Morgan Stanley Wealth Management

Investors face tough choices in an imperfect world, but can look for opportunities in fixed income while remaining cautious on emerging markets and commodities.Investors will need to make deliberate choices in 2024, paying close attention to monetary policy if they want to avoid a variety of potential pitfalls and find opportunities in an imperfect world of cooling but still-too-high inflation and slowing global growth.  Markets have already baked into asset prices the idea that central banks will manage a smooth transition to reduced levels of inflationmeaning theres limited runway for increased valuations. But 2024 should be a good year for income investing, with Morgan Stanley Research strategists calling bright spots in high-quality fixed income and government bonds in developed markets, among other areas.    Central banks will have to get the balance correct between tightening just enough and easing quickly enough, says Serena Tang, Chief Global Cross-Asset Strategist at Morgan Stanley Research. For investors, 2024 should be all about threading the needle and looking for small openings in markets that can generate positive returns.  Getting through the last stretch of inflation is likely to lead to slower growth, particularly in the U.S., Europe and the UK. Meanwhile, China's tepid growth will weigh on emerging markets, and there's a risk that the country's economy could get sucked into a wider debt-deflation spiral, with ripple effects for the rest of Asia and beyond. Morgan Stanley predicts that China will avoid the worst-case scenario, and that U.S. and European policymakers will begin cutting rates in June 2024, improving the macroeconomic outlook for the second half of the year.  A Tale of Two HalvesIn 2023, equity markets showed strong performance as they recovered from the recession fears that fed into the October 2022 trough, proving more resilient than analysts expected. However, 2024 is likely to be a tale of two halves, with a cautious first half giving way to stronger performance in the second half of the year.For the first half of 2024, strategists recommend that investors stay patient and be selective. Risks to global growthdriven by monetary policyremain high, and earnings headwinds may persist into early 2024 before a recovery takes hold. Global stocks typically begin to sell off in the three months leading into a new round of monetary easing, as risk assets start pricing in slower growth.  If central banks stay on track to begin cutting rates in June, global equities may see a decrease in valuation early in the year. In the second half of the year, however, falling inflation should lead to monetary easing, bolstering growth. We think near-term uncertainty will give way to a comeback in U.S. equities, says Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley.  And Wilson expects earnings growth to remain robust into 2025: Positive operating leverage and productivity growth from artificial intelligence should lead to margin expansion.  Throughout the year, however, there should be a few constants. Overall, U.S. equities are likely to have fair returns and better outcomes than European or emerging-market stocks.  This becomes especially true if these economies dont manage a soft landing, says Tang. In that case, we are likely to see a flight to quality in which the U.S. outperforms.Emerging-markets equities face obstacles, including a strengthening dollar and lackluster growth in China, where policymakers face the triple challenges of debt, demographics and deflation. These risks are compounded by the corporate focus on diversifying supply chains amid geopolitical tensions and the fallout from pandemic-era disruptions. However, emerging markets could see stronger recovery in the second half as lower rates and a weakening U.S. dollar could prompt inflows. One global bright spot is high-quality fixed income. Yields on a broad cross-section of U.S. corporate and government bonds reached 6%, the highest since 2009. U.S. Treasury and German Bund yields are the highest they have been in a decade, and Morgan Stanley forecasts 10-year yields on U.S. Treasury's at 3.95%, and DBR at 1.8% by the end of 2024. What might work for investors in this imperfect world? Morgan Stanleys recommended portfolio construction has a lower risk profile than our cross-asset benchmark, largely due to strategists recommendations for lower-than-average allocations in commodities and emerging-market stocks.Overall, Morgan Stanley strategists suggest an overweight across a broad range of bonds, an equal weight in both stocks and cash, and a significant underweight for commodities. Here are some of the key views:Overweight core fixed income, including government debt, agency mortgage-backed debt and investment-grade debt. It is likely to be a good year for income investing as high-quality debt continues to provide attractive yields, especially when compared against the risk/reward tradeoffs of other assets.Overweight Japanese stocks. Japanese policymakers have been an outlier among central banks, keeping interest rates low to boost growth.  Equal weight U.S. equities. For the past two years, the outlook was gloomier for stocks in the U.S. than anywhere else in the world. However, 2024 is shaping up to be different as U.S. equities should notch better outcomes than European or emerging market equities, particularly as central bankers globally aim for target rates.  