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Consumer

Urban population growth, improved transportation and increases in disposable incomes could triple consumption levels in China's smaller cities by 2030. Big implications for consumer goods and services, transportation, entertainment, travel and financials.

The economic expansion may be aging but according to Morgan Stanley’s Co-Head of Economics, Chetan Ahya, the business cycle could still have room to run

Last year, the global economy roared back to life as synchronous recovery in both developed (DM) and emerging (EM) markets propelled growth to a 3.7% annual average. However in the first quarter of 2018, DM growth began to moderate alongside rising worries of protectionist trade policies, renewing concerns over the near term growth outlook

The more critical debate, in my view, is how long the business cycle has left to run. As I’ll detail in a moment, the end does not seem near.

Evaluating First Quarter Growth

In terms of moderating growth in the first quarter, it’s worth noting that economic growth can often be complicated by seasonality adjustment issues. Our U.S. economics team has noted that this “residual seasonality” consistently distorts GDP, leading to weak first quarter growth.

A Focus on Business Cycle

While we can’t get away from tracking the ups and downs of high-frequency data, a broader perspective can be helpful. I believe the key debate for the global economy is whether the business cycle in developed markets is coming to an end. The current cycle is clearly more advanced in developed markets—with the U.S. furthest along—hence attention has (rightly) focused there.

Global

Rapid changes in the digital era have put software development on the C-suite radar. A look at why streamlined approaches to software development could be the key to unlocking business productivity—and investor interest—in the years ahead.

Morgan Stanley's thought leaders share insights on the latest industry trends covered at this year's Tech, Media & Telecom conference in San Francisco.

Wireless providers will spend big to deploy 5G, but they also stand to gain new markets, revive pricing power and reap rewards that should excite global investors.

The promise of faster and more reliable connections has driven consumer anticipation for fifth-generation mobile networks, or 5G, but for wireless providers and investors, the technology could drive significantly more than a speed upgrade.

Although 5G will take longer to reach maturity, the technology will emerge as the most important value driver for the wireless industry over the next decade.

Indeed, 5G stands to revolutionize global mobile telecommunications. It will open an assortment of new use cases and markets, drive major changes in market structure and create a new paradigm for pricing. For telecoms in leading markets, such as China, the U.S., Korea and Japan, these themes will emerge as the main share-price drivers over the next decade—a good deal of which isn’t yet priced into valuations.

In a recent report from Morgan Stanley Research, a collection of the firm’s telecoms strategists move past the headlines and take a deep dive on the impact of 5G on telecoms and share prices. They estimate that the game-changing network could generate incremental annual revenue of $156 billion from seven 5G use cases over the next decade—40% of current mobile service revenue.

Although 5G will take longer to reach maturity than previous cycles, the technology will emerge as the most important value driver for the wireless industry over the next decade. Here are some key issues for the industry.

Building the 5G Network

First, there’s the issue of how much global telcos will spend to build the 5G network. The report’s lead author, equity analyst Gary Yu, forecasts capital expenditures of $872 billion through 2030, 1.7 times the cost of building out 4G. The high cost of acquiring spectrum—a scarce global resource—is a key part of these costs because 5G needs new spectrum across different frequencies to operate effectively.

Another potential change from 4G to 5G is that China, the world's biggest telecom market, will change from a follower to a leader in this cycle, rolling out its 5G network together with traditional leaders the U.S., Japan and Korea,” says Yu. Although the synchronized rollout could help to lower initial 5G equipment pricing through scale, Morgan Stanley estimates China’s 5G capex at around $421 billion over the next decade which could initially drag down return on invested capital and become a negative catalyst for telecom shares.

In other regions, the lift could be lighter. The report adds that in the U.S., the Big 4 carriers could spend $26 billion on spectrum purchases over the next three years, along with total 5G capex of $265 billion. The report also forecasts $129 billion in Japan and $58 billion in Korea over the next decade.

Healthcare

Why MedTech’s adoption of artificial intelligence could deliver increased productivity, lower costs and improved patient outcomes in the coming years.

The patient suffers from abdominal pain, along with symptoms in atypical locations, which makes diagnosis tricky. An astute examination reveals the cause: an unusual form of appendicitis. However, credit doesn’t to go to the radiologist. Instead, an imagery machine built with artificial intelligence technology, which can draw on knowledge of tens of millions of similar scans, recognizes the anomaly and makes the diagnosis

Successful implementation of AI in the field could boost productivity, lower treatment costs and drive growth across the healthcare value chain

That scenario is no longer the stuff of science fiction. Pressed to reduce costs and boost productivity, medical equipment manufacturers and technology companies are increasingly investing in AI. Several such systems already exist, and growth could ramp up over the next few years, particularly in the field of diagnostic imagery.

Based on our analysis of AI capabilities, as well as discussions with executives and industry experts, we’re seeing a number of applications across the entire healthcare spectrum, from prevention to diagnosis to follow up,” says Michael Jungling, head of Morgan Stanley Research’s Medical Tech and Services team.

COULD AI TRANSFORM HEALTHCARE?

Why MedTech’s adoption of artificial intelligence could deliver increased productivity, lower costs and improved patient outcomes in the coming years.

THE DATA DECADE PIVOTS TO SOFTWARE

Why data warehousing, analytics and software are taking center stage as companies harness a new era of artificial intelligence, automation and machine learning.

