Morgan Stanley IM: The Soft-Landing Super Bowl: Here’s Our Playbook

Morgan Stanley IM: The Soft-Landing Super Bowl: Here’s Our Playbook
Fixed Income

Jim Caron, Co-Lead Global Portfolio Manager and Co-Chief Investment Officer, Global Balanced Risk Control Team, shares his macro thematic views on key market drivers.

08.02.2023 | 08:06 Uhr

Jim Caron

  • If we can make the analogy between economic data releases competing to create the narrative of the market and a football game, then last week was the Super Bowl.
  • The winner? The side that supported a soft landing. In fact, Fed Chairman Jerome Powell delivered that message as such in his presser last Wednesday.
  • Now what? The consensus is pushing the previous expectation for a softening of market prices from the first half of 2023 into the second half. This was the big change based on last week’s data.
  • In simple terms, we’ve gone from a ‘‘dip, then rip” scenario to “rip, then dip” for market prices. Importantly, the consensus is not ceding an economic and market swoon at least at some point this year.
  • We’ve been consistent about where we stand on this, believing investors are holding too much cash, essentially underinvested and vulnerable to a market rally. This provides a technical advantage for the market to overemphasize positive economic data and push prices higher.
  • As we’ve said before, “risk-on” is a risk, and like any other risk needs to be hedged. The market is now vulnerable to chase prices higher.
  • But it’s not just about the technicals. Fundamentals matter too. Last week’s economic data was a turning point for many to change their outlook.
  • Remember too though that correlations across asset classes remain high, a risk that need to be addressed. As we like to say it’s better to be balanced than defensive, and portfolio construction is the key.

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Risk Considerations

Diversification does not eliminate the risk of loss. There is no assurance that the Strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the Underlying Portfolios may be incorrect in light of actual market conditions and the Portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. Equity values fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds ETFs and other Investment Funds, the portfolio absorbs both its own expenses and those of the ETFs and Investment Funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio.

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