How to Navigate U.S.-China Tensions

Our analysts Brian Nowak, Keith Weiss and Matt Bombassei break down the most important tech insights from Morgan Stanley’s Spark Private Company Conference and industry shifts that will likely shape 2026 and beyond. Read more insights from Morgan Stanley.----- Transcript -----  Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Morgan Stanley's Head of U.S. Internet Research. I'm joined today by Keith Weiss, Head of U.S. Software Research and Matt Bombassei from my team.Today we're going to talk about private companies and technology – and how they're showing us the direction of travel for disruptive technologies and emerging investment opportunities.It's Wednesday, October 22nd at 10am in New York.Keith and Matt, we just returned from Morgan Stanley's Spark Private Company Conference last week in Los Angeles. It had over 85 private tech companies, 150 plus investor firms. There were a lot of themes that were discussed across the entire tech space impacting a lot of different sectors, including energy, healthcare, financial services, and cybersecurity.Keith, what were some of the biggest takeaways you took away from Spark this year?Keith Weiss: I'd say just to start off with, the Spark Conference is one of my favorite conferences of the year. It's a more intimate conference where you really get to spend time with both the private company executives and founders, as well as investors from the VC community and public company investors. And the conversations are more broad ranging; they're more about the thematics in the industry. They're more long term in nature.So, it's not just a conversation about what's next quarter going to look like, or what data points are you drumming up. You're having these thoughtful conversations about what's going on in the industry and how that's going to impact business models, how it's going to impact innovation cycles, how it's going to impact pricing models, within these companies. So, it tends to be a very interesting conference for me to attend.So, for me, some of the key takeaways. Typically, when we're in these innovation cycles, it feels like everybody's rowing in the same direction. We all understand where the technology's heading, we're all understanding how it's going to be delivered, and it's a race to get there. And you're having a conversation about who's doing best in that race, who's best positioned, who's got a better motor in their race car, if you will.So, to me, one of the big takeaways was we don't have that agreement today, right? There's different players that are looking at this market evolution differently. On one side of the equation, the application vendors – and a lot of this debate is in SaaS based applications. They see SaaS based applications having a very big role in taking these models that are inherently in-determinative and making them to be more determinative and useful within an enterprise context.Bringing them the data that they need to get the job done and the right data; bringing them the context of the business process being solved; bringing the governance that's necessary to use in an enterprise environment. But most importantly, to make it effective and efficient for the large enterprise.On the other side of the equation, you have venture capital investors and more early-stage investors who are looking at this as a huge phase shift, right? This is going to fundamentally change how we build software, how we utilize software, and they worry about a deprecation of that SaaS application layer. They think the model itself is going to start to encompass, it's going to start to subsume a lot more of that application functionality, a lot more of that analytics. And they see a lot more disruption going forward.So that debate within the marketplace, that's something that's interesting to me. It's something that we don't typically see in these innovation cycles. So that's takeaway number one.Takeaway number two, we're still really early days, and that's a little bit implied in in the first statement; I definitely hear a lot of it when I talk to the end customer. When I talk to CIOs. This wasn't necessarily at Spark, but earlier in the week, I was at a CIO conference, there was 150 CIOs in the room. One of the gentlemen on stage asked a question. ‘Who in the room has a good understanding of what we're talking about when we mean Agentic AI, when we mean agentic computing within our enterprise.’ Of the 150 CIOs, four raised their hands. Still very early days in understanding how this is going to evolve, how we're going to actually deliver these capabilities into the enterprise.And the last takeaway I would say is more excitement about the federal government becoming a better customer for software companies overall. People are more interested in new avenues into that federal government. There's been some very successful companies that have opened the door to getting into these federal government contracts without going through the primes, without doing the typical federal government procurement cycles.And that's very interesting to the startup community, which tends to move faster, which tends to drive on innovation versus relationship building; versus being in an existing kind of incumbent prime. So, I thought that opening was – it was pretty interesting as well.Brian Nowak: it sounds like it's still very early, there are a lot of different points of view and no real consensus as to where technologies could go next. However, one theme with an enterprise software – [it] does seem like cybersecurity has a little more of a unified view.So maybe walk us through what you learned from a cybersecurity perspective and what should we be focused on there?Keith Weiss: Yeah, absolutely. If there is a consensus, the consensus is that generative AI and these innovations and the fast pace of innovation is going to be a positive for cybersecurity spending, right? The reason being, there's three main factors that are driving that overall spending.One is expansion of surface area, right? Cybersecurity in one dimension, you can think of how much is there to be protected, right? And if we think about the major themes that we're talking about, we're going to be developing a lot more software, right? The code generation tools are improving software developer productivity. You have an expanding capability of what you can actually automate.We'll be building a lot more software. That software needs to be protected, right? We have new entities that are going to be operating inside of enterprises, and that's the agents. So, CIOs are thinking about this future state where you have tens, thousands, maybe hundreds of thousands of agents operating in the environment, doing work on behalf of end users, but having permissions and having ability to execute business processes. How do we secure that side of the equation? We're talking about outside of just the four walls of the large enterprise, going into more operational technologies, being able to automate more of that work. That needs to be secured as well.So, an expanding surface area is definitely good for the cybersecurity budget. You can almost think of cybersecurity as a tax on that surface area. We generally think about it; somewhere between 4 and 6 percent of IT spend is going to be spent on overall security. So, that's one big driver.The second big driver is the elevated threat environment. So, while we're excited to get our hands on these extended capabilities of generative AI, the bad guys are already there, right? They're taking advantage of this. The sophistication, the volume and the velocity of these attacks is all increasing. That makes a harder job for the existing infrastructure to keep up, and it's going to likely necessitate more spending on cybersecurity to tackle these newer challenges; the newer dynamism within the cybersecurity threat appropriately. So, you're going to have to use generative AI to counter the generative AI.And then the last component of it; the last driver would be the regulatory environment. Regulatory tends to have some cybersecurity angles. If we