Thoughts on the Market

Our Chief Latin America Equity Strategist Nikolaj Lippmann explains why Brazil’s election, the cost of capital, AI investment and geopolitics could help unlock a new era of growth across Latin America.
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Welcome to Thoughts on the Market. I'm Nikolaj Lippmann, Morgan Stanley's Chief Latin America Equity Strategist.
Today – why Brazil could be the missing piece of what we call LatAm Spring, and what AI has to do with it.
It’s Thursday, October 15th, at 10am in New York.
Brazilian equities rallied sharply last week after a surprising first-round presidential election result. Flávio Bolsonaro finished ahead of President Lula, setting up a runoff later this month. The outcome remains uncertain. But for investors, I think there’s a bigger question. Can Brazil approach a policy shift that unlocks something the country has lacked for years: investment.
We've long argued that Latin America is moving from a consumption-led economy towards an investment-led cycle, thanks to: 1. Changing geopolitics; 2. investment-friendly policies; and 3. The potential for lower interest rates. What's more, this fits into the framework of the AI CapEx cycle, driving the global and especially the U.S. economy that has moved from consumption to CapEx, as argued by Mike Gapen, our U.S. economist. We're already seeing signs of this LatAm Spring in Argentina, Chile, Peru and Colombia. Brazil could be the largest missing piece. And there are three reasons why.
First, the cost of capital. Brazil remains one of the world's most expensive places to invest. High government debt and elevated interest rates have made fixed income investment more attractive than equities or entrepreneurial risk-taking. But credible fiscal reform could change that equation. Lower government spending could reduce borrowing costs, strengthen the currency, and encourage private investment. Which means capital could shift from sitting in fixed-income assets toward funding growth.
Second, AI. AI might seem unrelated to Brazilian politics, but we see an important connection. Our global framework suggests that annual capital spending could rise from roughly $2.5 trillion to about $5 trillion - $6 trillion as companies build out global AI infrastructure. And Latin America has a critical role to play.
Data centers need electricity. Electricity requires energy infrastructure. And the infrastructure requires copper, lithium, and other critical minerals. Latin America as a whole supplies roughly 10 percent of the world's energy, holds about 20 percent of global energy reserves, about 30 percent of global copper, and approximately 60 percent of the world's lithium resources.
So, we've argued that Brazil and Argentina look increasingly like Texas, with exports of energy and of agriculture. And one other area around politics where Brazilians could perhaps learn or be inspired from peer Latin American countries and gather some inspiration from Texas could be around deregulation.
For Brazil, lower interest rates and greater policy credibility could make participating in this investment boom considerably easier.
And that brings me to the third factor: geopolitics. Brazil has strengthened its economic ties with the East, while remaining deeply connected to Western capital markets and U.S. technology. A more balanced relationship could improve access to capital markets and support long-term investments. Of course, an election result alone doesn't guarantee change. Fiscal discipline, policy execution, and global financing conditions remain critical. Higher U.S. Treasury yields are an especially important risk for a region carrying substantial debt.
But consider what's already happening elsewhere. Mexico contributes hardware to the AI supply chain. Chile is rebuilding its investment pipeline. And Peru is benefiting from mining activity. Argentina is attracting capital after significant policy changes.
As Latin America's largest economy, Brazil could have substantial regional implications if it moves in the same direction. That's ultimately our LatAm Spring thesis: a shift away from consumption toward investment, entrepreneurship, and capital formation.
There's still a long road ahead, but Brazil could be the most important test of whether that spring truly takes hold.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

The UK budget arrives later this month amid competing predictions about growth, inflation and public finances. Andrew Sheets and Bruna Skarica examine how the country’s economy defies expectations.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Bruna Skarica: And I'm Bruna Skarica, Morgan Stanley's Chief UK Economist.
Andrew Sheets: Today, the UK makes a budget. Why it matters? And more generally, what we've gotten right and wrong about the country.
It's Wednesday, October 14th, at 2pm in London.
Bruna, it's great to be here talking with you, and I'd like to get into a bigger discussion on the UK and what we've gotten right and wrong about the direction of the country this year. But more immediately, it has a very big event coming up.