Within the U.S., healthcare is forecast to outperform, and Morgan Stanley prefers industrials relative to other cyclical sectors.Underweight emerging-market equities, except Mexico and India. Chinas lackluster growth will weigh on emerging markets broadly, and there is an added risk that its economy will get caught in a debt-deflation tailspin. By contrast, Mexico is likely to benefit from the post-pandemic near-shoring trend, while India is forecast to see superior growth in earnings per share compared with broader emerging markets. Underweight commodities. Oil is forecast to trade at relatively flat prices in 2024 and geopolitics remain a concern, while gold appears overvalued. Copper, which could outperform because of stronger-than-expected demand from China, may be an exception.Investors should keep in mind that the markets have priced in the expectation that economic growth will go smoothly, and that central bankers will succeed in engineering a soft landing.  Markets seem to already assume that central banks can stick the landing, Tang said says. There is little room for error as far as valuations are concerned.IndexCurrent PriceBullBaseBearS&P 5004,3835,0504,5003,85015%3%-12%MSCI Europe1,7982,0401,8101,48013%1%-18%TOPIX2,3062,8002,6001,85021%13%-20%MSCI EM9581,1401,00075029%4%-22%Source: FactSet, Morgan Stanley research Forecast; Note: Data as of Nov. 8, 2023.

While educators debate the risks and opportunities of generative AI as a learning tool, some education technology companies are using it to increase revenue and lower costs.Contrary to the view that generative AI is undermining education, it could ultimately improve access and quality.Education technology companies have opportunities from generative AI that markets may be missing.Generative AI could bring $200 billion in value to the global education sector by 2025.Reskilling and retraining alone could require $6 billion in investments by 2025, with edtech companies poised to fill that need.Among educators, enthusiasm for generative AIs potential benefits have been overshadowed by fears of its misuse. Some school systems have banned the useof generative AI chatbots altogether amid concerns of plagiarism and misinformation. Others who view the use of the technology as inevitable and unavoidable have encouraged their students to gain fluency.iGenerative AI refers to unsupervised and semi-supervised machine learning algorithms that can use existing text, images, audio or video to create new content.This confusion around the ultimate role of generative AI in education has cast a pall over education technology (EdTech) companies and the education sector broadly amid heightened fears over subscriber growth. However, Morgan Stanley Research analysts think the market is skewing too negative in the debate over generative AI, while missing the technologys potential ability to both increase efficiency at all levels of learning and, over the long term, improve quality and access to educationboth positives for the EdTech sector. Generative AI could actually enhance the overall learning experience, by cutting down on administrative work and maximizing human interaction, as well as by reskilling or upskilling workers whose jobs have been affected by the technology, says Brenda Duverce, an analyst on the Morgan Stanley Sustainability Research team. These and other efficiencies could bring $200 billion in value to the global education sector by 2025, which could ultimately translate to higher revenue and lower costs for the best-positioned EdTech companies. Faster, Smarter, EasierGenerative AIs core capabilitiescreating and disseminating informationmake it a logical fit in the education space. Primarily, it can enhance productivity and allow more time for higher-value activities: For instance, teachers could use a chatbot tool to review and correct essays and grade exams, check for accuracy and plagiarism or to prepare coursework, freeing them up to interact with students. Teachers could also use generative AI to tailor curricula and performance assessments to individual students needs for a more personalized learning experience. Virtual assistants, meanwhile, could help reduce labor costs by automating some administrative tasks like enrollment, onboarding, class scheduling and payments. Over time, generative AI could parse the huge amounts of data captured by K-12, higher ed and companies providing corporate learning and development, helping these institutions make more informed decisions about program development, recruitment and retention and to fine-tune what they offer. Among education companies, the ones best positioned to generate returns have already begun rolling out some of these AI-powered products and features to customers. says Duverce. Those that develop unique offerings and differentiate themselves with innovation should perform well over the long term. An Evolving WorkforceCurrent generative AI technologies will likely affect a quarter of the occupations that exist today, rising to 44% within three years, according to Morgan Stanley Research estimates. But fears that substantial job losses and permanent displacement of workers will ensue may prove unfounded in the long term. Education providers could find themselves in a unique position to meet the growing need for retraining workers displaced by the technologyincluding by helping them learn skills needed to use or develop generative AI. Analysts estimate a $16 billion market opportunity within the next three years from reskilling workers displaced by generative AI, assuming that around 6% of affected workers will need reskilling. History tells us major changes in technological paradigms are often followed by periods of disruption, typified by economic growth and net job creationan idea at odds with current concerns about job destruction in the wake of generative AI, says Duverce. For full insights on generative AIs impact on the global education sector, ask your Morgan Stanley representative or Financial Advisor for the full report, More Than Meets the Eye: Sizing the GenAI Opportunity in Education, (Nov. 20, 2023). Morgan Stanley clients can access the report directly here.

