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Going into the Thanksgiving holiday in the US, this week largely felt ‘uneventful’ outside of Fed Chair Powell’s re-nomination and a few eye-catching earnings prints from retailers. Today’s market sell-off around the world reminds us how quickly things can change and that we may not be ‘out of the woods’ quite yet. In light of this, it’s important to take nothing for granted in this Covid-world and I hope everyone reading this enjoys a happy and healthy holiday season. I am grateful for all of you and your support will always be appreciated.
While news of the ‘variant of concern’ (more on this below) triggered one of the most dramatic market moves of the year, let’s not forget that this was still an important week for the Fed and state of the consumer. After Powell’s re-appointment and Brainard’s nomination for Vice Chair drove treasury yields near six-month highs, fears of another Covid-induced global slowdown brought us near November lows for yields. It’s hard to believe that it was only a few days ago when FOMC minutes confirmed the Fed is considering a faster taper and the lowest level of weekly jobless claims since 1969 seemed to indicate tightening on the horizon… Investors now shift their focus towards how the Fed will respond to an evolving situation around a new Covid variant and whether this could dismantle the current timeline for tapering.
Despite being in the early innings of processing news of this Covid variant, it seems as though many investors were quick to pull out the ‘Covid playbook’ from 2020, with WFH names like Zoom (ZM) and Peloton (PTON) ending Friday up more than 5% and re-opening names like Delta (DAL), Ryanair (RYA ID) and Meituan (24551 HK) each down more than8%. Could this finally be an inflection point in a tape that has been largely one-sided or merely a rotation away from a recently popular re-opening trade? Extended valuations and positioning in some crowded names could have contributed to today’s massive swings, yet this could also be an indicator for investor weariness going into an increasingly uncertain 2022 fundamental backdrop.
Investors will have plenty to digest this weekend as we learn more about the new variant and reflect upon the conclusion of Q3 earnings. While retail prints last week led many bulls to pound the table on the strength of the consumer and pricing power for brands, disappointing results from GAP (GPS), Best Buy (BBY) and Nordstrom (JWN) exposed a soft underside for some retail brands that came to the surprise of many and led shares of these names to fall more than 20%. With that being said, signs of easing supply-chain pressures (more on this below) and encouraging beats on consumer spending and income from this week further fueled the bull argument leaning into a strong final sprint going into year-end driven by the consumer. On the other hand, bears continue to emphasize that valuations are expensive and today’s sell-off shows case-in-point how quickly these lofty equity prices can become undone. The resurgence of Covid cases across European countries and the potential threat of a new variant spreading certainly add risk to what bears already view as a deteriorating economic backdrop, yet bulls would argue that a new variant is not something we haven’t already dealt with before and the state vaccines/treatments for Covid has never been better.
Taken together, we are set up for quite the final stretch going into year-end. The heightened pullback at the index level today should enable stock pickers to generate more alpha after weeks of indices grinding higher despite carnage beneath the surface. With that being said, it was concerning to see ‘nowhere to hide’ today as losses mounted across every sector. Crowded longs have already been under pressure, reflected by the MS Crowded Long Basket (MSXXCRWD) recently having the worst rolling one-month relative performance on record vs. the S&P 500 (down 13%). Incremental news on the new variant and signaling from the Fed going into December’s FOMC meeting will be crucial to investors assessing positioning. While it’s unclear whether we could be in the midst of another groundhog day moment, one thing feels for certain as I look ahead to the next few months: pain.
I continue, like many of you, to have a couple observations that crossed my mind this week including…
- Fed Chair Jerome Powell is back for another 4 years, this time with a new ‘sidekick’: Vice Chair Lael Brainard. Will we see more of the same or could this be the beginning of a new approach for the Fed? The Savone Family Movie of the Week is Batman and Robin
- I don’t know about your family, but my wife and kids are borderline obsessed with Christmas and have already started putting up lights and other ornaments. With the holiday season in full swing, I will begin including a new bonus Savone Family Holiday Movie of The Week. This week’s bonus movie is Elf.Will Farrell never fails to capture the hearts (and laughter) of his viewers. Open to any suggestions for the rest of the season!
- It’s been an absolutely heartbreaking week for my teams in the US…the Las Vegas Raiders stopped an incredible Cowboys comeback in overtime, my Bruins lost by a landslide to the #1 Gonzaga, and my Hoyas failed to give me hope against San Diego State…
- The one shining light this week was my team in Italy! A.S. Roma put on a Thanksgiving show in their dominant 4-0 win against FC Zorya Luhansk. Redemption is sweeter than gelato! They look to keep the momentum on Sunday in their game against Torino. I’m thankful for this team!
- My World Cup anxiety returns this week with news that Italy and Portugal face each other in the knockout round—only one of the two teams will travel to Qatar next year. I’m really holding my breath for this one. Forza Italia!