think about it here, we're seeing it in terms of data governance is probably the big one. Where does this data go when it goes into the model? Are we putting the right controls around it? Do we have the right governance on it? So that's a big area of concern.A lot of complaining going on at the conference about the lack of consistency in that regulatory environment. All these different initiatives coming up from the state – really creates a challenging environment to navigate. But that's all good-ness for cybersecurity vendors that can help you get into compliance with these new regulations that are coming up. So overall, a lot of positivity around cybersecurity spending and startups definitely look to take advantage of that.Brian Nowak: Matt, so Keith says there's lack of consensus and boats being rode in every direction on what should be adopted first. And only 3 percent of CIOs know what agentic AI means. What did you learn about early signal on adoption? And some of the barriers to adoption? And hurdles that companies are talking about that they need to overcome to really adopt some of these new tools?Matt Bombassei: Yeah. Well, to Keith's point, it is really early, right? And that was a consistent theme that we heard from our companies at the conference. They are seeing early signs of cost efficiency, making employees more productive as opposed to maybe broad scale layoffs. But it's the deployment of these model technologies into specific sub-verticals – so accounting, legal engineering – where that adoption is driving greater efficiency within the organization.These companies are also adopting models that are smaller and a bit more fine tuned to their specific work product. And so that comes at a lower cost. We heard companies talking about costs at 1/50 of the cost of the broader foundational models when they're deploying it within the organization. And so, cost efficiency is something that we're seeing.At the same time, to speak to how early it is, one of the biggest hurdles here is change management and actually adoption. Getting people to use these products, getting them to learn the new technologies, that is a big hurdle. You know, you can lead a horse to water, you can't make it drink, right? And so, getting people to actually deploy these technologies is something that organizations are thinking through. How do we approach [it]?Brian Nowak: And you make an autonomous car drive? I know you've been doing a lot of work on autonomous driving more broadly. There were some autonomous driving and autonomous driving technology companies at Spark. What were your takeaways on autonomous driving from last week?Matt Bombassei: Yeah, well, not only can you make an autonomous car drive, you can make a truck drive and a bunch of other physical equipment. I think that was one of the takeaways here was that these neural nets that are powering autonomous vehicles are actually becoming much more generalizable. The integration of the transformer architecture into these neural nets is allowing them to take the context from one sub-vertical and deploy it in another vertical.So, we heard that 80 to 90 percent of the software, the underlying neural net, is applicable across these verticals. So, think applicable from autonomous ride sharing to autonomous trucking, right? What that means from our point of view is that it's important to get the scale of total miles driven – to establish that kind of safety hurdle if you're these companies.But also, don't necessarily think of these companies as defined by the vertical that they're operating in. If these models truly are generalizable, a company that's successful and scaled and autonomous ride hailing can switch or navigate verticals to also become successful potentially in trucking and other industries as well. So, the generalization of these models is particularly interesting for scale, and long-term market position for these companies.Brian Nowak: It's fascinating. Well, from consumer and enterprise adoption, the future of agentic computing and autonomous driving, there will be a lot more themes we all have to stay on top of. Keith, Matt, thanks so much for taking the time today.Keith Weiss: Great speaking with you Brian.Matt Bombassei: Thanks for having us.Brian Nowak: And 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.

Our Global Head of Fixed Income Research and Public Policy Michael Zezas discuss the latest developments in U.S.-China relations and how they could affect investors.Read more insights from Morgan Stanley.----- Transcript -----  Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.  Today, we’re talking about the U.S. and China—why the relationship remains complicated, and what it means for markets. It’s Tuesday, Oct 21st, at 12:30pm in New York. If you’ve been following headlines, you know that U.S.-China relations are rarely out of the news. But beneath the surface, the dynamics are more nuanced than the daily soundbytes suggest. Investors often ask: Are we headed for a decoupling of the two economies, or is there room for cooperation? The answer, as always, is—it’s complicated. Let’s start with the basics. The U.S. and China are deeply intertwined economically, but strategic competition has intensified. Recent years have seen tariffs, export controls, and restrictions on technology transfer. Yet, there’s still plenty of trade between the two countries, and both economies are dependent on each other for growth and innovation. So what’s going on now?  In recent weeks, China has moved to tighten rare earth export controls and the U.S. has proposed 100 percent tariffs in return. If this came to pass, these events could mark a clear economic split. But given the interdependencies we just cited, neither Washington nor Beijing seems eager for a true split, at least not anytime soon. The economic costs would be staggering, and both sides know it. So, a truce seems more likely, perhaps with somewhat different terms than the narrow semis-for-rare earths agreement they made this spring. And longer term, this episode seems to be a part of a broader dynamic, where rolling negotiations and truces are more likely than either a durable trade peace or a hard economic decoupling. For fixed income investors, this drives some important considerations.  First, U.S. industrial policy is ramping up, with clear implications for AI infrastructure. AI is an area where the U.S. views it as essential that they outcompete China. Supported by renewed CapEx incentives from the latest tax bill, it’s clear to us that U.S. companies will be pushing further into AI development, where my colleagues have identified $2.9 trillion of data center financing needs over the next three years, about half of which will come from various credit markets. And for credit investors, this presents an important opportunity. Another consideration is how markets will balance near-term growth risks with an array of medium term growth possibilities. As our U.S. economics team has pointed out, the evidence suggests that corporates haven’t yet been forced to make tough decisions about passing on or absorbing tariff costs, underscoring that trade-related growth pressures aren’t yet in the rearview. The ongoing U.S. government shutdown doesn’t help either. It’s all a good argument for why bond yields could move lower in the near term.  But also, we should expect yield curves could steepen more, with higher relative yields in longer maturities. This would reflect greater uncertainties around higher fiscal deficits, inflation, and economic growth. Our economists have been calling out the mixed messages in economic data, as well as a U.S. fiscal sustainability picture that appears reliant on acceleration in corporate CapEx for a manufacturing and AI-driven growth burst. In sum, the U.S.-China relationship is evolving, with global implications that don’t lend themselves to easy narratives or quick fixes. Our challenge will continue to be crafting investment strategies that reflect durable policy undercurrents, the signal amid news headline noise. 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.