   The U.S. central bank may be moving quickly to cut interest rates as inflation risks remain. How should investors proceed?Investors cheered the Federal Reserve announcement that interest-rate cuts are coming in 2024, sending stocks sharply higher.However, the Feds move may be premature, based on economic fundamentals related to wages, liquidity and consumption.The Feds strategy may prompt a shift in equity markets, favoring U.S. stocks in financials, industrials, utilities, consumer staples, healthcare and defense.Markets rallied across the board last week, with the S&P 500 Index closing in on its all-time high, in response to the Federal Reserves surprising signal that interest-rate cuts are coming. The central banks pivot, which suggested an end to its historic policy-tightening campaign, may support a near-term broadening of the markets gains. However, we believe the Feds move last week may be premature and not based on economic fundamentals, for three reasons. 1Wage growth remains high.The Fed made a mistake on inflation in 2021, when it assumed that price pressures were merely transitory and stemmed mostly from supply constraints. It may be making the same mistake now as it assumes that inflation is coming under control. To the contrary, weve seen sticky inflation in areas directly linked to robust consumer demand. Take super-core inflation, a measure that strips out energy and housing prices, leaving mainly services such as haircuts, cleaning services and childcare. That gauge has been hovering around 4% since June, helping keep broader inflation measures above the Feds 2% target. The central bank has asserted that super-core inflation is driven by wage pressures in these labor-intensive services, and that this pressure should moderate as more people enter the labor market. But data show average hourly earnings have been growing at 4% year-over-year and even re-accelerated month-over-month in November, to a pace of 0.4%. If the growth in wages for the people performing these services remains high, its likely that prices will also.2Businesses and consumers still have money to spend.The Fed may be overlooking just how much money is still circulating in the U.S. financial system, after tremendous monetary and fiscal stimulus early in the pandemic. Despite decreases in recent months, the level of moneymeasured by M2, which includes cash, savings deposits and retail money-market fundsremains around $20 trillion, running about $4 trillion higher than long-term trends. Even after more than 5 percentage points of Fed rate hikes, this excess liquidity continues to present inflation threats, as the people and businesses holding this excess cash compete for a limited pool of goods and services.3The economy keeps chugging along.While the economy is likely to cool, the Fed has not yet squashed growth to the degree that may warrant interest-rate cuts. With the exception of a slumping housing market, key consumption metrics are still running 5% to 10% above normal, due in large part to massive fiscal spending. Recent data also showed retail sales were stronger than expected in November, reflecting still-resilient consumer spending as the holiday shopping season kicked off. Investing for the PivotAll told, we continue to question the timing of the Feds pivot and urge investors to remain cautious. However, we do see the move causing notable shifts in equity markets, at least in the short term. Gains could fade for mega-cap stocks in industries such as technology. With that in mind, investors should consider adding exposure to U.S. stocks outside of the markets biggest names, known as the Magnificent 7, by either buying the equal-weighted S&P 500 Index or actively picking individual securities. In doing so, look for cyclical stocks, which tend to perform better in a strong economy, and value-style stocks, which seem to be priced lower than they should be relative to their fundamentals. In terms of sectors, financials, industrials, utilities, consumer staples, healthcare and defense-industry stocks are among our favored investments, especially until the Feds first interest-rate cut. In addition, continued U.S. dollar weakness may help support a resurgence in non-U.S. stocks, especially emerging markets. This article is based on Lisa Shaletts Global Investment Committee Weekly report from December 18, 2023, The Great Rotation But. Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

Using climate scenario analysis offers investors a methodical approach to understand the portfolio impacts of different environmental and economic outcomes.Estimating the long-term effects of climate change on portfolios is inherently difficult, but climate scenario analysis can be a useful tool for investors.Using specialized computer models, climate scenario analysis assesses the potential impact of future events to help investors understand related risks and opportunities.Institutional investors can use this process to quantify the potential impacts of climate change on their portfolios at the individual company, sector, market and global levels.Climate change is widely considered to be one of the most significant global risks to society and economies. However, many institutional investors find it difficult to quantitatively assess what financial impact climate change could have on their portfolios.  