What is the budget, and why is there so much focus on it?
Bruna Skarica: The budget is the UK's key fiscal event. It is the time of year when the Chancellor receives a refresh of economic forecasts and decides whether he needs to respond to these, whether there's any spending cuts or increases that are required, and whether there's any tax hikes or potentially tax cuts that are required too. All with the view of ensuring fiscal consolidation and executing on what is a self-imposed fiscal framework.
Here in the UK, the main target for the Treasury is to achieve current budget balance in year three of the forecast. The fiscal watchdog forecasts five years of economic variables, and the idea is, by the third year, we ought to be spending outside of investment expenditure as much as we're receiving in tax receipts.
So, all of that happens once a year in the budget.
Andrew Sheets: Now, I might just stop you there [be]cause in the context of these other budget pictures that we see around the world – the U.S. is running a large budget deficit, France is running a large budget deficit, Japan's increasing its budget deficit. That actually seems like a quite ambitious goal within the next three years; to balance that outside of the interest expenses.
Can you just talk maybe a little bit more about that process and the thinking behind it?
Bruna Skarica: Yeah, sure. The idea really is to ensure that over the next five years, not only do we get the current budget balanced while allowing for borrowing for investment, which is, of course, a favorable way to borrow because it boosts growth.
But also, that within the five-year period, we're able to get debt-to-GDP ratio down. In order for that to happen, we need to be running a primary surplus around 1.5 percent of GDP.
Now, very often in UK macro, we tend to look at three-year forecasts, five-year forecasts. We talk about medium-term headrooms. But I think it's important here to take stock of where we are at this moment in time.
We think that in this fiscal year, [20]26-[20]27, primary deficit – our entire expenditure outside debt servicing costs minus tax receipts – we see that at just under 1 percent of GDP. The IMF is a little bit above 1 percent of GDP for UK. But for example, the IMF sees French primary deficit at 2.9 percent this year, with the U.S. measure forecast at 4.9 percent.
So already, UK has actually made a lot of progress in its consolidation path.
Andrew Sheets: And Bruna, talking about this announcement specifically, could you maybe talk about just one or two items that you'd be on the watch for as potential surprises? Or decisions that the market is really focused on?
Bruna Skarica: Sure. So, we do know that the Treasury is looking at ways of alleviating some of the pressures stemming from higher inflation, higher energy inflation in particular. So, the scale of support that will be provided to households and the scale of reduction in headline inflation, I do think will be in focus on the day.
We're expecting a relatively low-key budget, so the scale of measures at around £10 billion, which is much more moderate than what we saw in October 2024 and in November 2025.
However, we do think there is scope for some, let's say, higher level announcements. For example, Prime Minister Burnham is particularly focused on devolution in the UK, decentralization. And there might be a roadmap ahead for how different mayors and different regions in the UK get to keep their portion of income tax revenues and what they might do with it in order to boost regional growth.
UK does stand out as the country in G7 space that has the most centralized fiscal system, and this might start to be changed from this fiscal event onwards.
Andrew Sheets: Okay, so now I'd like to take a step back and do a little marking to market.
You know, you and I on this program, a couple of different times this year, have been talking about the UK, and those conversations have generally been upbeat. I think both of us were of the view that the UK could actually be a bit better of a story than expected. And maybe we start with the good news.
What do you think has been going right?
Bruna Skarica: So, for one, growth has outperformed in the first half of the year. In line with our long-standing thesis that UK ought to be a beneficiary of the global AI boom, the main driver of the upside surprise has been the tech sector. It's running at 8 percent year-on-year, this year.
We have also seen a bit stronger consumer spending growth than anticipated. And again, this reflects, we think, our long-standing thesis on fairly clean household. But also corporate balance sheets, I should mention, that tend to provide a fairly big buffer in one of energy shocks.
UK consumers have elevated savings, also elevated savings stocks, and so in energy shocks such as the one we've seen in the first half of the year, perhaps there is some reduction in desired level of savings, which allows consumers to support their spending habits.
