What are the policies and trends shaping 2018? Morgan Stanley Research identified 25 global debates—about countries, sectors and stocks—where its views diverge from the market consensus.
Will China's policy tightening help or hinder investors in 2018? Are investors underestimating Japan’s growth prospects? Are malls in Latin America insulated from ecommerce pressure?
While these debates are wide ranging, they all have the potential to redefine industries in the year ahead.
Against a backdrop of global synchronous growth, technological disruption, policy shifts and geopolitical developments, there are no shortage of topics for investors to consider as 2018 advances. To bring some of these questions into focus, Morgan Stanley Research recently identified 25 global debates where the firm’s views diverge decidedly from market consensus.
While these debates are wide ranging—from stock-specific analyses and sector trends to big-picture country views—they all have the potential to redefine industries, move asset prices and affect performance by year's end.
Here are 4 quick takes on some of the debates currently capturing investors’ attention:
The world's third largest economy has been mired by slow growth for decades and many investors expect the same in the year to come. Here's where Morgan Stanley's view diverges. “We think the recent revival of nominal growth is a big change for Japan," says Chief Japan Economist Takeshi Yamaguchi, noting that nominal GDP grew in 2017 for the sixth straight year, the longest stretch since 1992 to 1997.
In fact, Japan's nominal GDP recently reached an all-time high, exceeding the previous peak in the late 1990s. Several factors, including a synchronous global recovery and accommodating financial conditions, suggest that above-trend real GDP growth should continue in 2018 and 2019.
With Japan's unemployment rate now at its lowest in 23 years, moreover, wage growth should gradually pick up, further helping the country break out of its pattern of deflation.
“We have also seen various positive changes at the micro level, including improving corporate governance and companies' shareholder returns policies," Yamaguchi says.
China always plays a prominent role in global investment debates, and this year is no exception. The current market view is one of apprehension, given the country's continued de-capacity and deleveraging efforts, and the new emphasis on achieving high-quality growth rather than hitting GDP targets.
Morgan Stanley's view is that other positive trends will partly offset the effects of deleveraging and capacity tightening. “While we expect a policy-induced moderation, a growth slump is unlikely given robust exports and consumption, a shrinking housing inventory and improved policy coordination," says Chief China Economist Robin Xing.
In fact, consumption is becoming the key growth driver, with its share of real GDP growth likely rising further to 63% in 2018 (vs. 59% in 2017) on the back of a resilient job market and wage growth. Meanwhile, China's real export growth could remain above 5% in 2018, structurally higher than the average of 3% from 2014 through 2016. The outlook is further strengthened as the country's oversupply of housing has reached 4-year low and is expected to decline further.
All told, better coordination among economic policymakers paves the way for more financial stability and less market uncertainty. “We believe growth is becoming more self-sustaining and less debt-reliant," Xing says.
While the macro outlook for China affects many industries, the market is particularly interested in what it means for banks: Lower GDP growth could lead to slower growth of bank loans and raise issues with non-performing loans.
Morgan Stanley's view is more constructive. “We see a new era for asset yield trends, supported by emerging supply and demand dynamics in industrial sectors and a policy shift to more rational credit growth," says Chinese Banking analyst Richard Xu. “These trends could support bank asset yield increases and a multiyear rebound in profit growth at quality banks."
The consensus view is that slow Internet penetration and skepticism about ecommerce will keep shopping centers in Latin America alive for the foreseeable future. Yet, Morgan Stanley thinks real estate investors in Latin America should rethink those assumptions.
“Online retailers have trained their sights on Brazil and Mexico and channel checks show that other physical retail players are investing meaningfully in ecommerce platforms," says analyst Nikolaj Lippmann. The dynamic is not unlike what has unfolded in U.S. markets, where foot traffic and sales in non-destination retail centers has dropped off.
Top-tier malls in major urban areas may hold their ground. Owners of bottom- and mid-tier properties, however, may have to brace for rising vacancies and slumping rental prices.