have had issuance from semiconductor names. And then we've had some, what we call, private style data center deals.  But the vast majority still comes from hyperscaler investment grade rated bonds. For this market, our focus is less on fundamentals because fundamentals are very strong. And then hyperscaler are some of the more most creditworthy companies that we've seen in the history of the market. Our emphasis more is on just the quantum of supply.  So, year to date, we have had north of [$]100 billion of hyperscaler debt in the dollar market. We've had north of [$]50 billion being issued in other currencies. If you look at the overall investment grade market, supply is up almost 25 percent versus last year. That's consistent with our call for a year of record issuance this year.  And increasingly, if you look forward and then map these issuance numbers to our CapEx estimates, where we could very much be on track for another record to be hit next year. So, the issue of the investment grade market is not around the fundamentals of the companies or these deals. It's more about the quantum of supply, which we think eventually will test the demand capacity of this market.  And our base case for the investment grade space is similar to 1997-1998, where credit was starting to finance the business cycle, spreads widened modestly, and IG could underperform other risk assets. But over a longer time horizon, spreads still look historically very low.  Carolyn Campbell: Now, what about further down the credit spectrum into the non-investment grade portion? What about that part of the issuance spectrum for AI?  Vishwas Patkar: Yeah. So, what we're seeing in the sub-investment grade space, especially in high yield, is very different. There, the growth in data center financing has happened around project finance deals for data center construction. In many cases, these have come from crypto miner companies that effectively provide what we call speed to power solutions.  We've also had some unsecured issuance from neo clouds, although that's relatively small. But this sector has expanded from effectively zero billion around the fall of last year to about [$]40 billion this year. We expect to see another [$]20 billion of issuance by the end of 2026.  And the way they fit into this whole ecosystem is – these project finance deals we think are interesting diversifiers for regular credit investors. They do come with construction risks, especially initially for the first two to three years till the data center is up and running.  But on the flip side, you do get a lot of structural enhancements and creditor protections, which is something you don't see in the vast majority of the high yield market. So, I think a key shift in the framework that investors have to do for these deals is focus on asset-level risk, which is again, I think a big divergence from how the vast majority of the credit market trades, which is largely unsecured corporate-level risk that investors have been used to.  Carolyn Campbell: All right. You just brought up construction risks. Do you think that's the biggest risk facing the high-yield investors today?  Vishwas Patkar: Yes. I think for the high-yield deals in particular, construction risk is the dominant vector that investors are focused on. Because it's important to remember a lot of the debt issuers are first-time borrowers. And they have a limited track record of construction in the past. So, you could see potential delays and things like cost overruns that can affect sentiment on the sector. Or at least on specific bond deals.  And this will be especially important to monitor going into the second half of the year, as we have some of the first delivery dates coming up for the deals in the sector that were announced last year. That being said, you know, even though some of the tenants have termination rights, if delays go beyond 180 days, our view is that given the structural power constraints, these termination rights are unlikely to be exercised.  So, while construction milestones can affect sentiment and short-term valuations, we would look at any blips as buying opportunities in the space.  Alright. So Carolyn, let me throw this back to you. So, construction risk clearly very important for the corporate credit market, especially for high yield investors. Is that something ABS investors or commercial mortgage-backed investors care about? And in what other ways are these asset classes different from corporate credit?  Carolyn Campbell: Okay. So first and foremost, the biggest difference is that in securitized products, the assets are stabilized, they're cash flowing, they're online. We don't have that first vector of construction risk in our space.  The second biggest difference is while in high yield and IG we've mostly seen – or we've entirely seen single campus, single tenant data centers; in securitization issuance, it's mostly multi-tenant, multi-asset, multi-regional, deals that have come to market.  And so, it's a very different risk profile. And as a consequence, investors are focused not just on who is behind this one single lease and what are the termination rates, but what does the landscape look like in general for compute? How does that affect vacancy and churn rates?  And then lastly, the issuers themselves are different. You talked about the crypto companies. You get a little bit more of the data center, data center construction. Whereas in securitized products, these are companies that have been around for 5, 10, 20 years. They're accustomed to managing a fleet of assets, dozens if not hundreds of tenants. They've got a little bit more of a track record for the most part, than the types of issuers we're seeing in the credit market.  Vishwas Patkar: Your market post-construction, more leverage to the thematic of demand for compute – and how the AI investment cycle is playing out. Versus the corporate credit market, which is largely exposed to construction risks as the data centers get built out. So that's a very important difference. That being said, one theme that ties both our markets are just healthy fundamentals, but at the same time heavy supply. So, I talked about how we see that affecting our view on investment grade. How is that same tension showing up in securitized products?  Carolyn Campbell: So exactly as you said, the fundamental story is very strong. We don't see deterioration in performance of the assets either that has happened yet or that we expect to come in the near term. So, it really is a technically driven story. Supply in this space, we're forecasting at around [$]30 billion for year, so

    11 min

  2. 3d ago

    Can Policy Solve AI’s Chipflation?