All of this means that this year we see UK growth at 1.3 percent. Now, our U.S. colleagues are looking for 2.3 percent. Still, U.S. growth looks relatively stronger than any European country, including the UK.
However, I would say that 1.3 percent is about 30 basis points higher than where we were a couple of months ago when the energy shock started, so it is important to take that into account.
Andrew Sheets: And I'd also note that UK stocks are up about 10 percent this year, and its currency, the pound, is materially outperformed the euro or the Japanese yen.
But Bruna, I think it's pretty safe to say that sentiment towards the UK feels pretty downbeat. I think it's probably gotten worse as the year has gone on.
So, what's gone wrong and what's been worse than we were expecting?
Bruna Skarica: Yeah. So, while I do think that in the U.S. there is a lot of focus on the benefits from the AI boom and the AI build-out, in Europe, we're still waiting to see the sentiment shift towards how much growth and potential growth in particular can benefit from adopting AI.
We're more constructive, I would say, than probably the average forecaster here. We're pointing to healthy productivity growth performance in the UK private sector, printing productivity growth at 1.8 percent; whereas in the U.S. this figure is a bit above 2 percent over the second quarter this year. So, not too different, I would say.
So, I think the pessimism around potential GDP growth is really what's driving the view that whenever an external energy shock tends to hit, such as the one we've seen this year with higher oil and natural gas prices, it'll be embedded in the economy for a longer period of time. Because ultimately a spare capacity is very tight. And so businesses and consumers will try and preserve their real purchasing power, and inflation will remain elevated for a longer period of time.
Again, we tend to be a bit more constructive on this. We think the economy has enough spare capacity for this energy shock to come and go without material adjustments in the bank rate. We're expecting two hikes. But the market is still pricing four hikes. And certainly in conversations with investors, we are more and more talking about the scenarios in which these could be delivered.
So that, of course, means higher gilt yields, which means higher debt servicing costs, and that overall, I do think tends to dampen sentiment.
Andrew Sheets: Well, Bruna, a lot to watch in the days and weeks ahead. And thank you so much for taking the time.
Bruna Skarica: Thank you, Andrew.
Andrew Sheets: And thank you as always for listening. If you find Thoughts on the Market useful, let us know by leaving a review wherever you hear us. And also tell a friend or colleague about us today.

Our Head of Asia Credit Strategy Kelvin Pang explains why investors would benefit from a broader fixed income market in Asia, with opportunities across more countries, local-currency credit and dollar-denominated bonds.
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Welcome to Thoughts on the Market. I’m Kelvin Pang, Head of Asia Credit Strategy [at] Morgan Stanley.
Today – why the challenge in Asia fixed income may not be the region at all, but the way investors have traditionally looked at it.
It’s Tuesday, October 13th at 8am in Hong Kong.
Picture this. You’re shopping in a supermarket. As you walk down the aisles, you notice half of them are off limits. It’s unexpected.
Something similar has happened in Asia fixed income. The region’s fundamentals remain supportive, but the traditional investment universe has become increasingly constrained.
The pressure began in early 2023, when U.S. policy rates rose above those in much of Asia for the first time since before the Global Financial Crisis. The environment that had supported Asian bond markets for years turned upside down.
Consider Asia-dollar credit. Issuers have increasingly turned to cheaper local-currency financing, which is shrinking dollar-bond supply. Asia-dollar credit is now on track for a fifth straight year of negative net supply. At the same time, investment-grade spreads have tightened to 55 basis points. That makes Asia investment-grade credit the most tightly valued major credit market globally.
And investors have taken notice of this. Assets in dedicated Asia credit and high-yield funds have fallen 62 percent from their 2021 peak – from roughly $75 billion USD to around $29 billion USD.
But we feel Asia itself is not the problem. In fact, Asia Pacific nominal GDP could rise from $41 trillion USD in 2025 to [$]54 trillion by 2031. That would account [for] roughly one-third of global nominal GDP growth over that period.