Climate scenario analysis offers a methodical way forward, according to the Morgan Stanley Institute for Sustainable Investings new report, Integrating Climate Scenario Analysis into the Investment Process. With the right data and models, institutional investors can better quantify the economic effects of climate change in the same way that they currently analyze the potential impact of market signals and economic indicators. Investors have shown interest in using this nascent method to map climate-related uncertainties. An Institute for Sustainable Investing survey found that while more than half of asset owners want asset managers to conduct climate scenario analysis, less than one-third provide it. At the same time, investors are also increasingly expected to conduct climate scenario analysis to meet disclosure expectations, such as the Taskforce on Climate-related Financial Disclosures (TCFD), and even certain regulatory requirements. What Is Climate Scenario Analysis?At present, the impact of climate change on portfolios is difficult to measure and predict accurately. The understanding of climate science itself is constantly evolving in response to new data, and investment horizons are typically much shorter than climate impact timescales. As a result, it can be challenging to relate non- financial factors such as greenhouse gas emissions directly to financial outcomes. Using specialized computer models, climate scenario analysis assesses the impact of future events, to help investors understand related risks and opportunities. Quantitative climate scenarios are the best way to explore the connections between environmental factors (e.g., greenhouse gas emissions) and financial factors (e.g., gross domestic product, carbon prices and energy prices). Consider two possible climate futures: Temperatures increase by 1.5C or well below 2C above preindustrial levels, resulting in greater transition risks (financial or reputational) to businesses as they decarbonize; or Temperatures increase by 3C or more from preindustrial levels, resulting in greater physical risks such as sea-level rise, catastrophic weather events and loss of arable land.  Each of these scenarios would yield different political, social, technological and environmental considerations and outcomes. As a result, the global economy and market conditions in each scenario would differ. For climate scenario analysis in portfolios to be effective, investors must define a reasonable range of scenarios, supported by data, models and reliable practices, with the aim of assessing the impact on portfolios.  4 Steps for Climate Scenario AnalysisClimate scenario analysis can be categorized into four main stages: Set the question. First, investors need to define what question they want to explore. This will inform how the scenarios are constructed, which variables need to be tested or held constant, and the required outputs.  Build the scenarios. Investors can either choose pre-defined scenarios provided by organizations such as the Network for Greening the Financial System (NGFS) or build their own custom scenarios, which offer more nuance and control but are more complex and require a greater understanding of climate science.  Conduct analysis. Mathematical computer modelsusually Integrated Assessment Models (IAMs)draw the relationship between greenhouse gas emissions and social and economic factors. If an investor uses scenarios from organizations like NGFS, then this analysis will already have been completed; for custom scenarios, investors would run this analysis themselves with input from experts who understand how IAMs work.  Use outputs. Outputs can be used directly to inform portfolio risk analysis or bottom-up company analysis. Potential outputs could include prices for energy, carbon and other commodities, as well as imports/exports, emissions, supply/demand volumes and land use. The resulting outputs can then be used to analyze portfolio impacts for overall climate change risks. This can take the form of bottom-up company analysis or top-down macroeconomic analysis, generating estimates on factors such as bond yields, inflation or index prices. At each stage, investors may need to find a balance between competing priorities. Most notably, limited resources may constrain the level of detail that can be built in. Some of the challenges involved in using climate scenario modelling based on constantly evolving understandings of climate science cannot yet be resolved, and so the impact of physical risks, such as flooding, may be structurally understated in models. However, most challenges can be managed.  Case Study: Carbon Capture and Pricing ScenariosMorgan Stanley applied its in-house climate scenario capabilities to a case study that examines two scenarios related to the availability of carbon capture and storage (CCS), an emerging technology used to remove CO2 before, during or after the combustion of fossil fuels or biomass. The International Energy Agency (IEA)1 forecasts that meeting global net-zero targets requires a significant contribution from innovative technologies such as CCS, which is widely used in climate scenario analysis, but has yet to live up to its promise because of high costs and challenges with scale.  We considered two scenarios: CCS technologies being able to remove either 23 or 15 gigatons of carbon from the atmosphere by 2050, with other variables such as population, GDP and government policy on emissions held constant. Analyzing these paths shows different outcomes for CO2 emissions, carbon pricing, primary energy mix and electricity costs. Taking the carbon price as an example, when CCS technologies can sequester 23 gigatons of carbon, the 2050 carbon price is approximately $750 per ton of CO2. By contrast, when CCS can only remove 15 gigatons, the carbon price shoots up to approximately $1,100 per ton of CO2, reflecting higher costs of CCS in the lower volume scenario.   This analysis could inform a range of potential portfolio outcomes, including long-term fossil fuel demand, the impact on earnings for companies in energy and beyond, energy consumption and household spending. Quantifying Climate Impacts on Portfolios Despite ComplexityWhile climate change scenario analysis is a relatively new practice, it echoes how investors already assess the global markets and economy. Understandably, a constant stream of new climate change findings, data, policies, technologies and dynamics make risk assessment seem daunting. But climate scenario analysis can serve as a useful tool for institutional investors who want a methodical approach to understanding the potential impacts of climate change in their portfolios.