    AI’s appetite for memory has turned chips into an inflationary factor. Our U.S. Public Policy Strategist Ariana Salvatore looks at what policymakers could do to reduce that pressure. Read more insights from Morgan Stanley. ----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist.   Today, I'll be talking about chipflation and what policy tools can or can't be used to address the memory bottleneck.  It's Wednesday, June 17th, at 10am in New York.  Last week, you heard my colleague Shawn Kim talk about chipflation and the surging cost of memory. Today, I'll get into what policymakers can and can't do about it.  As listeners will know, memory chips are becoming an increasingly strategic resource because AI infrastructure depends on them. And when a resource becomes strategic, governments tend to get involved. The challenge is that policy can help at the margin but probably can't solve the problem quickly.  There are three reasons for that. First, many U.S. policy tools all take time. Direct subsidies, tax credits, procurement guarantees, and faster permitting are all things that can support new fabrication plants, packaging facilities, and testing capacity. But memory supply is not going to appear overnight. This new capacity has to be built, equipped, qualified, and ramped – and that process can take years.  Second, China may be able to add some supply in conventional memory markets, but not enough to close the broader gap created by AI demand. That's especially true for high bandwidth memory, the more strategic type of memory for frontier AI systems. Supply there still remains highly concentrated, technically complex, and difficult to scale.  Third, our base case is that U.S. policy remains more restrictive, not less. We don't expect a broad loosening of export controls given the strategic imperative of this technology. Instead, we think policymakers are likely to continue to prioritize supply chain resilience, trusted capacity, and geopolitical de-risking over the near-term price relief.  Now, from a policy perspective, we think it's important to split memory into two categories. The first is AI strategic memory, high bandwidth and advanced DRAM. That's the memory that enables the most advanced AI systems. And for that reason, we think policy here is likely to focus on protecting strategic capability, limiting geopolitical vulnerability, and expanding trusted supply across the U.S. and its allied countries.  The second category is commodity or legacy memory. That's the memory that you can think of as being used in autos, industrial systems, consumer electronics, and other non-frontier applications. Now here, we think policymakers could consider more flexible options, like differentiated licensing or targeted support for critical sectors. But even then, the limits are practical: permitting, workforce, tools, qualification cycles, and production lead times.  China is the other major variable. Chinese producers are expanding in conventional DRAM and NAND. In some consumer-grade applications, that supply could act as a relief valve for buyers that have been crowded out by AI-related demand.  But still, there are limits. Chinese producers face yield and technology gaps, even if policy is supportive. And China alone will not solve the high-bandwidth memory bottleneck. The regulatory backdrop reinforces that point. Some Chinese memory producers remain subject to U.S. restrictions or even heightened scrutiny. Access to the most advanced lithography tools also remains a hard ceiling. Without that access, scaling leading-edge memory becomes much more difficult.  So, the bottom line is this: policy can mitigate chipflation, but it's unlikely to end it in the near term. For AI strategic memory, policymakers are more likely to defend access, deepen allied coordination, and encourage trusted capacity than to loosen restrictions. For commodity memory, there may be room for some targeted flexibility.  But of course, geopolitics and timing still matter.  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 min

