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MORGAN STANLEY: These are the 4 biggest risks keeping analysts and economists up at night

Reuters / Lucas Jackson

  • Analysts, economists, and strategists from Morgan Stanley outlined the most pressing macro trends and risks facing markets right now.
  • Their analysis comes as investors around the world weigh the uncertain outcome of the US-China trade war.
  • Meanwhile, a growing number of other signals are flashing that the global economy is slowing.
  • Listed below are the four biggest macro trends and risks Morgan Stanley is keeping a close eye on right now.
  • Visit the Markets Insider homepage for more stories.

Warning signs of a slowing global economy seem to be popping up daily.

China reported worse-than-expected industrial output, retail sales, and capital investment growth. Germany said its economy shrunk in the second quarter. The spread on the two- and 10-year Treasury yields fell below zero for the first time since 2007, sending the stock market spiraling downward on fears of a US recession.

Looming over all the disappointing news is the remaining uncertainty over the outcome of the ongoing trade war between the US and China, the world’s two largest economies.

All of these macro trends trickle down and affect corporate earnings, hiring, spending, and the overall demand environment.

Economists, analysts, and strategists from Morgan Stanley laid out the most important macro trends and risks on their radar in a research note sent to clients on Wednesday.

“Companies are indicating the convergence of trade uncertainty, demand weakness, and 2020 planning could all line up higher restructuring in 4Q, meaning lower capex spending and higher risk to employment, ” the firm said in the report.

Here are the four biggest macro trends and risks Morgan Stanley’s analysts, economists, and strategists are looking at:


1. Slowing corporate spending and business investments

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Geopolitical uncertainty, largely driven by the US-China trade spat, has been a drag on corporate confidence and capital expenditures, according to Morgan Stanley.

That means large corporations are less likely to make significant investments in new facilities, real estate, or other physical assets that are more difficult to offload in the throes of a recession.

“The impacts are non-linear so further deterioration can easily surpass expectations on the downside,” Chetan Ahya, the chief economist and global head of economics for Morgan Stanley said in a note to clients on Wednesday.

He added: “Underlying corporate credit risks still exist and could come to the fore as the economy slows further.”


2. Small- and mid-cap companies are seeing earnings shrink

Associated Press

First-quarter earnings growth for small and mid-cap companies fell by double-digits in 2019, while earnings from large-cap stocks stayed flat, according to Morgan Stanley.

“Additional Fed cuts/easing will not be able to fix the corporate profit problem of deteriorating margins, slowing demand, and trade-related pressures,” chief investment officer Mike Wilson said in a research note to clients on Wednesday.

Small and mid-cap stocks are also underperforming the broader market this year. The Russell 2000 index, which tracks 2000 of the smallest companies in the stock market, is up about 9% so far this year, while the S&P 500 is up roughly 14%.


3. Small- and medium-sized businesses are pulling back on hiring

Reuters

Despite the US economy reaching historically low unemployment, small and medium-sized businesses are putting the brakes on hiring, according to Morgan Stanley’s chief US economist.

“The first cut is hours worked as companies cut hours of current staff before laying people off,” Ellen Zentner, the firm’s chief US economists said in a note to clients on Wednesday. “This is starting to show up in the data even if we haven’t seen jobless claims pickup yet.”

Zentner also said he expects weaker sentiment and lower spending in August as market volatility typically goes hand in hand with decreases in consumer spending.


4. Tariffs and trade tensions

Philippe Wojazer/Reuters

Uncertainty from the trade environment is propelling a slowdown across multiple industries, according to Morgan Stanley’s economists.

“If the US were to implement 25% tariffs on all imports from China for 4-6 months and China responds with countermeasures, the global economy will likely enter a recession in 3 quarters’ time,” Ahya said.

Many US retailers and manufacturing companies either lowered their sales guidance for the year or mentioned the trade war as a continuing challenge in the macro environment during the second-quarter earnings season.


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