Heading into 2024, its time to take stock of your budget, debt and investmentsand check them against your financial goals. These six steps can get you started.Key TakeawaysRevisiting your finances at the beginning of the year can allow you to establish a clear plan and meet your long-term financial goals.   Several useful strategies include reviewing your budget, checking on your emergency fund and consolidating debt.Also, it can be helpful to check whether youre tracking toward other goals, such as saving and investing for a comfortable retirement. Revisiting your finances at the start of a new year may not seem as exciting as making other resolutions, such as exercising more, eating healthier or taking steps to reduce stress in your life, but its important to remember that your financial wellness is often closely connected to your physical and mental health.1 The good news: Improving your financial wellbeing might be easier than you think. Here are six simple steps you can take to help set yourself up for financial success in 2024 and beyond. 1Revisit Your Household BudgetStart the year by revisiting your budget. Assess your average monthly income, as well as your fixed and variable expenses, and determine your financial priorities for 2024 to develop the ideal budget for you. Reassessing your budget may be especially valuable now, as still-high inflation requires households to continue allocating more for essentials like groceries or gas.  Having trouble getting started? Morgan Stanleys financial management tools, available on Morgan Stanley Online, can help you track income and expenses and create custom budgets to optimize how you put your money to work. 2Check Your Emergency FundIts always a good idea to double-check that you have adequate funds set aside for a rainy daybut thats especially true in times when the economy may be slowing from its once robust pace. Economic growth unexpectedly surged in 2023, with GDP expanding at a robust 4.9% seasonally- and inflation-adjusted annual rate in the third quarter. However, Morgan Stanley Researchs economics team sees growth slowing from here. They forecast year-over-year U.S. GDP growth to moderate to an annual rate of 1.9% in 2024.2 Particularly in an uncertain economy, an emergency fund can help keep you financially afloat in unforeseen life circumstances, such as a change in your or a loved ones employment situation. A general rule-of-thumb for an emergency fund is saving three to six months worth of living expenses in a safe, liquid account. 3Tackle Your DebtEven if youre already good about managing debt, consider taking steps to help reduce and consolidate it further. For example, if youre expecting a raise or year-end bonus, consider applying the extra income to any balances with high interest rates. Then, think about consolidating any remaining debt, which may help you swap varying interest rates on multiple loans, credit lines or cards for a potentially lower rate on a single loan. Reducing the number of loans you carry can also help simplify your financial life and ease money stress. You may want to ask your Financial Advisor about possible strategies. 4Make Sure Youre on Track with Your GoalsBe sure to check whether youre still tracking toward your goals, such as saving and investing for a comfortable retirement. If recent changes in the market or other factors have temporarily thrown you off course, work with your Financial Advisor to figure out how you can get back on the right path. Or, if youre still on track with your goals, talk with your Financial Advisor about new goals you want to work toward. For example, in 2023, were you able to boost your contributions to a workplace retirement plan or individual retirement account? In 2024, can you contribute even more to these or other accounts? Your Morgan Stanley Financial Advisor can help you look holistically at the year ahead and assess your progress towards your goals.5Revisit Your Asset AllocationThink about revisiting your asset allocation, or how your investments are split within your portfolio amongst equities, fixed income and cash. Asset allocation in your portfolio should ideally reflect your various life stages and the saving goals associated with them. For example, as you near retirement, you may consider moving portions of your portfolio into a more conservative asset allocation like fixed income. Or, if recent gains or losses in financial markets have caused your portfolio investments to stray away from your target allocation it may be time to rebalance. Remember, as you near retirement age, you have less of an ability to absorb volatility from the stock market. 6Update Your Estate and Insurance PlansThe new year can also be a good time to review and consider: Creating or updating your estate plan: If you dont have an estate plan consisting of a Last Will and Testament, power of attorney or health care proxy in place, consider completing your estate plan a priority matter for this coming year. An estate plan ensures that your assets are distributed according to your wishes.   Updating and reviewing any life insurance policies: Make sure theres sufficient coverage for your familys current financial needs. If your current employer doesnt offer an insurance policy, you may want to purchase your own insurance policy. If you currently have life insurance, its crucial to access and optimize your coverage to safeguard your wealth, livelihood and loved ones effectively. If your net worth has grown or if there have been changes in your liabilities, now is an opportune moment to ensure that your coverage aligns with your increased needs and provides comprehensive protection. By February 1st, many of us have lost track of our resolutions. To make sure that doesnt happen in 2024, be sure to connect with your Morgan Stanley Financial Advisor to discuss your financial goals for the year ahead and beyond.