Macroeconomics

Turning Point Ahead: Global Markets Reverse Course in 2019

As growth in developed markets slows, emerging markets could resume their role as the world’s economic growth engine. Morgan Stanley’s economists, strategists and portfolio managers share outlooks for 2019.

While potential for a rate cut has lifted markets, investors shouldn’t see it as a cure-all for ailing global growth.

Since 2019 could continue to be challenging for U.S. equity and fixed-income markets, broader diversification may be in order.

This is the time of year when, in addition to preparing for the holidays, investors need to think about the outlook for 2019 and consider making moves that can lay the groundwork for better returns in the new year.

To help, I’ll summarize Morgan Stanley Wealth Management’s outlook and then elaborate on a key piece of advice: Next year, even more than usual, I believe it will be important to diversify beyond U.S. stocks and bonds.

Our 2019 outlook (members of the firm’s Global Investment Committee, which I sit on, collaborate on it), includes six key points:

FOR THE S&P 500, BREAKING OUT IS HARD TO DO

On today’s podcast, Chief Investment Officer Mike Wilson says a sustained breakout above 3,000 has eluded the S&P 500. Will the Fed’s potential rate cut be the catalyst?

IS IT THE END OF THE LINE FOR GLOBALIZATION?

Globalization has been a dominant investment theme for decades. Now, several trends are making global trade less advantageous and, in some cases, less feasible.

Rates

Shifting the Gear: Tech Drives Transition for European Financials

European financials are at an inflection point as digitalization and technology drive more strategic and sustainable business models. Morgan Stanley's thought leaders share insights on how these shifts in the financial sector could be key differentiators in the coming years.

Changing dynamics have put pressure on the institutional side of the wholesale banking business, but growing demand for corporate banking services could offer notable upside for select European banks.

Global economic growth, easing capital pressures and the prospect of rising rates are all positive themes for wholesale banks. However, these themes are only part of the story.

Although we at Morgan Stanley Research believe revenues will pick up by 5% in 2018, the future success of these banks could hinge on whether they can tilt their focus toward the fast-growing corporate segment—without losing sight of institutional clients.

In Europe, a combination of negative rates and high cash balances could make the tailwind of rising rates even more powerful.

The reason? We expect revenues for corporate banking to grow at a compound annual growth rate (CAGR) of 4% over the next few years, which is double the rate of institutional growth.

While the right revenue mix is a linchpin for overall earnings growth for most of this group, it is particularly true for European banks, which have been losing market share to their U.S. counterparts. Since 2013, large U.S. banks as a group have gained 8 percentage points of market share based on revenue in Europe, while the European banks have lost about 7 percentage points of North American market share.

FOR ECONOMIC CUES, DON’T LISTEN TO STOCKS

As stocks and bonds diverge in terms of the signals they send about the direction of the U.S. economy, here’s why you should pay attention to bonds.

DON’T CHASE THE BAD NEWS BULLS

Markets are rising as investors interpret weak U.S. economic data as the odds for a Fed rate cut.

Why continued trade tensions could alter the narrative for the second half of 2019. Without progress on trade, global growth faces headwinds.

Technology

The New Climate Reality

Extreme weather events are the new normal, a growing risk that businesses and investors are learning to manage. At the same time, they are meeting the challenge with creative market solutions that have long-term impact.

Climate change poses growing challenges for investors in real assets. What’s the key to building resilience into real estate, infrastructure and other real-asset investments?

As hurricanes, droughts and other severe weather events grow more frequent and destructive, investors who own real assets—such as buildings, airports, pipelines and cell towers—need to take stock of how resilient their portfolios are. That is, how much has been done to plan for adverse events and how ready are all stakeholders to respond and recover?

Building up resilience involves taking a lifecycle approach to managing such investments: preparing for big weather-related disruptions, handling them deftly when they happen, and working with insurers, local authorities and others along the way. A recent report from Morgan Stanley 's Real Assets Investing Team and the firm’s Institute for Sustainable Investing, “Weathering the Storm: Integrating Climate Resilience into Real Assets Investing,” lays out the steps that investors should take to apply a “climate lens” to their properties.

Given that real assets are often held for 10 years or more, “climate resilience is becoming an investment imperative,” says John Klopp, Head of Global Real Assets at Morgan Stanley Investment Management. “By undergoing a comprehensive evaluation of climate change impacts at the asset level, investors can most accurately weigh risks and returns.

FISHING FOR DATA IN A SEA OF STARS

New access to satellite data is revolutionizing our approach to myriad environmental, social and economic problems back on earth.

DOWN-TO-EARTH INVESTING IN THE SPACE ECONOMY

Investing in ‘the final frontier’ can seem daunting, until you start to see the ‘space economy’ as part of the larger transportation industry.

DOES EARTH'S FUTURE DEPEND ON SPACE?

How satellite technology and space exploration could be the key to addressing climate change—and could be central to sustainable investing in the coming years.

ALLOCATING ACCESS

Carla Harris talks with Monika Mantilla, President and CEO of Altura Capital and co-founder and Managing Partner of Small Business Community Capital, working to connect emerging managers and small businesses with the capital they need.

SHARPENING AN INNOVATIVE EDGE IN PRIVATE EQUITY

Private equity investing has evolved beyond the days of buy low and sell high. Now the focus is on transforming portfolio companies into category-leading platforms.

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