As the S&P 500 continues to rally, our CIO and Chief U.S. Equity Strategist Mike Wilson discusses three factors that could lead to a stock market correction in the near term.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 on the podcast I'll be discussing why we are still in a new bull market even if a correction is likely in the near term. It's Monday, October 20th at 1pm in New York. So, let's get after it. I continue to believe the sharp selloff in April following Liberation Day marked the trough of what was effectively a three-year rolling recession in the U.S. economy. We have written extensively about this view; but it still remains very much out of consensus. Since 2022 most sectors of the private economy have gone through their own individual recession but at different times. The final trough in the rate of change in economic activity came in April  around the tariff announcements which came as a surprise to almost everyone, at least in terms of the magnitude and scope. In short, Liberation Day was really capitulation day on the last piece of bad news for the economic cycle which then bottomed. Stocks seem to agree which is why they have rallied in a straight line since then, much like they do after the trough in any economic cycle. The other proof we have for this claim is the v-shaped recovery in earnings revision breadth, something we have discussed for many months in our written research and on this podcast. Based on our numerous conversations with investors, this view remains very unpopular. Instead, most believe the economy and earnings growth for next year are at risk of being lower rather than higher than expected, as I do. Core to my view is that we are now firmly in an inflationary regime since COVID and the implementation of helicopter money to get us out of that crisis. The government has  to run it hot to get us out of the massive debt and deficit problem created over the past 20 years. The end result is that investors need to expect hotter but shorter cycles rather than the elongated 10-year cycles we experienced between 1980-2020 when inflation was falling. That means two-year up cycles followed by one-year down cycles for U.S. equity markets, which is exactly what's happened since 2020. We are now in the midst of a new up cycle that began in April. The key thing to understand during this new regime is that inflation is not bad for stocks so long as it's accelerating and the Fed is on the sidelines or easing like in 2020-21, 2023 and now today. Higher inflation means higher earnings growth which is why price earnings multiples are high today. With inflation likely to accelerate next year, stocks are anticipating better earnings growth. In other words, stocks are a hedge against inflation. In fact, relative to gold, high quality stocks may offer a cheaper inflation hedge at this point given their dramatic underperformance to precious metals year-to-date and since 2021. Eventually, inflation will be a problem again for stocks like in 2022 when the Fed has to react by tightening policy, but that's a story for another day. Having said all this, the equity markets are a bit frothy at the moment and so a 10-15 percent correction in the S&P 500 is not only possible but would be normal at this stage of a new bull market. I see  three primary reasons for why we could get that in the near term. First, China-U.S. trade relations have recently escalated again, and we are slowly marching toward a November 1st deadline for tariffs on China to go back to Liberation Day levels. While most investors don't want to get sucked into selling at the worst possible time like they did in April, this risk is real and will weigh on stocks if we don't see evidence of a de-escalation in the next few weeks. Second, funding markets have exhibited some signs of increased stress lately. This is likely due to the ongoing quantitative tightening program by the Fed which is draining bank reserves. Should these stresses increase, it could spill over into equities. Third, our earnings revision breadth metric is rolling over now after its historic rise since April. This could continue into earnings season as it's normal to see some retracement from such a high level and tariffs start to flow through from inventories to the income statement. Trade tensions might also weigh on company guidance in the short term. Bottom line, I believe a new bull market began in April with a new rolling economic and earnings recovery that is now quite nascent. However, even new bull markets have corrections along the way, and certain conditions argue we are at risk for the first tradable one since April. Keep your powder dry in the near term for what should be a great buying opportunity, if it arrives. 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!