                                             Companies and investors are watching five technology trends around the exchange of data in industrials, insurance, healthcare, digital infrastructure and resource planning.A number of industries need technology solutions that facilitate the widespread exchange of data, creating opportunities for public and private investing and M&A.Industrial companies are investing in technology that manages, digitalizes and automates their physical assets.Technology developments in insurance may lead to the next fintech.Healthcare providers are seeking solutions that improve productivity and patient outcomes.Digital infrastructure will evolve to support massive and growing data needs.Artificial intelligence, cloud and security are trends to watch in enterprise resource planning and human resources. Interoperabilitysoftware platforms ability to communicate and share data and informationis the next frontier for technology innovation. Technology companies are increasing their customer bases with products that connect disparate data for consumers, creating a seamless experience. At Morgan Stanleys recent Technology, Media and Telecom (TMT) Conference in Barcelona, the firms investment bankers discussed five key themes in this space that point to investment opportunities. Were in the very early innings of a multi-decade development in data, analytics capabilities and software within specific industries, said Lauren Ares, a Morgan Stanley banker specializing in B2B information services and data analytics. Businesses are vying to become top-three market leaders in the sectors where they are focused, and investors are looking where to place their bets.1Industrial Companies: Early Stages of Digital ConnectivityIndustrial companies in the automotive, energy and construction sectors are just starting to use systems that offer help managing physical assets and that connect disparate parts of value chains. There are numerous opportunities for industrials to increase efficiency with such solutions. For an energy company, for example, helpful connectivity solutions might offer an overview of all physical assets as well as features such as pipeline safety notifications that automatically assign workers to investigate and address issues, said Bjoern Crombach, a Morgan Stanley banker who specializes in industrial software. For a car manufacturer, technologies might automate reordering paint once supply runs low to help the company keep up production. Industrial companies are demanding software that helps manage their different stages of day-to-day business, Crombach said. Private companies are offering a number of promising solutions, and thus attracting the attention of large public companies interested in acquisitions, he said.2Insurtech: The Next Fintech?Compared to industrials, technology is in further stages of development for the insurance sector (known as insurtech) as proliferation and use of software applications in the industry has been growing for five years, Ares said. A significant number of businesses have emerged in insurtech with meaningful revenue growth and attractive profitability, he said. Investors are interested in whether insurtech could be the next fintech. Insurtech technology spans data analysis, Internet of Things (IoT)i.e., physical devicesand AI, and it aims to facilitate cost savings and efficiencies in processing claims, evaluating risks and underwriting policies. With mainstream adoption of open banking and payments apps in the last decade, fintech has become the poster child proving the value of networks that connect and manage various sources and forms of data, an incredibly sticky proposition for any industry, Ares said. Companies offering tailored technology solutions in verticals such as insurance are betting that apps and online platforms can catch on, similar to how they did in consumer banking and financial services.3Healthcare Technology for the Continuum of CareHealthcare is an industry lagging behind in its adoption of technology, so opportunities abound to improve patient outcomes and accessibility to healthcare amid caregiver labor shortages and the rising cost of care in Europe and the U.S. One method is complete data sharing between patients doctors and care locations (i.e. clinics and labs): Data-centric healthcare requires technology embedded throughout the continuum of care, said Marie-Gabrielle Bui, a Morgan Stanley banker who specializes in healthcare technology. A patients doctors and patients themselves should be able to easily access secure data that is privacy-compliant across care locations. Another lever is to move chronic patients from emergency care, which