And most importantly investment is also accelerating. Asia’s capital spending could rise from $11 trillion to [$]16 trillion by 2030. That would mark the strongest industrial cycle since the mid-2000s. And we think this extends well beyond AI, with energy, defense, and broader industrial investment all playing major roles.
The key issue here is how investors have traditionally looked at Asia. They basically need a bigger map.
That broader map is what we call APAC fixed income. Traditional Asia fixed income has largely focused on U.S.-dollar credit and local-currency government bonds across emerging Asia. APAC fixed income adds convertible bonds and local-currency corporate credit. It also brings Japan and Australia into the mix.
So, what’s the advantage of this broader map? You see, each of these pieces behaves differently. Convertible bonds let investors participate in regional growth through their equity link. APAC dollar credit plays a more defensive role, with a mostly investment-grade, U.S.-dollar-denominated profile. Local-currency rates provide exposure to interest rates, currencies and the economic cycle. At the same time, local-currency corporate credit broadens credit and sector exposure.
Together, they create a more flexible mix of risks across changing economic conditions. For example, when growth and inflation rise together, convertible bonds can benefit from their equity link. In a recession, currency-hedged local bonds can benefit from falling rates while limiting foreign-exchange risk. During stagflation, dollar credit can offer more defensive characteristics.
Our portfolio analysis since 2023 suggests a diversified APAC fixed-income portfolio could target a 7.5 percent return with a vol[atility] of roughly 4 percent, depending on allocation constraints. Investors also increasingly need to manage currency exposure as the dollar cycle shifts.
For years, investors could navigate Asian bonds with a relatively narrow toolkit. Today’s market demands more flexibility. The opportunity in Asia has not disappeared. The better question may be whether investors are looking at enough of it.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Energy costs are a key election issue and AI data centers are adding to the debate. Our Head of Public Policy Research Ariana Salvatore looks at policy discussions in Washington that could determine how the U.S. powers its next technological boom.
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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.
Today, I'll discuss the growing energy demands of AI and what the government can do in response.
It's Monday, October 12th at 10am in New York.
Markets and policymakers are preparing for a potentially important debate following the November elections. The future of American energy infrastructure. And at the center of that debate is an increasingly urgent question: How can the U.S. build enough power infrastructure to support the AI investment cycle – without passing the costs on to everyday electricity consumers?
Late last month, lawmakers in Congress introduced the bipartisan American Affordability and Jobs Act. That legislation represents a significant effort to reform federal permitting. But importantly, it also includes provisions that require data centers to cover the transmission costs associated with their projects.
We think that's a notable development, particularly as we think about the legislative agenda after the November elections. Of course, the path forward still remains uncertain given substantial policy differences and a limited legislative calendar after the elections.
But why might this matter for markets?
Well, first, it's worth considering the scale of the energy challenge. My colleague Stephen Byrd and his team recently updated their projections for the U.S. data center power shortfall. They now see a potential 57-gigawatt gap through 2028, and that's before accounting for new solutions that could accelerate access to power. That's up from their previous estimate of 38-gigawatts.
And that's why the permitting proposal is so important. There are two elements that I'd highlight.
First is the effort to accelerate infrastructure development. The bill would reform federal environmental reviews and provide greater certainty for projects that have already received approvals. We think that can help reduce delays and uncertainty around new energy projects, although permitting reform alone won't resolve constraints involving equipment, labor, or grid capacity.
The second element is the growing focus on who pays for the infrastructure, and here the proposal actually builds on an existing policy initiative. Earlier this year, a number of hyperscalers signed on to the Ratepayer Protection Pledge.
That's a voluntary agreement under which companies commit to securing the electricity needed for their data centers and pay for associated power infrastructure upgrades rather than passing the costs on to residential consumers. The pledge was subsequently expanded to include a broader group of utilities, developers, and state participants.
Now, what's different about the permitting reform bill is its potential shift from voluntary commitments toward federal requirements. In particular, the proposal would require data centers to cover their associated transmission costs.
That's an area where we think policymakers from both parties appear to share concerns about electricity affordability, even though they may disagree over the broader approach to energy policy.
Looking beyond the elections, we think that creates two related policy catalysts for investors to watch.