Our U.S. Public Policy Strategist Ariana Salvatore unpacks how China’s announced rare earth export controls and signals of sweeping U.S. tariffs could impact global supply chains, markets and economic growth.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 talk about a development keeping markets and investors on alert: a re-escalation of U.S. China trade tensions. It's Friday, October 17th at 10am in New York. Since April, the U.S. and China have been in what we've been calling a very delicate detente. Remember, President Trump paused the additional reciprocal tariffs after Liberation Day. Since then, we've been consistently skeptical that the pause was durable enough to actually allow the U.S. and China to come up with a full-fledged trade agreement. But now we're equally as skeptical that the current escalation will lead to a material disruption in the bilateral relationship. So, what happened last week? China announced stricter export controls on rare earths, which are really critical for manufacturing everything from electric vehicles to defense equipment and advanced electronics. So, in response, the Trump administration on Friday announced a proposed 100 percent tariff, said to go into effect November 1st across all Chinese exports to the U.S. That date matters because that's around the same time that Presidents Trump and Xi were scheduled to meet at the upcoming APEC Summit in South Korea. When we think about this most recent escalation, it's pretty significant because China accounts for about 70 percent of global rare earth mining, and 90 percent of processing and refining. A lot of countries around the world – the U.S. Japan, Korea, and Germany – all rely heavily on these imports from China. And so potential new export controls mean that every economy may have to start negotiating bilaterally with China to secure supplies, which raises the risk of supply chain disruption across Asia, Europe, and the U.S. Looking ahead, we're thinking about four potential scenarios for how the current U.S.-China trade tensions could play out. The most likely outcome, which is our base case, is a return to the recent status quo following a period of rhetorical escalation and likely a reset of expectations heading into this APEC meeting. That's because we think both the U.S. and China would prefer to maintain the existing equilibrium to an abrupt supply chain decoupling. That equilibrium is effectively chips for rare earths. So, the U.S. receives China's rare earths, and then in return the U.S. exports some of its chips to China. But that equilibrium doesn't necessarily mean that the temporary implementation of trade barriers like higher tariffs or more export controls are off the table. The broader trajectory we think will continue to point toward competitive confrontation, which is a bipartisan strategy that encompasses both these traditional trade tactics as well as unilateral domestic investment – either vis-a-vis direct federal spending, or the government taking more stakes in companies involved in these critical industries. So, think things like the IRA, the CHIPS Act, and other bipartisan pieces of legislation. So, in the near and medium term, expect to see these trade barriers persisting and a bipartisan push toward U.S. industrial policy, as the U.S. attempts to undergo selective de-risking from China. Our base case scenario anticipates further short-term tensions, but ultimately a limited agreement that avoids deep structural changes. We've also thought through some alternate scenarios. So, in one downside case, you could see temporary escalation past November 1st. Both sides could fully implement their proposed policies, but after doing so, come back to the status quo once the economic costs become apparent. A more severe downside scenario involves durable escalation. So, in this case, we would see both countries maintain trade barriers for an extended period. That outcome would see both the U.S. and China decide to change calculus on that equilibrium, so that no longer holds. And in that case, we could see a push toward decoupling and a significant strain on supply chains. Finally, our last scenario reflects a quick de-escalation in which heightened rhetoric actually acts as a catalyst for renewed negotiations and a potential framework agreement that could result in some tariffs, but most likely at lower levels than initially proposed. So, what does this all mean? In the base case, our economists expect China's GDP growth to slow to below 4.5 percent in the second half of 2025, with exports supported by robust non-U.S. shipments. Our equity strategists in this outcome see the volatility actually providing a dip buying opportunity, given that they see a rolling recovery that began earlier this year. However, a more durable escalation could possibly prolong China's deflation and necessitate further policy adjustments. Similarly, that outcome could negate the early cycle rolling recovery thesis here in the U.S. 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.

With Morgan Stanley’s European Leveraged Finance Conference underway, our Head of Corporate Credit Research Andrew Sheets joins Chief Fixed Income Strategist Vishy Tirupattur to discuss private credit, M&A activity and AI infrastructure.Read more insights from Morgan Stanley.----- Transcript -----  Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan StanleyVishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Andrew Sheets: Today, as we're hosting the Morgan Stanley European Leveraged Finance Conference, a discussion of three of the biggest topics on the minds of credit investors worldwide.It's Thursday, October 16th at 4pm in London.Vishy, it's so great to catch up with you here in London. I know you've been running around the world, quite literally, talking to investors about some of the biggest debates in credit – and that's exactly what we wanted to talk. We're here at Morgan Stanley's European Leveraged Finance Conference. We're talking with investors about the biggest debates, the biggest developments in credit markets, and there are really kind of three topics that stand out.There's what's going on with private credit? What's going on with the merger and acquisition, the M&A cycle? And how are we going to fund all of this AI infrastructure?And so maybe I'll throw the first question to you. We hear a lot about private credit, and so maybe just for the listener who's looking at a lot of different things. First, how do you define it? What are we really talking about when we're talking about private credit?Vishy Tirupattur: So, Andrew, when we talk about private credit, the most common understanding of private credit is lending by non-banks to small and medium sized companies. And we probably will discuss a bit later that this definition is actually expanding much beyond this narrow definition. So, when you think about private credit and spend time understanding what is the credit in private credit, what it boils down to is on average, on a leveraged basis, the credit in private credit is comparable to, say CCC to B - on a coverage basis to the public markets.So, the credits in the private credit market are weaker. But on the other hand, the quality of covenants in these deals is significantly better compared to the public credit markets. So, that's the credit in private credit.Andrew Sheets: So, Vishy, with that in mind then, what is the concern in this market? Or conversely, where do people see the opportunity?Vishy Tirupattur: So, the concern in this market comes from the opaqueness in these deals. Many of these private credit borrowers are not public filers. So not much is well known about what the underlying details are. But in a sense, a good part of the public markets, whether it's in high yield bonds or in the public, broadly syndicated leveraged loans are also not public filers. So, there is information asymmetry in those markets as well.So, the issue is not the opaqueness of private markets, but opaqueness in credit in general. But that said, when you look at the metrics of leverage, coverage, cash on balance sheet…Andrew Sheets: Because we can get some kind of high-level sense of what is in these portfolios...Vishy Tirupattur: Yeah. And we look at all those metrics, and we look at a wide range of metrics. We don't get to the conclusion that we are at a precipice of some