is extremely expensive, to preventative care, which is more affordable, Bui said. One example is healthcare technology that helps diabetic patients by continuously monitoring their glucose levels, warning them when levels are too high and scheduling doctors appointments and follow-up when necessary. Other avenues include artificial intelligence (AI)-backed symptom checkers and gamified apps for patient engagement or chatbots providing tools for psychological support, such as cognitive behavioral therapy. Given wide demand for healthcare technology, companies are looking to acquire businesses that offer healthcare software or digital health tools because M&Aeven across country bordersmay cost less than fully developing solutions in-house, Bui said. In particular, European companies are interested in acquisitions to capture more geographic market share, despite different local regulations.4Trends in Digital InfrastructureData consumption by businesses and consumers is continuing to grow exponentially, driving demand for all types of digital infrastructurenotably fiber, data centers and mobile towers. In recent years, this has also driven high levels of M&A activity and valuations, with lower-cost capital providers becoming increasingly comfortable with future growth prospects. Nevertheless, the current macroeconomic environment is a test for the asset class, said Max Thiele, a Morgan Stanley banker who specializes in digital infrastructure: While the investment case for digital infrastructure continues to be very strong and demand for quality assets is high, companies and investors are carefully scrutinizing the impact of inflation, power prices and the risk of recession, including if and how certain cost drivers can be passed through to customers. In addition, market participants are searching for the next adjacent infrastructure growth and capital deployment opportunities, Thiele said. This includes investments in tier 2 cities and markets, infrastructure deployments in preparation of new exciting use cases, such as edge computing, and also asset classes that have historically not been considered classic infrastructure but have proven highly predictable and economically resilient.5Cloud and AI for Resource Planning and HRCompanies across industries are looking to technology to streamline internal functions such as enterprise resource planning (ERP) and human resources (HR), said Leila Harestani, a Morgan Stanley banker who specializes in ERP and HR technology. In ERP, one of the biggest trends is cloud for deployment, in which software is hosted on vendors servers and accessed through a web browser, generally at a lower cost than the alternative on-premises software, which is installed locally on a companys computers or servers. As cloud-based ERP proliferates, more small- and medium-sized businesses may adopt these solutions, but vendors will have to prove they have prepared for security risks, such as who can access sensitive data and potential data theft by malicious actors, Harestani said. Another important theme is the use of AI to identify and learn from data patterns, which offers widespread applications for forecasting and modelling, supply chain tracking and customer service. In HR, AI is useful for recruiting, onboarding and employee engagement, and companies are also investigating how the blockchain could enable better data security through encryption, according to Harestani. Emerging private companies are the frontrunners offering these ERP and HR capabilities, and that has led to M&A interest from bigger companies, Harestani said. The more innovative and advanced technology solutions are coming from start-ups, and existing players in the marketlarger companies and private equity firmsmay look to acquire them.Looking AheadEmerging technology in industrials, insurance, healthcare, digital infrastructure and enterprise resource planning is enabling the exchange of data across value chains, and investors are monitoring companies that help connect data across disparate sources in specific sectors. Given demand for these solutions, big companies and private equity firms are on the hunt for acquisitions to increase their market share within industry verticals. Next

Key TakeawaysInvestors looking to capitalize on AIs rapid growth should consider stocks of dominant larger companies that are quickly integrating the technology.Many of these companies are harnessing AI to improve efficiency, introduce new services or roll out enhancements that can help reduce costs and boost revenue.Companies that supply the critical inputs needed for the development and use of AI, such as semiconductors, are also likely to benefit.Investors should pay close attention to AI beneficiaries with low valuations relative to how fast their earnings are growing.Artificial intelligence (AI), and particularly generative AI, is currently one of the most disruptive forces in business, permeating virtually every sector of the economy and promising to usher in new levels of productivity. Morgan Stanleys Global Investment Office sees AI as one of the most important investment themes of the next decade and estimates that it will rapidly grow to a $3 trillion industry in the next several years. Where can investors find compelling AI opportunities? Thus far, many investors have focused on a handful of mega-cap tech stocks known as the Magnificent 7 as the main beneficiaries of advances in AI. But given how wide-ranging AIs impact will likely be, we believe there are far more companies that stand to benefit, across sectors ranging from Consumer Discretionary to Health Care and Financials. Heres a look at the types of companies our strategists are watching.  