  3. 4d ago

    Warsh’s Opening Act at the Fed

    Our Global Head of Macro Strategy Matthew Hornbach and our Chief U.S. Economist Michael Gapen discuss the signals investors will be seeking from the new Fed Chair leading his first monetary policy meeting and possible implications for markets. Read more insights from Morgan Stanley. ----- Transcript ----- Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.  Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.  Matthew Hornbach: Today, markets are watching the Fed's next move. Are rate cuts delayed or could hikes possibly be back on the table?  It's Tuesday, June 16th at 8:30am in New York.  So, Mike, the FOMC meeting today and tomorrow is likely more about reading the signal rather than announcing a rate change. Markets will focus on inflation forecasts, the unemployment rate, and the growth outlook. But, of course, this will also be the first meeting after Powell ended his term as Fed chair in May. All eyes will be on Warsh.  So, what are your thoughts before the press conference?  Michael Gapen: A lot of thoughts, actually, before the press conference. I do think it's basically a foregone conclusion that the Fed will be changing its easing bias in favor of more neutral language. Seems clear the committee wants to do that, probably wanted to do that at the last meeting. And it does fit, I think, Warsh's preference for less communication, less guidance from the Fed. So, I do think that's largely a foregone conclusion, although obviously we need to see whether that happens and whether there are dissents.  I think, as you noted, the forecasts will be important, but I think what's really important from my perspective – more than the modal outlook or the baseline that participants have – is their assessment of the balance of risks around the dual mandate. And I say that because obviously a year ago, the Fed eased policy when it felt that there were downside risks to the labor market that outweighed upside risk to inflation.  This year, that seems to have flipped, where the labor market appears to have stabilized, labor demand has picked up a little bit, and it is inflation that looks persistent. So, if the Fed cut last year on downside risk to the labor market, I think the concern for markets is – maybe they hike in 2027 or later this year based on a changing balance of risks in the direction of firmer inflation.  So, for me, that's really kind of key. In addition to what they're saying about growth inflation in the labor market, what is their assessment of the distribution of risks around that modal forecast?  Matthew Hornbach: There's definitely going to be a lot of investor interest in the press conference itself. What exactly may result from the opening statement. Presumably, Chair Warsh will give an opening statement.  How are you thinking about the back and forth between Warsh and the reporters that are asking questions? Are there certain questions that you would anticipate him getting asked, and how do you think he might respond?  Michael Gapen: Well, I think certainly that if we are correct, and I think markets are correct, that they do change forward guidance in the statement to more neutral bias, that certainly opens up the possibility that the Fed will be hiking.  So, the obvious first question is – is this the first step in the direction of hiking? What would get you to raise rates? Should investors be thinking about that? Is that the course of travel here?  Now Warsh may not want to answer that if he, kind of, is consistent in the view of saying the Fed shouldn't give a lot of forward guidance. So maybe get some popcorn, Matt. It could be a situation where he gets asked questions about the future path of monetary policy, and maybe he decides, ‘I don't want to take that up right now. The data will tell us, and we'll do what's necessary.’  And second, I think as you're noting and getting to about the structure of the press conference and what he might say is; past Federal Reserve chairs, let's say from Bernanke on, have found the press conference – the press conference statement, the questions, the format, the venue – as a way to control the narrative. And I think what will be interesting is to see whether Warsh has the same design.  The risk, of course, is perhaps that he doesn't and pulls back the amount of communication guidance that he wants to give. And then we'll see what fills that vacuum. What narrative fills that vacuum? And is he okay with that?  So, it may be that there's a new sheriff in town, and he chooses that there's some questions I'll answer, others I won't. And so, I do think that interaction with the press corps will be interesting. Hard to know exactly where it's going to come down until we see it in real time.  Matthew Hornbach: During Chair Warsh's testimony to Congress, he alluded to the idea that potentially the Fed may not do a press conference at every meeting going forward. How are you thinking about that in the context of this idea that if you leave a void, somebody else may fill it?  Michael Gapen: Obviously, the Fed used to not have press conferences at all, and then they moved to having them quarterly or four times a year. And they found that that was a little suboptimal because it became harder to make decisions and changes in the off-press conference meetings [be]cause they didn't have a venue to explain what they were doing and what they were thinking. So, they migrated to eight meetings.  So, I think it’s kind of twofold. Yes, it would mean that they speak less and therefore maybe their word doesn't carry as much weight. Or there's longer gaps for other narratives to come in. Like, do we lose forward guidance from the Fed, and is that replaced by forward guidance from the Treasury, for example? How do markets weigh those signals?  And but then also I would say would that ultimately box in the Fed to only make decisions on quarterly meetings rather than eight times a year? Would the chair, for example… Let's assume that at some point in the future, the Fed decides it does want to raise interest rates. Historically, the Fed does not surprise on rate hikes. It's perfectly willing to surprise on rate cuts, when it comes to that.  But if there is a world where the Fed does decide, ‘Hey, we do need to raise rates, but we don't have a press conference to explain our view.’ Would they take the decision at that meeting or would they wait? So, does it reduce their opportunity set?  Matthew Hornbach: I think this issue would certainly be an interesting one for investors to think about, which is why I'm bringing it up with you. Because to the extent that the plan going forward is to hold a press conference only once a quarter, as you alluded to – investors may interpret that as the Fed not being willing to raise rates at every single meeting going forward, which would certainly affect the pricing in the very short end of the interest rate market.  But more broadly, on communication strategy, do you think that that would be something that Chair Warsh would take upon himself? Or do you think it would be more likely for him to organize a committee to discuss communications?  Michael Gapen: I think the right thing to do… Again, our job is to say what we think he will do – not what he should do. But I'm going to answer this one in the question of what I think he should do.  I do think he should create, say, a subcommittee on communication and reevaluate what the Fed does. [Be]ause as chair, he has almost unilateral control over communications. But obviously you work within a committee, the committee operates with consensus. So, I do think it would make sense to, kind of, work through a committee and try and get as much consensus as you can.  And, here, what I would hope where they, kind of, ultimately land is – Warsh has been critical in the past of the Fed's forecast, the forecast being incorrect, providing maybe incorrect forward guidance. And I would argue that it's not really the sole job of the SEPs – the Summary of Economic Projections – to provide a forecast.  But what you get out of them is more than just a forecast. You get a hint of the committee's reaction function. That if data are above or below certain thresholds on growth, inflation, and unemplyment, then expect our policy path to look different.  So, is there a way that he could review the communication strategy, tamp down the elements that are, say, a pure forecast, but keep the items that communicate to the market what a reaction function is? That's where I think a review committee could be useful in reforming or revamping what they do.  Matthew Hornbach: Absolutely. In terms of the things that are really the purview of the committee, can you walk us through what those are in the context of Chair Warsh coming in having to ultimately make decisions on monetary policy – both interest rate policy as well as balance sheet policy? What are the purview of the committee itself?  Michael Gapen: Yeah. The two main tools of monetary policy, in this case interest rate policy and balance sheet policy, is both of those are under the purview of the Federal Open Market Committee. So, to change interest rates, to reduce the size of the balance sheet, to change the rollover rate, to buy assets, to sell assets – all of that is an FOMC decision. There are subcomponents of that world where the board can make certain decisions.  Now, the Fed views communication broadly as a tool, but in this case, communication is not an FOMC decision. The evolution of the communication strategy grew kind of organically out of '08, '09. Chairman Bernanke kind of started that process. It continued through, through Yellen. And that's been more of what I'll call a consensus operation, but there's no formal vote. So, the chair has a lot of control over how the Fed communicates, how often it communicates.