systemic risk exposure in credit. On the other hand, there are idiosyncratic issues. And these idiosyncratic issues have always been there and will remain there. And we would expect that the default rates are sticky around these levels, which are slightly above the long-term average levels, and we expect that to remain.Andrew Sheets: So, you may see more dispersion within these portfolios. These are weaker, more cyclical, more levered companies. But overall, this is not something that we think at the moment is going to interrupt the credit cycle or the broader markets dynamic.Vishy Tirupattur: Absolutely. That is exactly where we come down to.So, Andrew, let me throw another question back at you. There's a lot of talk of growing M&A, growing LBO activity. And that could potentially lead to some challenges on the credit front. How do you look at it?Andrew Sheets: So, I'd like to actually build upon your answer from private credit, right? Because I think a lot of the questions that we're getting from investors are around this question of how far along in this always, kind of, cyclical process; ebb and flow of lending aggressiveness are we? And, you know, this is a cycle that goes back a hundred years – of lenders becoming more conservative and tighter with lending. And then as times get good, they become somewhat looser. And initially that's fine. And then eventually something, something happens.And so, I think we've seen the development of new markets like private credit that have opened up new lending opportunities and then also new questions. And I think we've also seen this question come up around M&A and corporate activity.And as we start to see headlines of very large leveraged buyouts or LBOs, as we start to see more merger and acquisition – M&A – activity coming back; something we've at Morgan Stanley been believers in. Are we really starting to see the things that we saw in the year 2000, or in the year 2007, when you saw very active capital markets actually coinciding with kind of near the peak of equity markets near the top of major market cycles.And in short, we do not think we're there yet. If we look at the actual volumes that we're seeing, we're actually a little bit below average in terms of corporate activity. There's really been a dearth of corporate activity after COVID. We're still catching up. Secondly, the big transactions that we're seeing are still more conservatively structured, which isn't usually what you see right at the end. And so, I think between these two things with still a lot of supportive factors for more corporate activity, we think we have further to go.Vishy Tirupattur: On that point, Andrew, I think if you look at the LBOs that are happening today versus the LBOs that happened in the 2007 era, the equity contribution is dramatically different. You know, equity to debt, these LBOs that are happening today [are] of a substantially higher amount of equity contribution compared to the LBOs we saw pre-Financial Crisis…Andrew Sheets: That's such a great point. And the listener may not know this, but Vishy and I were working together at Morgan Stanley prior to the Financial Crisis, and we were working in credit research when a lot of these LBOs were happening, and…Vishy Tirupattur: And I used to be tall and good looking.Andrew Sheets: (laughs) And they were just very different. We're still not there. If you go back and pull the numbers, you're looking at transactions still that are far more conservative than what we saw then. So, you know, this activity is cyclical, and I think we do have to watch deregulation, right? You saw a lot of regulations come in after the Financial Crisis that led to more conservative lending. If those regulations get rolled back, we could really move back towards more aggressive lending. But we haven't quite seen that yet.Vishy Tirupattur: Absolutely not.Andrew Sheets: And Vishy, maybe the third question that comes up a lot. We've covered private credit, which is very topical. We've covered kind of corporate aggressiveness. But maybe the icing on the cake. The biggest question is AI – and is AI spending?And it just feels like every day you come into the office and there's another headline on CNBC or Bloomberg about another mega AI funding deal. And the question is, okay, where's all that money going to come from?And maybe some of it comes from these companies themselves. They’re very profitable, but credit might have to fill in some of the gaps. And you and some of our colleagues have done a lot of work on this. Where do you think kind of the lending story and the borrowing story fits into this broader AI theme?Vishy Tirupattur: Our estimate of simply data center related CapEx requirements are close to $3 trillion. You add the power required for the data centers and add another $300-400 billion. So, a lot of this CapEx will come from – roughly about half might come from the operating cash flows of the hyperscalers. But the rest, so [$]1.5 trillion plus, has to come through various channels of credit.So, unsecured corporate credit, we think will play a fairly small role in this. Of that [$]1.5 trillion plus, maybe [$]200 billion to come from unsecured credit issuance by these hyperscalers, and perhaps some of the securitized markets, such as ABS and CMBS that rely on stabilized cash flows may be another 1[$]50 billion. But a different version of private credit, what we will call ABF or asset based finance, will play a very big role. So north of [$]800 billion we think will come from that kind of a private credit version of investment grade, or a private credit markets developing. So, this market is very much in the developmental mode.So, one way or the other, for AI to go from where it is today to substantially improving productivity and the earnings of companies that has to go through CapEx; and that CapEx needs to go through credit markets.Andrew Sheets: And I think that is so fascinating because, right Vishy, so much of the spending is still ahead of us. It hasn't even really started, if you look at the numbers.Vishy Tirupattur: Absolutely. We are in the early stages of this CapEx cycle. We should expect to see a lot more CapEx and that CapEx train has to run through credit markets.Andrew Sheets: So, Vishy, there's obviously a lot of history in financial markets of larger CapEx booms, and some of them work out well, and some of them don't. I mean, if you are trying to think about some of the dynamics of this funding for AI and data centers more broadly versus some of these other CapEx cycles that investors might be familiar with. Are there some similar dynamics and some key differences that you try to keep in mind?Vishy Tirupattur: So, in terms of similarities, you know, they're big numbers, whichever way you cut it, these numbers are going to be big dollar numbers.But there are substantial differences between the most recent CapEx boom that we saw towards the end of the late 90s, early 2000s; we saw a massive telecom boom, telecom related CapEx. The big difference is that spending was done by – predominantly by companies that had put debt on their balance sheet. They were already very leveraged. They were just barely investment grade or some below investment grade companies with not much cash on their balance sheet.And you contrast that with today's world, much of this is being done by highly rated companies; the hyperscalers or between, you know, A+ to AAA rated companies, with a lot of cash on their balance sheets and with very little outstanding debt on their part.On top of that, the kind of channels that exist today, you know, data center, ABS and CMBS, asset-based finance, joint venture kind of financing. All of these channels were simply not available back then. And the fact that they all are available today means that this risk of CapEx is actually much more widely distributed.So that makes me feel a lot better about the evolution of this CapEx cycle compared to the most recent one we saw.Andrew Sheets: Private credit, a rise in M&A and a very active funding market for AI. Three big topics that are defining the credit debate today. Vishy, thanks for taking the time to talk.Vishy Tirupattur: Andrew, always fun to hang with youAndrew Sheets: And thank you for listening. If you enjoy Thoughts on the Market, please leave us review wherever you listen and tell a friend or colleague about us today. 

