Episode Details

Lisa Shalett is a member of Morgan Stanley’s Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

Our CIO for Wealth Management, Lisa Shalett, and our Head of Corporate Credit Research continue their discussion of the impact of interest rates on different asset classes, the high concentration of value in equity markets and more.

----- Transcript -----

Welcome to Thoughts on the Market, and to part two of a conversation with Lisa Shalett, chief investment officer for Morgan Stanley wealth management. 

I'm Andrew Sheets, head of corporate credit research at Morgan Stanley.

Today, we'll be continuing that conversation, focusing on how higher interest rates could impact asset classes, and also some recent work about the unusually high concentration of stocks within the equity market.

We begin with Lisa's very topical question about how higher interest rates might impact credit. 

Lisa Shalett: So, Andrew, let me ask you this. From your perspective as the Global Head of Corporate Credit Research, what happens if we're, in fact, in this new regime of rates being higher for longer? 

Andrew Sheets: Yeah, thanks, Lisa. It seems more topical by the day as we see yields continuing to march higher. So I think like a lot of things in the market, it kind of depends a little bit on what the fundamental backdrop is that's driving those interest rates higher. Because if I think about the modern era for credit, which I’ll define as maybe the last 40 years, the tightest that we've ever seen corporate credit spreads was not when the Fed or the European central bank was buying bonds. It was not when you had lots of leverage building up in the financial system prior to the financial crisis. 

It was in the mid 90s when the economy was pretty good. The Fed had hiked rates a lot in [19]94 and then it cut them a little. And, you know, the mid nineties, I think, are one of the poster children for, kind of, a higher for longer rate environment amidst a pretty strong economy. 

So, if that is what we're looking at, we're looking at rates being higher for longer because the economic output of the US and other regions is generally stronger. I think that's an environment where you can have the overall credit market performing still pretty well. You'll certainly have dispersion around that as not every balance sheet, not every capital structure was planned, was created with that sort of rate environment in mind.

Overall, if you had to say, is credit more afraid of a kind of higher for longer scenario or is it more afraid of, growth being a lot weaker than expected, but that would bring low rates. I actually think a lot of credit investors would much rather have a more stable growth environment, even if that brings somewhat fewer rate cuts and higher for longer rates.

Lisa Shalett: One other thing, I know that the Global Investment Committee has been debating is this idea between the haves and the have nots that's been somewhat unique to this business cycle where, there's been a portion of the mega cap and large cap universes who have demonstrated, quite frankly, total insensitivity to interest rates because of their cash balances. Or because of their lack of need for actual borrowing. And then there's smaller midsize companies, these smaller cap or unprofitable tech companies, some of the companies that may have been born in the venture capital boom of the early 2020s. 

How is this have, have not, debate playing out in the credit markets? Are there parts of the credit markets that are starting to worry that there's a tail?

Andrew Sheets: Yeah, I th