    12 min

  4. 5d ago

    The Bull Case After the Pullback in Stocks

    Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why the recent equity correction may be more reset than reversal and where investors may find the next opportunities. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.   Today: Possible opportunities to look out for in the equity correction over the past few weeks. It's Monday, June 15th at 1:30pm in New York.   So, let’s get after it. Sometimes the market changes direction or leadership not because the story has broken. Instead, it just needs to digest how quickly the story has evolved.  Over the past few weeks, equities had their biggest correction since the important bottom in March. I don’t view this as the end of the bull market though. I view it as a pause after an unsustainable acceleration in two key factors driving stocks higher this year: earnings revisions and liquidity.  In my view, the market wasn’t questioning the earnings bull market as much as it is questioning the speed at which earnings have been revised higher. These revisions have been particularly strong in leading sectors like semiconductors, which also corrected the most.  When earnings revisions breadth gets north of 70 percent, it’s reasonable to ask whether the second derivative is about to slow. That doesn’t mean earnings estimates are going down. Instead, it means the rate of improvement is probably peaking, and in markets, it’s always about the second derivative in growth. Such decelerations create corrections, not crashes.  That distinction is important. Earnings revisions breadth may pause or roll over from extreme levels, but the next twelve-month earnings estimates are still likely to rise as we move through the year and roll forward toward 2027 numbers. That’s why I remain convicted in our year-end S&P 500 target of 8000, even if the next few weeks remain choppy. Markets can correct while the earnings story remains intact. In fact, that’s often exactly how healthy bull markets reset. The second part of this adjustment is liquidity. Earlier this year, liquidity was flowing strongly through the system as a means of regaining financial stability. Between the Fed’s Reserve Management Program, reduced bank capital requirements, and Treasury buybacks, more than half a trillion dollars of liquidity was effectively added.  But that pace is now slowing. The Reserve Management Program has fallen from roughly $40 billion a month in April to about $10 billion today; while Treasury buybacks have also slowed from the March and April highs. This rate of change slowdown matters at the margin, especially for crowded momentum trades that have been supported by abundant liquidity.  Take note of these corrections in momentum because they often bring a change in leadership and that’s the real opportunity. We’ve already seen a few leadership rotations this year – from precious and base metals, to rare earths, to energy and finally to semiconductors. Now I think the market may be ready to broaden again, much like it did late last year and in the first six weeks of this year. Importantly, our preferred sectors of Consumer Discretionary Goods, Transports, and Regional Banks are all up more than 10 percent over the past month while the S&P 500 was down modestly. Yet, sentiment toward these areas is still muted. That’s exactly the kind of setup I like: improving fundamentals, better relative price action, and investors still skeptical. Another piece that should help this broadening. Macro variables that have been holding lower quality cyclicals back include interest rates, crude, and the dollar – they may all now be peaking. That fits nicely with the announced deal to reopen the Straits of Hormuz last night. If oil pressure eases and the bond market walks back the Fed hike it is currently pricing, interest rate sensitive groups should have room to extend their recent outperformance.  Finally this week’s Fed meeting matters too because it’s Kevin Warsh’s first as the Chair. I’ll be watching less for the rate decision itself and more for how the bond market reacts. The key markers are still the same for me: 4.5 percent on the 10-year, while bond volatility and funding market stress need to remain calm. If the Iran deal holds, I think the Fed can lean less hawkish on rates – but I don’t expect a proactive pivot to add more liquidity. Bottom line, markets have been digesting the peak rate of change in growth acceleration and liquidity. But that’s far from the end of the cycle. The earnings driven bull market remains intact, but the leadership may be changing. As usual, the best opportunities may be hiding in the places investors don’t believe in, yet. Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