The first is whether Congress can reach an agreement on permitting reform that helps accelerate the construction of energy infrastructure. And second, whether lawmakers move to establish a more formal cost-sharing requirement for data centers.
The eventual policy mix, we think, could influence both the timing and the economics of new projects. Faster approvals could make some investments more attractive. But requiring developers to absorb additional transmission costs could also change where projects are built and which power solutions they pursue. A changing policy framework could also reinforce the importance of alternatives.
Of course, legislation is far from guaranteed. The elections will shape the political environment in which these negotiations continue, and any final agreement could differ substantially from the current proposal.
But stepping back, I think there's a broader takeaway.
For much of the AI investment cycle, the focus has been on the pace of technological innovation and capital spending. Increasingly, though, policy decisions around electricity infrastructure, permitting, and affordability could become just as important in determining how quickly that investment translates into operational capacity.
The permitting bill is an early indication of how D.C. may approach those challenges after the elections. And for investors, the central question may be less about how much companies are willing to spend on AI and more about how quickly and at what cost they can secure the power needed to support it.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Markets have remained resilient despite the prospect of higher-for-longer rates. Our Global Head of Fixed Income Research Andrew Sheets considers the risks building beneath the surface.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, exploring further the question that seems to be on everyone's mind: At what point do higher rates become a problem for markets?
It's Friday, October 9th, at 2pm in London.
We recently hosted Morgan Stanley's ninth annual European Credit Conference here in London. Fifty companies, over a thousand investors, and to some extent, one dominating question.
The market has been impressively resilient this year – but as yields rise, at what point does this change?
I think a good place to start with this question is whether the current level of interest rates are obviously wrong. And I don't think it's clear that they are. Growth in the U.S., Europe, and Asia remains surprisingly robust and has for a lot of this year. Meanwhile, inflation across regions is still generally above central bank targets.
Too high, and a sign that conditions are more likely too hot than too cold. That's the opposite of what the wrong level of rates would imply – as rates that were too high would be curtailing activity and pushing inflation down below target.
Thanks in part to the scale of AI spending and how insensitive the spending has been to the level of interest rates; we're just not seeing this.
I think the yield curve is also confirming this message that the level of rates for now is okay. In an environment where the market thinks that central banks have raised rates too much, it will often so-call invert the yield curve. Pushing short-term interest rates above longer-term ones on the belief that rates that are too high today will need to be lowered when conditions weaken in the future.
We're not seeing that, and that is, I think, a pretty important indicator.
At the risk of being pedantic, I think there's also the premise of the question around resilience. At one level, without a doubt, markets have been impressively solid given the large rise in yields this year. U.S. and European stocks have been posting double-digit gains. Credit spreads, a measure of risk premium, sit near multi-decade lows.
But under the surface, that resilience isn't so apparent. Spreads on the lowest-rated credits, so-called triple CCCs, have increased significantly this year across both the U.S. and Europe. Publicly traded BDCs, which contain portfolios of lower-rated private credit, have traded at widening discounts to their book value.
And even in the mighty U.S. stock market, my colleague Mike Wilson and our U.S. equity strategy team note that over half of the 3000 largest stocks have seen a drawdown of at least 20 percent since June, which happens to be the month that yields started to rise.
2026 may be showing that global growth overall is just less sensitive to higher rates than was initially expected. Large government deficits in the U.S., Europe, and Asia, and large spending on AI may be two reasons why. With growth strong and inflation still too high, rates may be simply seeking out a level that they think will keep things in balance.
But the interest rate that helps balance – this technology and spending boom – are not the same rates that keep a smaller, weaker, or a more indebted company happy. If higher rates are needed to balance things overall, the weaker tails of the market can still suffer.
We've seen this in the past, particularly 2005. Back then, a large U.S. government deficit, booming China CapEx, and significant U.S. housing wealth all helped push up rates. The overall econom y held up for several more years. But weaker parts of the credit market were challenged by those rates more quickly.
We think the same may be true today and therefore favor an upper quality bias. We favor high-yield bonds over loans and decompression across credit indices.
Thank you as always for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.