Morgan Stanley GIC Weekly Published December 19, 2022: https://www.morganstanley.com/pub/content/dam/mscampaign/wealth-management/wmir-assets/gic-weekly.pdf
I've been enjoying reading these each week and hope you do too! Not much commentary from me this week but I've pulled out a few interesting quotes below, starting with the intro:
“We believe 2023 will be difficult for investors because of the uncertainty about the pace and nature of economic slowing, and the Federal Reserve’s response to it. Markets have mostly dismissed policymakers’ hawkish messages and embraced the dovish ones. Some expect policy rate cuts to bring back the 2009-2020 investing regime in which passive index funds, whose returns are largely driven by US secular growth stocks, are winners as disinflation returns and low US Treasury yields support rich valuations. In contrast, we see evidence of a new regime in which growth is stronger, inflation normalizes closer to 3% and interest rates remain higher for longer. In this environment, fundamentals take on added importance, value leads growth, cyclicals beat defensives and non-US stocks outperform the US. Furthermore, long-duration bonds once again hedge stock risk and stocks move as much on earnings as they do on interest rates. Consider repositioning for regime change. Besides fixed income, this means value stocks, global dividend payers, early cyclicals, enterprise technology and the emerging markets.”
“Even now, the futures market forecasts a terminal fed funds rate of 4.8% versus Fed guidance of 5.2%. The futures market also anticipates as much as 50 basis points of rate cuts next year despite the Fed’s promise to hold rates 'higher for longer.' “
“Evidence of regime change comes from the market itself which since September has seen some interesting and powerful shifts. The first is the broadening of the value-overgrowth trade. In large-cap stocks, the performance premium is roughly 17 percentage points. Next, global stocks with high dividend yields are besting the S&P 500. European equities are handily outperforming the US on a currency-hedged basis despite the threats of higher rates, higher inflation and precarious energy dependency. Perhaps most telling is that since mid-August, emerging markets equities have outperformed the Nasdaq Composite by eight percentage points. Stay tuned.”
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