    5 min

  5. Jun 12

    India’s Next Market Phase

    Chief Asia Economist Chetan Ahya joins Head of India Research and Chief India Equity Strategist Ridham Desai to break down India’s macro outlook, capital flows and sector opportunities. Read more insights from Morgan Stanley. ----- Transcript ----- Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Ridham Desai: And I'm Ridham Desai, Morgan Stanley's Head of India Research and Chief India Equity Strategist. Chetan Ahya: Today, the biggest takeaways from our India Investment Forum in Mumbai. From the shifting outlook for India's markets and flows to the sectors driving the next phase of corporate earnings and CapEx. It's Friday, June 12th at 7PM in Hong Kong. Ridham Desai: And 4:30PM in Mumbai. Chetan Ahya: Ridham, the Morgan Stanley's India Investment Forum took place in Mumbai last week, and I was there with you. These events are a great opportunity to speak with investors who come across from the globe to attend. Now that we have had a few days to process the conversations, what stood out to you? What was the biggest shift in investor sentiment that you picked on? Ridham Desai: So, Chetan, I think it's been the case of a continuing story about India. Domestic investors look that they are bullish, and foreign investors continue to stay rather cautious on the Indian markets. We could see that in the overall attendance. In contrast, I think domestic investors were looking for the next stock that they wanted to buy. They were seeking opportunities, and there was a lot of interest in meeting companies. Before we get into markets, let me turn back to you from a macro side. India's growth story remains strong, but relative growth appears to be cooling. This is in contrast to markets like Japan, Taiwan, Korea, and the US. How should investors think about India's macro positioning in that context? Chetan Ahya: So, Ridham, when I look at the macro data in India, they're all indicating a meaningful upside in the growth trend. So I'll just cite two key cyclically sensitive macro data points. One is the banking system credit growth, and number two is the auto sales, particularly the passenger vehicle. So bank credit growth is growing as of the last biweekly data point that we got. It's growing at seventeen point seven percent year-on-year, and car sales are growing at twenty-seven percent in the month of May. But as you were mentioning earlier, the relative growth opportunity is a challenge for India and to just share the numbers on the earnings growth for the first quarter that we saw across the region. So we saw Korea's earnings growth at one hundred and seventy percent. We saw Taiwan's earnings growth at forty-eight percent year on year. Japan at thirty-three percent. The US has seen a growth of about twenty-seven percent year on year. So in that context, when India is reporting thirteen percent growth, it's becoming a challenge for investors to look for opportunities in India relative to other markets. Either they are more focused on the other markets than India. So let me come back to you, Ridham. Staying with the investment implications, India projects stable valuations and strong corporate earnings, but its relative growth advantage has narrowed. How should investors reconcile this contradiction? Ridham Desai: If I go back thirty-five years, as long as we have the MSCI index series, and as far as I have been in this industry, this is the lowest relative multiple that India has traded at. And indeed, growth last year was weak. But if you see QOQ, we have started to accelerate. The broad market earnings growth trajectory has shown a doubling in the quarter that ended March over the quarter that ended December. But it underscores the point you made about the relative growth complex. It's clearly not in India's favor. And a lot of the capital in the world is short-term oriented, and it cares for what growth is gonna come in the next quarter or two. And that's the state of the market right now. However, what I would say is that equities is a quintessential long-duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much. It remains far superior to a lot of other countries around the world. And therefore, I think this does present itself as a great opportunity for a long-term investor while the markets are digesting this relative growth disadvantage that India seems to have over the next, say, three or four quarters. Chetan Ahya: And Ridham, another theme from the forum was policy action to attract capital. Policymakers announced a number of measures right as our conference ended and they aimed to withdraw withholding tax on debt investors, also providing banks with an incentive to take up more dollar borrowing. How central are these measures to sustaining foreign inflows into Indian markets? Ridham Desai: I think the measures taken by policymakers are very important, probably amongst the most important policy actions this year. The removal of taxation on debt investors will make a difference. The provision for hedging to external commercial borrowings as well as to foreign currency deposits will make a difference. It should boost flows into India over the next twelve months. That said, these measures may not help the equity flows because the equity flows, I think, are going to depend on the relative growth situation. Now, there's only that much India can do to lift its growth. It may accelerate to the high teens. So growth elsewhere needs to decelerate for equity investors to return. Or India needs to see the start of a major IPO cycle because in primary issuances, foreigners do come to buy, and that may change the net picture on FBI flows in the equity markets. But as far as the debt markets are concerned, I think the measures taken last week are going to prove to be quite potent, and India should see the benefits accruing over the next few weeks and months. Chetan, from your perspective, how important is the policy backdrop right now in determining whether India can keep attracting long-term global capital despite more competitive returns elsewhere in the short run? Chetan Ahya: So Ridham, I think the key focus for the policymakers had been with these measures to boost short-term capital inflows to stabilize the currency. There has been a balance of payment deficit. So from that perspective, the short-term capital inflow augmentation effort as you mentioned, has been the correct move. But from the long-term perspective, we think that the government needs to boost competitiveness of the Indian manufacturing. Because in the context in which AI could affect India's services exports, there is a need to augment more export receipts from the manufacturing sector. At the same time, if they improve the competitiveness of the manufacturing sector, it will help India to attract more capital inflows from long-term investors for the purpose of FDI. And the good news is that the government is on it. They are taking a number of measures to boost that competitiveness in the manufacturing. But we think that there is more action needed and hopefully in the intention to improve the balance of payment dynamics and exports from manufacturing sector, we will see more actions from the government in the coming months. Ridham Desai: Chetan, you've also written extensively about the structural capital spending cycle in Asia and India. Can you walk us through the key details here, especially in the Indian context? Chetan Ahya: I think the key story that we are observing, it's sort of more or less global, but definitely very clearly seen in Asia, that there seems to be a super cycle for CapEx as well as industrial activity. This CapEx cycle is effectively driven by spending in four key sectors, and that is AI and AI-related digital infrastructure, energy, defense, and industrial onshoring-related CapEx. Now, as far as India is concerned, we are seeing investments in all the four segments that I just mentioned. In fact, it's seeing a significant amount of activity in the space of energy. And, similarly, we are seeing a lot of policy measures, I mentioned earlier, in terms of boosting manufacturing competitiveness. But at the heart of it is government's effort to onshore industrial supply chain. So India's CapEx has also inflected higher. Having said that, the difference between India and, let's say, North Asia, which is Korea, Taiwan, Japan and China, is that they are also a big player in the export market for capital goods when there is global CapEx cycle upswing happening. Nevertheless, India will see the benefit of this CapEx cycle in terms of its own growth push, as well as improvement in productivity. So Ridham, how would you think about the sectoral opportunity within the Indian markets? Ridham Desai: We see a lot of interest in some of these sectors which you mentioned. But actually, I would like to start off with financials. I see the banks in a very sweet spot. Balance sheets are in pristine condition. The interest rate cycle has troughed, which means margins for the banks have also bottomed and credit growth is finally accelerating. If this CapEx cycle unfolds like the way you are describing it, I think financials will stand to gain the most. And interestingly, the valuations are quite good, both on an absolute as well as on a relative basis. Also, of course, investors can go directly into those sectors which are doing this capital spend. Energy to start with, semiconductors, fertilizers, data centers and aerospace. The only thing to note here is that not everywhere are the valuations attractive enough because in some cases the market has recognized the coming growth cycle and has started to price that in. So we have to be careful about the valuations. But I think financials and industrials are clearly great opportunities in the context of this CapEx recovery that India is likely to see in the coming f

