About this episode
After a year of falling assets, 2023 has started strong for global markets. Chief Cross-Asset Strategist Andrew Sheets outlines which markets could sustain their momentum. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 3rd at 2 p.m. in London. 2022 was a year where almost all assets fell. 2023 so far has been the opposite. Stocks in China, Japan, Europe and the U.S. are all off to unusually good starts. Meanwhile, U.S. long term bonds have actually risen more than the stock market. But behind this widespread strength are some rather different stories. I want to talk through these and how they inform our view of where this strength could continue, or not. One set of strength is coming out of Asia, where China's reopening from COVID has been much more aggressive than expected. This is a material change of policy in the world's second largest economy, which has persisted despite a large initial rise in case numbers. That persistence has made our analysts more confident that large amounts of consumer spending could still be unlocked. While valuations in emerging markets and China equities have risen as a result of this reopening, we think they remain reasonable, and therefore our overweight equities in China, Korea and Taiwan. The second story is Europe. China's rebound is part of the narrative here, but we think a larger driver is energy. A mild winter and abundant supplies of U.S. LNG have caused the price of natural gas in Europe to fall by more than 60% since early December, and by more than 80% since late August. This decline has specific benefits reducing inflation while simultaneously easing pressures on economic growth, a proverbial win-win. But falling energy prices also have a more general benefit. For much of the last six months, the specter of a severe energy shortage has hung over Europe, discouraging investment. With the existential threat of energy shortages easing, the region is once again attracting capital. Flows by U.S. investors into European stock ETFs, for example, is on the rise, and we think continued investment flows into the region will help boost the euro. The third story, the U.S. story, is different still. Better growth in China and Europe are part of this, but we think the bigger issue is growing confidence of a so-called soft landing, where growth slows enough to reduce inflation, but not so much to cause a recession. That soft landing scenario is the base case forecast of Morgan Stanley's economists. But on several key variables, major uncertainties remain. On the one hand, the index of economic leading indicators or measures of new manufacturing orders have been surprisingly weak. But today's U.S. labor market report was extremely strong, with the lowest unemployment rate since 1969. And while inflation has been easing, every update here will remain important, including the next reading of the Consumer Price Index on February 14th. Global markets have been almost universally strong, but the drivers are quite different. We think the stories in Asia and Europe have the best chance of persisting throughout the year, while the U.S. story remains more data dependent. Stay tuned. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.