As the U.K. grapples with structural, political, and economic issues, how are markets affected across assets, and what stories may look better for investors than others? Chief Cross-Asset Strategist Andrew Sheets and U.K. Economist Bruna Skarica discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan stanley's Chief Cross-Asset Strategist. Bruna Skarica: And I'm Bruna Skarica, Morgan Stanley's U.K. Economist. Andrew Sheets: And on part two of this special two part edition of the podcast, we'll be talking about the market implications of the latest political, economic and market developments in the U.K. It's Friday, October. 28th at 2 p.m. in London. Bruna Skarica: So Andrew, we already discussed the economic outlook for the U.K., and today I'd like to turn our conversation to you and your cross asset views. Obviously the current economic and political situation in the U.K. has a very significant impact on both macro and micro markets. Let's start with one of the number one investor questions around the U.K., which is the mortgage market. Roughly one in four mortgages has a variable rate and current estimates suggest that more than a third of UK mortgage holders will see their rates rise from under two to over 6% over the next year. What is your outlook for the mortgage market and its impact on the U.K. consumer, especially amid what is already severe cost of living crisis? Andrew Sheets: Like the U.S. most household debt in the U.K. is held in the form of mortgages. Unlike t,vhe U.S., though, those mortgages tend to have a quite short period where the rate is fixed. The typical U.K. mortgage, the rate is only fixed for 2 to 5 years. Which means that if you bought a house in 2020 or 2021, a lot of those mortgages are coming due for a reset very soon. And that reset is large. The mortgage, when it was taken out in 2020, might have had a rate of 2%. The current rate that it will reset to is closer to 6%. So that's a tripling of the interest rate that these homeowners face. So this is a very severe consumer shock, especially if you layer it on top of higher utility bills. This is, I think, a big challenge that, as you correctly identified in our conversation yesterday, that the Bank of England is worried about. And, you know, this is one reason why we think the pound will weaken. I'm sure we'll talk about the pound more, but if rate rises in the U.K. work their way into the household much faster because the mortgage fixed period is much shorter, maybe that means the Bank of England can't hike as much as markets expect. Whereas the Fed can because the dynamics in the mortgage market are so much different. Bruna Skarica: Indeed. Now, aside from that, U.K. rates have also seen a historical level of volatility this year. The pound as well has been weak all year, even though it has rallied a bit recently. Perhaps let's focus on the currency first. How do you see the pound from here? Do you think the downside risks have subsided or the structural risks still remain? Andrew Sheets: So the pound is a very inexpensive currency. It's inexpensive on a number of the different valuation measures that we look at, purchasing power parity, a real effective exchange rate and it's certainly fallen a lot. But our view is that the pound will fall further and that this temporary bounce that the pound has enjoyed in the aftermath of another new leadership team in the country is ultimately going to be short lived. A lot of the economic challenges that were there before the mini budget are still there. Weak economic growth, a large current account deficit, trade friction coming out of Brexit. And also I think this part about the Bank of England maybe not raising rates as much as the market expects, there's that much less interest income for investors for holding the pound. We forecast a medium term level for the pound relative to the dollar, about 1.05, so still lower from here. And we do think the pound