    13 min

  6. Jun 11

    Inflation Relief Ahead?

    Our Global Head of Fixed Income Research Andrew Sheets explains our differentiated view of a potential benign outlook for inflation, despite the recent acceleration. 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, why is everything still so expensive? It's Thursday, June 11th at 2pm in London. The Federal Reserve has a so-called dual mandate, tasked with keeping the labor market healthy and prices stable. It is currently having much more success with the former than the latter. Let's start with that good news. Last Friday saw solid data from the U.S. jobs market, reducing some of the fears from earlier this year that artificial intelligence and other factors would lead companies to make do with fewer workers. The U.S. unemployment rate sits at just 4.3 percent, a historically low level. Measures like initial jobless claims indicate no large uptick in firings. Yet the success within the U.S. labor market is mirrored by struggles with inflation. The Fed tries to keep inflation, the annual increase in a broad set of prices, to about 2 percent per year. Their preferred measure of these prices, so-called PCE inflation, well, it's been materially above this target over the last three months, six months, twelve months, and indeed, the last five years. As for another key measure of inflation that was reported yesterday, CPI, overall prices increased more than 4 percent. While that was close to expectations, it still represents prices that are rising much faster than the Fed would prefer. This leads to a dilemma. One diagnosis of what's going on is that elevated inflation is a sign that conditions are simply too loose and too accommodative at these levels of interest rates. Corporate capital expenditure and merger activity is surging, regulation is being eased, and the U.S. government is spending a lot more than it's taking in. All of these are consistent with a hot economic cycle, which in the past would've warranted higher interest rates to bring the economy back down to a more sustainable speed. But it might not be that simple. The surging spend that we're seeing on AI data centers feels pretty unique and almost insensitive to other dynamics. Indeed, we've seen a 700 percent increase in the price of memory over the last year. Yet it's done little to slow demand for this construction as the large, well-capitalized companies behind the AI buildout see it as so essential to their future success. U.S. consumers are also still spending, boosted perhaps by record levels of household wealth. As just one example of this, my colleagues in Equity Research note that the price of airline tickets has gone up 25 percent over the last year, yet there's been no sign of people flying less. Now, the positive story would be that while there are some high-profile categories like computer memory or airfare that are seeing these large price increases, the broader inflation picture is actually set to get better as the year goes on, and costs for things like housing and tariff-impacted goods moderate. That is our view at Morgan Stanley, where our economists think that inflation will ultimately be lower over the next twelve months – and lower than many in the market expect. But there's definitely uncertainty. This month, June, is one where central banks may appear to have a renewed commitment towards inflationary pressures; with the ECB hiking rates today and our expectation that the Bank of Japan will hike rates next week, while the Fed will remove their easing bias. And our more benign economic base case for inflation does assume that oil will start flowing through the Strait of Hormuz pretty soon. It may not, and that could also lead to more sustained inflationary pressure. The big story on inflation has not gone away. Our assumption that pressures could ease in the second half of the year is a key and differentiated input to our forecast for lower bond yields and higher stock prices in 12 months' time. But it does rely on a change of the status quo. As of now, inflation is still too high. 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.

    5 min

  7. Jun 10

    Who Owns Travel Loyalty?