- Dollar Tree (DLTR) stands as one of many companies passing cost pressures on to the consumer. President and CEO Michael Witynski plans on raising prices from $1 to $1.25. Although a 25% price increase sounds extreme, their goods will always be a great bargain!
- Speaking of goods, today is Black Friday and shoppers continue to flex their wallets both online and in stores—I wonder if people will ever wait for stores to open at midnight again…in years past some Best Buys have looked like The Hunger Games! What are the most popular gifts you’re buying for the holidays?
- The NFT craze continues this Thanksgiving as Macy’s (M) auctions off 10 digital images of its Thanksgiving Day parade balloons. Which one was your favorite?
- While we point to crypto, NFTs, and the metaverse when talking about our rapidly evolving world, it’s important to keep tabs on the high-growth sector that continues to fly under the radar: Impact Investing. MS Global Head of Sustainability Research Jessica Alsford highlights her expectation that impact investing will experience the strongest growth of all ESG strategies in her latest report. Make sure to ask for a copy!
- Sitting down with my family for Thanksgiving dinner, I was reminded once again of how important it is to disconnect from the digital world and fully enjoy the presence of those who surround you. I am very grateful for my family both at home and at Morgan Stanley.
A data point I continue to follow closely is the ratio of dispersion between sectors vs dispersion within sectors, which this week jumped meaningfully to the 24th %ile from the 11th %ile last week. During today’s action, Covid winners outperformed comparable to reopening names, while growth stocks on the margin outperformed value cyclicals. Nevertheless, on a relative basis, even though moves like today provided an opportunity for some investors to close the gap on the index, this comes with a caveat as investors also saw their P/L cushion deteriorate in absolute terms. Chris Metli and our QDS team highlight that the market shock seen today is effectively the opposite of the shock to hedge funds’ P/L seen over the last few weeks. Chris sees a growing risk that as P/L deteriorates, contingent on the presence of negative news flow, it could drive more de-risking behavior to protect P/Ls into year end. Ask to be connected with Chris and the team.
On positioning as of Nov 24, US Equity L/S gross leverage decreased ~4% WoW to 195% and net leverage of these funds remained flat WoW at 62%; this gross leverage is the lowest we have seen in the past 12 months. On a YTD basis, absolute performance for the US L/S cohort remains strong, up +7.2%, but relative to the S&P 500 up +26.8%, that upside capture rate remains low vs. historical averages. Across other regions, gross leverage for EU L/S funds fell ~3% WoW to 174% due to the majority of equity de-grossing done by hedge funds, while net leverage was down 3% WoW at 47%. Asia fund gross leverage fell ~1% WoW to 136%, meanwhile net leverage fell ~1% WoW to 73%. While global funds ended the week down ~40bps on average, Americas-based L/S funds were the worst performers as they ended down 1.1% through Wednesday, despite the S&P actually being up ~10bps.
With news of the Nu COVID variant shaking markets today, two questions investors are asking is why the Nu variant is different from the others and what are potential implications. MS Biotech Analyst Matt Harrison outlines that B.1.1.529 is a new variant with a significant number of mutations first identified in Botswana. Matt expects it to take ~2 weeks to have an initial understanding of the impact of the mutation on vaccine efficacy. Since the variant has 32 mutations in the spike region, it’s possible this could reduce vaccine effectiveness. The most important factor to watch is the transmissibility of the variant. If it is more transmissible than delta, Matt expects concern to increase, but notes that it is still quite early. Nu contains mutations previously identified in alpha, beta and delta, but never in the current combination and many mutations not previously identified. The mutations are 'cumulative' suggesting the variant emerged in a chronically infected immunosuppressed patient. South Africa is starting to see a significant rise in new COVID cases centered in Gauteng, so there is some anecdotal evidence to suggest B.1.1.529 may be easily transmissible. If the current vaccines fail to prove effective against the new variant, the development of a new vaccine will be imminent. Moderna CEO Stéphane Bancel says the company would be able to get a new vaccine construct into human trials in <60 days, while manufacturing would ‘take a few months’. Please reach out to be connected with Matt for information on these developments.