Leaders May Keep LeadingMany of the economic benefits of AI are likely to accrue to companies that are already leading in their industries. Specifically, large firms with dominant market share, recurring revenues and sticky customers are positioned to use AI to amplify their already considerable competitive advantages. These companies often have customers who cannot easily switch to rival products and thus may be more willing to try their AI productand even pay more for itbecause it is from a company they already know and trust. Companies that move quickly to integrate AI into their business models are more likely to avoid disruption and widen their lead.Four Types of AI LeadersAmong these likely AI beneficiaries, investors may want to pay particular attention to companies that fit at least one of four categories. 1Margin ExpandersThese companies are using AI to reduce costs. Generative AI tools that help software companies write code, for example, may help them lower their often-sizable Research & Development costs and more rapidly introduce new products and features. Professional services companies are also using AI to realize savings: For example, one leading tax-services provider uses AI tools to help its accountants process significantly more returns in the same amount of time, without having to hire additional professionals. 2TrailblazersCompanies in this category are rolling out new AI-powered products or services to boost sales or create new revenue streamsoften targeting existing customers who may be reluctant to switch providers. Theres precedent for this strategy: Recall that in the 1990s, many people first tried web browsers from their existing operating-system vendor, and in the 2000s, customers tried video-streaming from their DVD delivery service. An example today is a leading online meal-delivery service that is developing a new generative-AI phone-answering system to take orders and make add-on suggestions. This helps increase order sizes, as well as reducing missed opportunities from the 20% of customers who say they would still prefer ordering by phone instead of online.3Price RaisersThese industry leaders are introducing AI-based enhancements to justify charging more. They include a leading video-conferencing provider whose new AI companion will help users catch up on missed meetings by generating summaries. Similarly, a company that provides e-commerce tools for retailers has added generative-AI features to help clients write product descriptions or answer their operations questions, such as how to create a holiday sale. Such value-added features can make it easier for these companies to justify higher prices, particularly in industries where customer frustration has been growing over routine price hikes with minimal perceived improvements.4Input SuppliersThese companies provide the building blocks of AI technology, including data-management tools, data centers and the equipment needed for advanced chips manufacturing. As organizations add the computing capacity necessary for AI, global semiconductor companies are among the most likely beneficiaries, with surging demand for chips helping drive record profitability. But they are not the only ones. Investors may also want to watch select companies that provide the infrastructure and tools for businesses to develop or use AI, such as companies that specialize in data management for corporate IT departments and client-to-cloud networking services for data centers.Mind the Risks and Be Selective While AI is likely to usher in long-term growth in many industries, investors should be mindful of a potential bubble in the near future. There have been recent hype cycles around some new technologies, such as cryptocurrency and work-from-home technology, that have fizzled out to some degree. It may take a while before investors see big productivity improvements from AI, and companies that overpromise could fare poorly. There is also the risk that AI will actually reduce what economists call efficient scale, making it so inexpensive for smaller companies to compete that it effectively erases the size advantages enjoyed by larger players. Lastly, new regulations and legal battles over issues such as copyrights and intellectual property could smother AI development. Investors should be selective. Pay particular attention to likely AI beneficiaries that are favored by equity analysts and sport comparatively low valuation multiples relative to how fast their earnings are growing. For a list of 25 stocks that our strategists believe are attractively priced and likely to benefit from growth in AI in the next several years, ask your Morgan Stanley Financial Advisor for a copy of the October 20, 2023, AlphaCurrents report, Building an AI Army. Your Financial Advisor can share specific investment recommendations that may help you position for rapid growth in AI.