    Morgan Stanley analysts Ravi Shanker and Jeff Adelson take a look at what the fight for affluent, loyal travelers could mean for banks and airlines.  Read more insights from Morgan Stanley. ----- Transcript ----- Ravi Shanker: Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's North American Airlines analyst.  Jeff Adelson: And I'm Jeff Adelson, Morgan Stanley's U.S. Consumer Finance analyst.  Ravi Shanker: Today, who really owns your travel loyalty? The airline, the bank, the rewards platform, or you?  It's Wednesday, June 10th at 7am in New York.  Jeff Adelson: So, Ravi, you just came from your annual travel conference, and I'm about to head into the second day of Morgan Stanley's 17th Annual Financials Conference here in New York, where we're hosting roughly 135 corporates. A lot of themes are coming up there: retail engagement, product innovation, regulatory change, AI digital assets, capital markets recovery, and so on. All of these connect back to a bigger question. Who owns the customer relationship?  Ravi Shanker: And that's exactly where travel co-branded cards come in. They sit at the crossroads of premium consumer spending, loyalty, and the competition for wallet share. They've become a more important revenue stream across travel, banking, and hospitality. But it's not as simple as more travel means more co-brand growth. Most customers still want flexibility, cashback, and low fees. Premium travelers and loyal airline customers behave differently.  Let's start with the cardholder. Most consumers have a credit card, but travel co-branded cards are still a much smaller piece of the overall wallet. So, how big is the opportunity here, and how hard is it to get consumers to switch?  Jeff Adelson: So, what's actually interesting, Ravi, is that travel co-branded cards are still relatively under-penetrated. In our survey, about 90 percent of cardholders have a general purpose card, while only about 22 percent have an airline card, and 12 percent have an hotel co-brand card. So, on the surface, the runway for growth does look significant.  The upshot is also that once you get these consumers in the door, they are much higher spending and drive a ton of volume and incremental card economics for both the banks and their co-brand travel partners.  The challenge is that consumers are pretty loyal to their cards or airlines that they already use, so most people aren't actively looking to switch. They tend to add a new card only when the value proposition is compelling enough. And sometimes given these one-time nature of the signup bonuses, it results in some churning without keeping the customer for the long term.  So ultimately, what this all means is issuers and travel brands aren't just competing with each other, they're competing against habit. So, to win, they need to offer something that's meaningfully better than what's already in the consumer's wallet.  Ravi Shanker: Got it. So, consumers seem to care most about value, fees, rates, and reward. Cashback still leads by a wide margin. So where do travel-specific rewards fit in?  Jeff Adelson: The nuance here matters. Travel rewards don't need to win with everybody to be valuable. What makes them so powerful is they resonate with a specific group of customers, specifically the ones who are traveling – the frequent travelers, the ones who spend more, and those who engage more deeply with loyalty airline programs, for instance. For those consumers, lounge access, status benefits, upgrades, and airline or hotel points can create a level of engagement that's difficult for just a basic cashback card to replicate.  The nuance here matters. Travel rewards don't need to win with everybody to be valuable. What makes them so powerful is they resonate with a specific group of customers, specifically the ones who are traveling – the frequent travelers, the ones who spend more, and those who engage more deeply with loyalty airline programs, for instance. For those consumers, lounge access, status benefits, upgrades, and airline or hotel points can create a level of engagement that's difficult for just a basic cashback card to replicate.  Ravi Shanker: So, the premium consumer looks different. Why is that customer so important to card issuers?  Jeff Adelson: So, higher income consumers frankly just spend a lot more. They're more loyal, they carry more cards, and they're more willing to pay a higher annual fee if they feel like they're getting the value from the card back after they pay that fee.  In our survey, consumers earning over [$]150,000 per year of income spent roughly twice the amount on their primary card, and they were willing to pay almost twice the annual fee as other income cohorts. They're also attractive from a credit standpoint, from a, you know, delinquency perspective. These customers are more likely to pay their balances in full each month, and as a result, have lower credit risk. And often they keep long-standing relationships with their banks or their airline partner.  That's why premium card and travel partnerships remain such an important customer acquisition tool for a bank. It has a really long lifetime value. The battle isn't really for the average card holder; it's for the affluent consumer who's driving a disproportionate share of spend in the U.S. economy. Ravi Shanker: Got it. So, the banks and travel brands are partners today. But they're also starting to potentially compete more directly for the same customer. What should investors watch to see whether this stays a partnership or becomes more of a tug-of-war?  Jeff Adelson: So historically, this has been a successful partnership, especially in recent years as high-income consumer spending pie has grown in the U.S. How this works is airlines provide loyalty and travel experiences. Banks provide the card issuance, distribution scale, and share back those card economics to the airlines.  Everybody wins when the travel spend grows. But we're starting to see some things overlap. Banks are building their own premium travel ecosystems. That includes things like flexible rewards points with the ability to transfer to any airline you want, proprietary lounges away from the airlines, and travel benefits that increasingly compete with airline loyalty programs.  So, what investors should watch from here, in our view, are two things. Number one, is the high-income consumer and the travel pie continuing to grow? That's really what's held everything up and frankly, driven the airlines that you cover to realize that they hold this golden ticket. They hold the access to that consumer, so they've begun negotiating for more of the economics away from the card issuers.  The second thing we think that you need to watch out for is whether consumers really continue to value these airline-specific rewards enough to justify the existing partnership model. Our survey indicated that most consumers still prefer flexible rewards over points tied to a single airline. But among frequent travelers and airline loyalists, the airline ecosystem does remain powerful.  So, the future does seem to depend in part on whether these travel brands can continue to deliver on experiences that the consumers really can't get elsewhere.  So, Ravi, maybe switching to you.  For the airlines, the question I have for you is a little different. How do you turn loyalty into a durable, profitable revenue stream without losing sight of the core travel product?  Ravi Shanker: That's exactly it. Kind of you referenced the strength of the travel ecosystem in your previous response, and I think that's exactly what the airlines need to focus on. I think the takeaways for the airlines from the survey is very clear.  You cannot have a co-brand revenue opportunity in isolation. It is just a layer on top of your core revenues. You cannot build an incredible loyalty or co-brand franchise without having a very strong core airline product. The analogy we use in our report is that it's sort of like the restaurant business. Most restaurants usually make the bulk of their profitability off of the wine menu or the liquor menu, even though you're going there primarily for the food and the ambiance and the service. If you don't have really good food and ambiance and service, you can't make money off of the wine menu.  Similarly, we think the airlines need to continue to focus on their core product, whether it's their network or their reliability, their safety, where they fly, the quality of the product in the sky, the lounges, as you mentioned. And once you get all of that in order, then you can tap into the co-brand revenue opportunity over time.  Jeff Adelson: So maybe just running with that analogy on, you know, co-branded revenues becoming a more meaningful part of the airline business. Why are they so strategically important in your view? Why should the consumer pay for that bottle of wine that they can get?  Ravi Shanker: Look, we, we don't have a full disclosure from the airlines just yet, but we have some nuggets that tell you that this is a very attractive revenue opportunity, right?  So, look at some of the numbers we do have. We think that this business has been growing at a low double-digit CAGR for the industry, which is much faster than core revenue growth. We think it has already grown to be about low double-digit percentage of overall revenues. And from the little info we have, we can surmise that this is a very, very profitable business. Something in the order of 35-50 percent operating margins, if not much higher than that in an industry that is overall working really hard to get to double-digit margins on a core basis.  So, this business can be about half of overall mid-cycle profitability, maybe even higher for some of the airlines, even though, it is considered to be an ancillary revenue stream. This is also a very, very stable business that doesn't exhibit the kind of cyclicality