Our Chief Asia Economist Chetan Ahya discusses how youth unemployment will impact future growth and stability across China, India, and Indonesia.Read more insights from Morgan Stanley.----- Transcript -----  Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today – Asia’s young workforce is facing a significant challenge. How a soft labor market will shape everything from consumer demand to social stability and long-term growth. It’s Tuesday, October 14th, at 2pm in Hong Kong. Across Asia, a concerning trend is emerging. The region’s younger generations face mounting challenges in the job market. Asia’s youth unemployment averages 16 percent, which is much higher than the U.S. rate of 10.5 percent. Youth unemployment rates are running two to three times higher than headline unemployment rates. The underlying situation is even weaker than what is represented by [the] unemployment rate. And within Asia, the challenge is most acute in China, India, and Indonesia, the three most populous economies. Youth unemployment rates for these three economies are running close to double, as compared to other economies in Asia. Now let’s take a closer look at China. The urban youth unemployment rate, i.e. for 16–24-year-olds, has steadily increased since 2019. What’s driving this rise in unemployment? A mismatch in labor demand and supply. The number of university graduates surged 40 percent over the last five years to close to 12 million. But economy-wide employment has declined by 20 million over the same period. Entry-level wages are sluggish, and automation plus subdued services growth mean fewer opportunities for newer entrants.  Turning to India, their unemployment rate is the highest in the region at 17.6 percent. Employment creation has been subdued. And on top of it, India also faces another issue: underemployment. Post-COVID, primary sector – i.e. farming and mining – employment rose by 50 million, reaching a 17-year high. Note that these jobs are relatively low productivity jobs. And this is explained by the fact that [the] primary sector now accounts for less than 20 percent of GDP but it employs about 40 percent of the workforce. That’s a sign of COVID-induced underemployment. How fast must growth be to tackle the unemployment challenge? In our base case, India's GDP will grow at an average of 6.5 percent over the coming decade – and this will mean that India will be one of the fastest-growing economies globally. But this pace of growth will not be sufficient to generate enough jobs. To keep [the] unemployment rate stable, India needs an average GDP growth of close to 7.5 percent; and to address underemployment, the required run rate in GDP growth must be even higher at 12 percent. Shifting to Indonesia, its youth unemployment rate is the second highest in the region. Moreover, close to 60 percent of jobs are in the informal sector. And many of these jobs pay below minimum wage. Similar to India, both these trends signal underemployment. The key reason behind this challenge is weak investment growth. Indonesia's investment-to-GDP ratio has dropped meaningfully over the last five years. So, what’s the way forward? For China, shifting towards consumption and services could reduce labor market mismatches. And for India and Indonesia, boosting investment is key. India in particular needs much stronger growth in its industrial and exports sectors. If reforms fall short, policy makers may need to fall back on increasing social welfare spending to manage social stability risks. 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.

Morgan Stanley analysts Betsy Graseck and Michael Cyprys discuss what’s driving unprecedented consolidation for asset and wealth management firms.Read more insights from Morgan Stanley.----- Transcript -----  Betsy Graseck: Welcome to Thoughts on the Market. I'm Betsy Graseck, Morgan Stanley's U.S. Large Cap Banks Analyst and Global Head of Banks and Diversified Finance Research.Michael Cyprys: And I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers and Exchanges Research.Betsy Graseck: The asset management and wealth management industries are on the cusp of major consolidation. We're going to unpack today what's driving the race for scale and what it means for investors and the industries at large.It’s Monday, October 13th at 4pm in New York.Mike, before we dive into the setup for M&A, I did want to get out here on the table. What's your outlook for the asset management industry?Michael Cyprys: Sure. So, asset management today is, call it, $135 trillion industry, in terms of assets under management that are managed for a fee. We expect it to grow at about an 8 percent clip annually over the next five years. And that's driven by faster growth in private markets, solutions and passive strategies, while we expect to see slower growth in the core active arena.Two key drivers of growth there. First private markets. We expect to see rising investor allocations from both institutional investors, but also more importantly from retail investors that remain early days in accessing the asset class. So, as we look out in the coming years, we do expect this democratization of private markets to play out, and we see that being helped by product innovation, investor education and technology advances that are all helping unlock access.Second growth driver is solutions. And I think you're looking at me a little dazed on what's solutions. And by that we really mean products and strategies that are addressing demographic challenges around aging populations. So, think about that as solutions that provide for retirement income, as well as those that offer tax efficient solutions. So, think about that as model portfolios, as well as sub-advisory mandates. We also expect to see growth in outsourced Chief Investment Officer, OCIO mandates and broadly retirement focused products.So that's the asset management industry in terms of our outlook. Betsy, what's your outlook for the growth in the wealth management industry?Betsy Graseck: Well, somewhat similar, but a little bit slower – off of a larger base. What does that mean? So, we are looking for global growth in wealth management of 5.5 percent CAGR, and that is off of a base of [$]301 trillion, which is intriguing, right? Because that's larger than the [$]135 trillion you mentioned for asset management.So, in wealth, we were expecting [$]301 trillion in 2024 grows to [$]393 trillion in 2029. And within the wealth industry, what we see as the driver for incremental opportunities here is both in the ultra high net worth segment as well as the affluent segments, as client needs evolve and technology delivers improving efficiencies.And I think one of the interesting things here – as we think about the look forward from industry perspective – is the fact that both asset management and wealth management industries have been very fragmented for a very long time, especially relative to other financial industries. I think one reason is that they need less capital to operate successfully.But Mike, back to the asset management industry, specifically – deal activity seems to be inching up. What are you attributing this increase in M&A to?Michael Cyprys: Yeah, so we do see M&A picking up, and we expect that to continue over the next couple of years. A number of reasons for that. First growth is becoming a bit more scarce, with clients working with fewer partners. And over the next five years, we expect the number of available slots to continue to decline upwards of a third, which concentrates growth opportunities.Betsy Graseck: Wait, wait, wait. Upwards of a third. And number of slots. When you say number of slots, you're talking about it from the asset manager client perspective…Michael Cyprys: Correct. From the asset owner standpoint or intermediary standpoint.Betsy Graseck: They're looking to consolidate their providers?Michael Cyprys: Correct.Betsy Graseck: Okay.Michael Cyprys: They're looking to work with fewer asset