The valuations of stocks and corporate bonds, which have been driven largely by macroeconomic factors since 2020, are finally starting to reflect companies’ underlying performance. Our Head of Corporate Credit Research explains what that means for active investors.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about trends across the global investment landscape – and how we put those ideas together.
It's Friday, February 23rd at 2pm in London.
In theory, investing in corporate securities like stocks or corporate bonds should be about, well, the performance of those companies. But since the outbreak of COVID in 2020, financial markets have often felt driven by other, higher powers. The last several years have seen a number of big picture questions in focus: How fast could the economy recover? How much quantitative easing or quantitative tightening would we see? Would high inflation eventually moderate? And, more recently, when would central banks stop hiking rates, and start to cut.
All of these are important, big picture questions. But you can see where a self-styled investor may feel a little frustrated. None of those debates, really, concerns the underlying performance of a company, and the factors that might distinguish a good operator from a bad one.
If you’ve shared this frustration, we have some good news. While these big-picture debates may still dominate the headlines, underlying performance is starting to tell a different story. We’re seeing an unusual amount of dispersion between individual equities and credits. It is becoming a market of many.
We see this in so-called pairwise correlation, or the average correlation between any two stocks in an equity index. Globally, that’s been unusually low relative to the last 15 years. Notably options markets are implying that this remains the case. We see this in credit, where solid overall performance has occurred along-side significant dispersion by sector, maturity, and individual issuer, especially in telecom, media and technology.
We see this within equities, where my colleague Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist, notes that the S&P 500 and global stocks more broadly have decoupled from Federal Reserve rate expectations.
And we see this in performance. More dispersion between stocks and credit would, in theory, create a better environment for Active Managers, who attempt to pick those winners and losers. And that’s what we’ve seen. Per my colleagues in Morgan Stanley Investment Management, January 2024 was the best month for active management since 2007.
The post-COVID period has often felt dominated by large, macro debates. But more recently, things have been changing. Individual securities are diverging from one another, and moving with unusual independence. That creates its own challenges, of course. But it also suggests a market where picking the right names can be rewarded. And we think that will be music to many investors' ears.
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.
Will the U.S. Presidential Election Change Fed Policy?
What Matters Most to Markets in the U.S. Election
Taking the Long View
Chasing the End of the Economic Cycle
Special Encore: Andrew Sheets: Why 2024 Is Off to a Rocky Start
Mexico Nearshoring Keeps Going Strong
Three Investment Themes for 2024 and Beyond
The Growth Outlook for China’s Tech Sector
What’s Next for Money Market Funds?
The Path Ahead for Natural Gas and Shale
Will Global Oil Markets Surprise In 2024?
Are These Gen AI’s Next Big Winners?
Will Anti-Obesity Drugs Disrupt the MedTech Industry?
Andrew Sheets: Why 2024 Is Off to a Rocky Start
Can Japanese Equities Rally in 2024?
New Year, New Investment Themes?
2024 U.S. Autos Outlook: Should Investors Be Concerned?
End-of-Year Encore: Macro Economy: The 2024 Outlook Part 2
End-of-Year Encore: Macro Economy: The 2024 Outlook
End-of-Year Encore: 2024 Asia Equities Outlook: India vs. China
Create your
podcast in
minutes
It is Free
The emPOWERed Half Hour
Now, What’s Next?
Access and Opportunity
At Scale: A Sustainability Podcast