    13 min

  8. Jun 9

    Asia’s Race to Power AI

    As AI demand surges, our Asia Energy Analyst Mayank Maheshwari discusses the new multi-trillion-dollar investment cycle to secure the power, fuels, grids and storage that keep modern life running. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Mayank Maheshwari, Morgan Stanley’s Asia Energy analyst.  Today: how AI’s rapid growth is forcing Asia into a massive energy buildout across power grids, fuels, storage and dependable energy and power generation.  It’s Tuesday, June 9th at 8am in Singapore.  Every time you ask AI to draft a note, summarize a file, plan a trip or generate an image, the response feels instant and easy. But behind it sits a very physical system: data centers, electricity, cooling, fuel, metals, power lines, storage tanks and ships.  There is no AI without energy. And in Asia, the power and energy needs could get much bigger. And right now, we are at a critical inflection point where energy, AI, and security converge into [a] once-in-a-generation investment cycle.  We see a super cycle with $5 trillion plus in new investments in energy over next five years, almost double of what we have seen in the past decade. And this has global implications as Asia consumes almost half of the world's energy needs – but produces only about a third of it at home. Energy markets may be global, but energy insecurity is local. It shows up in electricity prices, fuel shortages, factory delays, food supply pressure and household budgets.  By 2030, Asia’s energy use could rise by about 38 exajoules. That increase is roughly equal to all the energy the Middle East consumes today. Power demand alone could reach about 19 trillion units a year when expressed in kilowatt-hours. That is around four trillion more units of electricity usage than in 2025, driven by data centers, industry, and onshoring of businesses.  AI is now part of that demand story. By 2030, data centers could use roughly one-sixth of all new power units in Asia. That makes AI a major new load on the power system.  Meeting this demand requires a major investment cycle. Asia’s annual energy investment could rise to roughly US$1.1 trillion a year over the next five years. Much of that spending goes into the power system itself: generation, grids, storage and the equipment needed to connect everything.  Grids may be the biggest bottleneck. Think of [the] grid as the highway system for electricity. You can build more power plants, but if the roads clog up, the power does not reach homes, factories or data centers. Asia’s grid investment needs could reach close to about US$1 trillion by 2030. Transformer lead times have stretched to years in some cases, which shows how tight the equipment supply chain has become.  The hardest part is keeping the lights on every hour of the day. Baseload power means electricity that can run around the clock. Asia is adding a large amount of renewable power to its energy infrastructure. But that source depends on when the sun shines or the wind blows. That is why coal, gas and nuclear remain part of the conversation.  Storage also moves from useful to essential. Batteries help smooth out renewable power demand when supply rises and falls during the day. Global energy storage installations could rise from about 500 gigawatt hours in 2025 to around 3,000 gigawatt hours in 2030.  Powering AI also reaches beyond electricity. Data centers need power, but the system around them needs dependable fuels, grids, batteries, metals, refining, storage and shipping. Electricity has to be generated, moved, backed up and supplied through physical infrastructure. That is why this story pulls in copper and aluminum for grids, fuel refining for transport and petrochemical supply chains, and fertilizers because energy security also connects to food security.  The future may look digital, but it will be powered by something far more physical: the largest energy buildout Asia has seen in decades.  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.

    5 min
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