managers.Betsy Graseck: Mm-hmm.Michael Cyprys: At the same time, the winners are taking more share, right? So, our work shows that the largest firms are disproportionately capturing a larger share of net new money as they leveraged their scale to reinvest in capabilities as well as in relationships.And also, I'd point to the fact that we have seen a pickup in deal activity already. And we think that's going to lead more firms to consider strategic activity themselves, as they think and rethink what constitutes scale. And we think that that bar is rising…Betsy Graseck: Mm. Michael Cyprys: And firms are thinking about how to compete effectively as the landscape evolves. And look, this is all in the context of already a lot of challenges and changes happening as you think about evolving client needs. The rising cost of doing business, whether it's investing for growth or even harnessing AI, and that's all pressuring profitability. We think this is particularly a challenge for those mid-size money managers that are multi-asset, multi-liquid and global. Those with, call it, [$]0.5 trillion to [$]2 trillion in size, making them more likely to pursue consolidation, opportunities to bolster their capabilities and scale while also generating cost efficiencies.Betsy Graseck: So now looking forward, what type of deals do you expect and how does it differ from past years?Michael Cyprys: Sure. So, a few things are different than past years. First is that the deal activity is encompassing many forms of partnership. And we think that this experimentation around partnership will only accelerate. That allows, for example, for private market managers to access retail distribution without owning the end infrastructure and the last mile to the customer. It also allows traditional managers to provide their retail customers with access to high quality private market strategies from well-known and branded firms.Second is we see a broadening out of the types of acquisitions themselves when we talk about M&A, right? So, three types of deals. First are deals within the same vertical or intersector. So, think about this as an asset manager buying another asset manager to acquire capabilities, to gain cost synergies or bolster distribution.Second type of deals that we're seeing are ones that expand beyond one's own vertical. So intersector deals. So, asset management combining with wealth or insurance, for example, where firms would seek to own a larger, greater portion of the overall value chain. And so, these firms are getting closer to that end client. For example, an asset manager getting closer to that end customer. And the third type being financial sponsor deals where a sponsor is investing either as an in an asset or a wealth manager.Now you didn't ask me around the historical outcomes of M&A. But I would say that the historical outcomes have been mixed in the asset management space. But here we think that the opportunity ahead is so bright that we think firms will find ways to navigate and pursue strategic activity. But it does require addressing some of the culture and integration challenges that have plagued some of the deals in the past.Betsy Graseck: Okay.Michael Cyprys: So, Betsy, what do you see as the key drivers of consolidation in wealth management?Betsy Graseck: There's several. From the wealth manager side, number one is an aging population of advisor and advisor-owners, and the need to address succession and how to best serve their clients when passing on their book of business. So, we've got succession issues as the number one driver. But additionally, the need for scale is clearly getting higher and higher – given the costs of IT infrastructure rising, the needs to be able to leverage AI effectively and to manage your cyber risk effectively. These are just some of the drivers of desire to merge from the wealth manager perspective.Second. We have an increasing buying pool. If you just look at the large cap banks, for example. Significant amount of excess capital. Could we see some of that excess capital be put to work in the wealth management industry? To me, that would make sense. Why? Because wealth management is one of the best, if not the best financial institution service for shareholders. It is a high ROE business. It also is a business that commands a high multiple in the stock market.So, we would not be surprised to see activity there over the course of the next several years. So, Mike, thanks for joining me on the show today.Michael Cyprys: Thanks, Betsy. Always a pleasure.Betsy Graseck: And to our listeners, 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. 

Our U.S. Thematic and Equity Strategist Michelle Weaver discusses how the largest intergenerational wealth transfer in history could reshape saving, spending and investment behavior across America.Read more insights from Morgan Stanley.----- Transcript -----    Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and Equity Strategist.Today, a powerful force reshaping the financial lives of millions of Americans: inheritance.It's Friday, October 10th at 10am in New York.Americans are living longer and they're passing on their wealth later. Longevity is one of Morgan Stanley Research's four key themes, and this is an interesting element of longevity. As baby boomers age, they're expected to transfer their wealth to Gen X, millennials and Gen Z to the tune of tens or even hundreds of trillions of U.S. dollars.Estimates vary widely, but the amounts are unprecedented. And so, inheritance isn't just a family milestone; it's becoming an important cornerstone of financial planning and longevity. And understanding who's receiving, expecting, and using their inheritances is key to forecasting how Americans save, spend, and invest.According to our latest AlphaWise survey, 17 percent of U.S. consumers have received an inheritance, and another 14 percent expect to receive one in the future. Younger Americans are especially optimistic. Their expectations split evenly between those anticipating an inheritance within the next 10 years and those expecting it further out.But here's the kicker; income plays a huge role. Only 17 percent of lower income consumers report receiving or expecting an inheritance, but that number jumps to 43 percent among higher income households highlighting a clear wealth divide.What about the size of the inheritance? In our survey, those who received or expect to receive an inheritance fall broadly into three categories. About half reported amounts under $100,000 dollars. For about a third, that amount rose to under $500,000. And then meanwhile, 10 per cent reported an inheritance of half a million dollars or more.Younger consumers tend to report smaller amounts, while inheritance size rises with income. One important thing to remember about our survey though, is it looks more at the average person. We are missing some of those very high net worth demographics in there where I would expect inheritance to rise much higher than half a million.And so, when we think about this, how will recipients use this wealth? That's a really important question. The majority, about 60 percent, say they have or will put their inheritance towards savings, retirement, or investments. About a third say they'll use it for housing or paying down debt. Day-to-day consumption, travel, education and even starting a business or giving to charity also featured in the survey responses – but to a lesser extent.The financial impact of inheritance is significant: 46 percent of recipients say it makes them feel more financially secure; 40 percent cite improvements in savings; and 22 percent associate it with increased spending. Some even report retiring earlier or lightening their workloads.Inheritance trends are shaping consumer behavior and have the power to influence spending patterns across industries. To sum it up, inheritance isn't just a family matter, it's a market mover.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.

