By Michael Zezas, Head of Global Thematic Research at Morgan Stanley, via ZeroHedge
What do you get when 45 global research analysts gather in a room for two days to debate secular market trends? A plan. Amid rapid change, Morgan Stanley Research views concentrating on multiyear secular trends as an opportunity. In markets where short-term focus has become the norm (i.e., the average equity holding period has declined from eight years in the 1960s to six months today), it stands to reason that there’s less competition and more potential alpha to be found from analyzing the market impacts of longer-term trends. A collaborative, cross-asset culture has long been core to our mission, and in the spirit of debate and collaboration, we gathered analysts from around the globe to identify the key secular themes that Morgan Stanley Research should focus on this year.
Our dialogue made it clear that collaboration can eliminate blind spots for investors who are grappling with complex global themes. The agenda for our meeting included over 30 topics, none of them unfamiliar to market participants. But the discussion raised questions of broader concern, suggesting their answers could impact markets beyond what analysts could plausibly perceive or analyze individually. Many of these questions centered on knock-on impacts to inflation, interest rates, and the structure of markets themselves as the world undergoes major geopolitical and technological transformations.
This year, we’re taking our collaborative, in-depth work a step further, focusing on three key global transitions. We think these shifts will have a profound impact on markets for many years, but that a collaborative, cross-asset approach is required to master their complexity and produce meaningful insights for investors. The three transitions are: 1) Rewiring global commerce for a multipolar world; 2) Decarbonization; and 3) Accelerated technology diffusion. We plan to address them this year in collaborative in-depth reports, briefs, and podcasts.
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Rewiring global commerce for a multipolar world: With the shift from unbridled globalization to a world with more than one meaningful power base and commercial standard, companies and countries can no longer seek efficiencies through global supply chains and market access without factoring in geopolitical risks. While we first flagged this secular trend in 2018, we believe it became the consensus following Russia’s invasion of Ukraine and the West’s policy response, which created fresh trade barriers and incentives to realign supply chains.
What our analysts believe is less well understood are the practical implications of this rewiring. It makes sense in theory but is exceedingly complicated to execute in practice. Questions that surfaced in our discussions included: How long will it take? Will it lead to higher inflation and, if so, for how long? How will bond markets cope with financing the transition? Which companies and countries will benefit or suffer because of it? Having come early to this theme, we believe we are well placed to address these questions through a collaborative, multidisciplinary approach across economists, market strategists, and equity analysts.
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Decarbonization: Between 1) Europe’s problematic reliance on imported natural gas being laid bare by Russia’s invasion of Ukraine; 2) Growing EU policy support for energy transition infrastructure via the REPowerEU plan; and 3) The US appropriation of $400 billion+ to speed the adoption of clean energy technology, we think it’s fair to say that the developed world is accelerating its efforts to reduce carbon emissions. Still, this is a tall order. To reach ‘Net Zero by 2050’, carbon emissions would need to start falling by ~8% per year. Even during 2020, when the lockdowns heavily impacted mobility and global GDP shrank, emissions fell only 5%. In addition, the cost would be significant. The IEA estimates that the energy transition will cost an extra ~$70 trillion over the next 30 years, taking energy spending to 4.5% of global GDP from its current run rate of 2.5%.
Investors will need to grapple with both the positive and negative impacts of this transition. Our assessment of which companies, sectors, and macro markets will benefit or be challenged will be shaped by answers to the following questions: What are plausible scenarios for timelines? Which technological and policy developments and failures could speed or slow the transition? Which markets will finance it and how must they change and expand? Which companies will benefit and which are exposed to downside risks? What are the macroeconomic and geopolitical impacts of different paths to Net Zero?
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Tech diffusion: While this is hardly a new theme, what’s different and noteworthy are the speed and breadth with which tech diffusion can impact sectors that were previously untouched. Fragmented industries or those with high regulatory barriers – which have typically not reaped as much tech-driven productivity benefit – suddenly look poised for a multi-year transition via tech diffusion. Opportunities range from embedded finance in consumer user experience and payments, to tokenized assets allowing for greater global financial inclusion, to modernizing healthcare data ownership and biopharma R&D breakthroughs. We expect the next five years of tech diffusion to move meaningfully faster than the last five.
And what if we’ve identified the wrong themes? We’ll regroup and tell you about it. Our analyst group stressed the importance of remaining flexible. While not fans of the source, we see wisdom in the truism that “there are decades where nothing happens, and there are weeks where decades happen”. The past three years certainly underscored how unforeseen events, e.g., a global pandemic and a war in Europe, can give rise to new, dominant secular themes. Hence, if similar events occur in 2023, we’ll be quick to reorganize our thematic efforts, let you know, and deliver the collaborative insights you need to navigate new transitions.
Image by Pete Linforth from Pixabay
