How should investors view a world where there may be room for more than one norm when it comes the balance of power among economies and commerce?
In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.
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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, June 24th, at 11:30a.m. in New York.
A funny thing happened on Monday night. A key trade adviser to the president went on TV and said the phase one trade deal with China was "over." He quickly walked it back and the president clarified by tweet within a couple hours that the trade deal was still on, but not before S&P market futures dropped nearly 2%. So what does this tell us? Investors are worried about and ready to react to trade tensions with China. But the solution probably isn't in looking to the election, but in thinking and investing for a world where these tensions are the norm.
Why won't the election make this go away? Some investors think it will. In our election investor survey, those identifying a Democratic win as a bullish outcome did so because they thought it would come with reduced tariffs. But we don't see that happening. Hawkishness towards China has now become bipartisan. In our battleground survey, a majority of voters of all stripes expressed meaningful concern with the role of China in the economy. Maybe the tone in the approach towards China could change. But we don't think the policies will meaningfully.
So we think it may be time to embrace something they call "multipolarity" in the world of international relations. It's the idea that there's more than one norm globally when it comes to power, including the power of the economy and commerce. We see a trend in this direction, with the U.S. and China increasingly drawing up trade barriers between them, and Europe increasingly caught in the middle, wanting to preserve a free trade path. Our new Morgan Stanley research Blue Paper, "Investing for a Multipolar World," shows that this will have a variety of positive and negative impacts on companies globally. So if you're concerned about U.S. China trade tensions enduring, you might want to focus on two groups of companies: The first we call "Slowbalizers," those that benefited from globalization but may now face trade barriers because they use or produce technology that's sensitive to national and economic security concerns in the U.S. or China. Expect headwinds with these companies, which we expect will come from sectors like semiconductors and capital goods. The second we call "emerging regional champions." Companies who are out competed by global rivals may now benefit from those rivals facing trade restrictions. Asia Internet and U.S. enterprise software companies fit the bill here and may see some tailwinds.
The report goes into greater depth on how this multipolar world will impact over 500 companies across 35 global sectors. We'll keep you updated here on how this trend develops.
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