Diving into the history of Morgan Stanley’s first bond deal, our Head of Corporate Credit Research Andrew Sheets explains the value of high-quality corporate bonds.Read more insights from Morgan Stanley.----- Transcript -----    Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today, a look at the first bond that Morgan Stanley helped issue 90 years ago and what it might tell us about market uncertainty. It's Thursday, October 9th at 4pm in London. In times of uncertainty, it's common to turn to history. And this we think also applies to financial markets. The Great Depression began roughly 95 years ago. Of its many causes, one was that the same banks that were shepherding customer deposits were also involved in much riskier and more volatile financial market activity. And so, when the stock market crashed, falling over 40 percent in 1929, and ultimately 86 percent from a peak to a trough in 1932, unsuspecting depositors often found their banks overwhelmed by this market maelstrom. The Roosevelt administration took office in March of 1933 and set about trying to pick up the pieces. Many core aspects that we associate with modern financial life from FDIC insurance to social security to the somewhat unique American 30-year mortgage rose directly out of policies from this administration and the financial ashes of this period. There was also quite understandably, a desire to make banking safer. And so the Glass Steagall Act mandated that banks had a choice. They could either do the traditional deposit taking and lending, or they could be active in financial market trading and underwriting. In response to these new separations, Morgan Stanley was founded 90 years ago in 1935 to do the latter. It was a very uncertain time. The U.S. economy was starting to recover under President Roosevelt's New Deal policies, but unemployment was still over 17 percent. Europe's economy was struggling, and the start of the Second World War would be only four years away. The S&P Composite Equity Index, which currently sits at a level of around 6,700, was at 12. It was into this world that Morgan Stanley brought its first bond deal, a 30-year corporate bond for a AA rated U.S. utility. And so, listeners, what do you think that that sort of bond yielded all those years ago? Luckily for us, the good people at the Federal Reserve Bank of St. Louis digitized a vast array of old financial newspapers. And so, we can see what the original bond yielded in the announcement. The first bond, Morgan Stanley helped issue with a 30-year maturity and a AA rating had a yield of just 3.55 percent. That was just 70 basis points over what a comparable U.S. treasury bond offered at the time. Anniversaries are nice to celebrate, but we think this example has some lessons for the modern day. Above anything, it's a clear data point that even in very uncertain economic times, high quality corporate bonds can trade at very low spreads – much lower than one might intuitively expect. Indeed, the extra spread over government bonds that investors required for a 30-year AA rated utility bond 90 years ago, in the immediate aftermath of the Great Depression is almost exactly the same as today. It's one more reason why we think we have to be quite judicious about turning too negative on corporate credit too early, even if the headline spreads look low. 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, please tell a friend or colleague about us today.

An extended U.S. government shutdown raises the risk for weaker growth potential. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas suggests key checkpoints that investors should keep in mind.Read more insights from Morgan Stanley.----- Transcript -----   Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Today: Three checkpoints we’re watching for as the U.S. government shutdown continues. It’s Wednesday, October 8th at 10:30am in New York. The federal government shutdown in the United States has crossed the one week mark. But if you’re watching the markets, you might be surprised at how calm everything seems. Stocks are steady. Bond yields haven’t moved much, and volatility’s low. It’s more or less the scenario my colleague Ariana and I had talked about in anticipation of the impasse in Washington. We’d noted the potential for uncertainty for investors and market reaction depending on how long the shutdown would last. So that raises a big question: what, if anything, about this government shutdown could shake investor confidence and start moving markets? The question is worth considering. Prediction markets now suggest the most likely outcome is that the government shutdown will not end for at least another week. And as we’ve seen in past shutdowns, the longer it drags on, the more likely it is to matter. That’s because risks to the economic outlook start to accumulate, and investors eventually have to start pricing in a weaker growth outlook. There’s a few checkpoints we’re watching for – for when investors might start feeling this way. First, the missed paycheck for furloughed federal workers. The first instance of this comes in a few days. Less pay naturally means less spending. Studies suggest that spending among affected workers can drop by two to four percent during a shutdown. That’s not huge for GDP at first; but it’s a sign the shutdown is having effects beyond Washington, DC. Second, this time might be different because of potential layoffs. The administration has hinted that agencies could move to permanently cut staff — something we haven’t seen before. Unions have already said they’d challenge that in court. But if those actions start, or even if legal uncertainty grows around them, it could raise the economic stakes. Third, we’re watching for real disruptions to economic activity resulting from the shutdown. The last shutdown ended when air traffic in New York was curtailed due to a shortage of air traffic controllers. We’re already seeing substantial air traffic delays across the country. More substantial delays or ground halts obviously impede economic activity related to travel. And if such actions don’t coincide with signals from DC of progress in negotiating a bill to reopen the government, investors’ concern could grow. So here’s the bottom line: markets may be right to stay calm — for now. But the longer this shutdown lasts, the more likely one of these pressure points pushes investors to rethink their optimism. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.