Even if transmission of the Nu variant is contained and we remain on our current path, MS Chief US Equity Strategist Mike Wilson remains cautious of US equity indices. While most still expect US equity indices to deliver 5-10% returns over the next year, he projects flat to slightly down returns in his base case. The primary difference of opinion is on valuation which appears vulnerable, in his view, to tightening financial conditions and a more uncertain range of outcomes in the economy and earnings over the next 6 months. In Mike’s view, this is the tug of war between strong flows and the underlying message from the market that uncertainty is rising. Mike recommends earnings stability and valuation as key factors to embrace as these seasonal patterns peak next month. Recent macro (retail sales) and micro data (company earnings) suggest to Mike that the consumer remains strong into the holidays. Mike notes that this is very much in line with the consumer survey he published two weeks ago, the same survey that suggests this strength might not be sustainable into next year due to weakening personal financial conditions from higher inflation. On another positive note, there have been six signs globally pointing to an easing of the supply chain crisis: a) Shipping freight rates are falling by ~20% and global freight rates have fallen for eight consecutive weeks b) Major US retailers like Walmart (WMT), Target (TGT) and Home Depot (HD) noted that they are already stockpiling goods for the holiday season c) Backlogs at major ports are down from record highs, highlighted by the Port of LA reporting shorter wait times for incoming container ships d) Chinese manufacturing is powering up toward normal capacity following an electricity crunch e) COVID-related factory closures have let up in Southeast Asia in countries including Malaysia + Vietnam f)US manufacturing output reached its highest level since March '19 driven by an +11% jump in Auto production + car parts. Please reach out to be connected with Mike and the global team.
Looking more broadly to the economic landscape, the key debate revolves around lockdown and travel restrictions. Services spending weighs more on the economy than goods (within GDP), so new quarantine orders would critically impact economic growth in 4Q and into next year. With this in mind, there is potential for a derailing in the wallet share shift to the services trade for now. If we do not see massive new breakouts across the country, the narrative will likely stay the same. MS Chief US Economist Ellen Zentner expects the Fed to keep the current pace of tapering asset purchases by $10bn UST and $5bn MBS per month. While Ellen’s perspective on tapering remains constant, her 4Q GDP outlook has more than doubled from 3% to 8.7%. This drastic change comes from incorporating new data on robust spending, strong inventories, strong durable goods orders, and upside in new home sales. Looking to ’22, Ellen expects the combination of strong growth, receding but above target inflation, and a patient Fed will lead the market to push out rate hikes, and price a higher terminal rate (10y yields end 2022 at 2.10%). Please reach out to be connected with Ellen and the team.
On a global level, fear tightly follows news of the Nu variant and its transmissibility. If vaccines hold strong, MS Global Head of Macro Strategy Matt Hornbach highlights that the journey toward tighter financial conditions will start from a place of extreme looseness or even easier financial conditions than exist today. Matt notes that even if financial conditions loosen further or remain as loose as today, not every market must move in a direction consistent with looser conditions. He expects that a decline in inflation risk premiums, rising growth expectations, and risks to more hawkish central bank policies will put upward pressure on real yields. Matt also thinks that investors will also have to absorb the 3rd highest amount of G7 net coupon government bond supply since 2007. He points out that the USD should also appreciate against low-yielders such as EUR, JPY, CHF and SEK, while riskier G10 currencies, such as CAD and NOK, should outperform the USD, aided by commodity prices and hawkish local central banks. Ultimately, perhaps the most significant area of anxiety is the notion of stagflation, where we have a slowing economic environment on top of continued pressures from inflation. This pandemic has created very unique conditions in this global economy. Please reach out to be connected with Matt and the team.
Looking to our neighbors down south, MS Chief LatAm Equity Strategist Gui Paiva forecasts c. +10% USD return for Latin American equities in 2022. Gui highlights three key external drivers for EM economies: a) Solid global growth of 4.7% in ’22, helped by gradual improvements in supply chains and a recovery of labor participation b) Normalization and tightening of monetary policy, at least in terms of market interpretation c) Inflation overshoot with differential tails, meaning prices will peak in first half of ‘22 then retreat, easing inflationary pressures. The question investors face is whether this area is truly mispriced or a ‘value trap’. YTD, the MSCI Latin America Index has de-rated by 30% (13x to 9x), and could continue on this trajectory depending on the outcomes of upcoming political catalysts. Gui’s top 10 stock ideas in Latin America include: 1) XP Inc. (XP), 2) Itau Unibanco (ITUB), 3) Minerva SA (BEEF3), 4) Vale (VALE), 5) Gerdau S.A (GGBR4), 6) Petrobras (PBR.N), 7) Becle SAB de CV (CUERVO.MX), 8) Santander Chile (BSA C.N), 9) S.A.C.I. Falabella (FALABELLA.SN), and 10) Mercado Libre (MELI).
Looking across the pond to Europe, MS Chief UK Economist Jacob Nell believes that the downside risk to economic activity will be more modest than in the past as economies have learned to coexist with the virus. Specifically, he is estimating a negative hit to aggregate euro area GDP growth in 4Q of about only 10bps, with countries such as Germany, Austria, and Ireland potentially facing a 20bps decline. Nonetheless, there is fiscal concern that more severe containment measures may lead to a rise in furloughs and extension of credit guarantees, potentially widening the economic deficit for 2022 and beyond. Shifting attention to the region’s market outlook, Head of European Equity Strategy Graham Secker recently shared his conviction for remaining bullish on European EPS (6% ahead of consensus forecasts for Dec 22) and on global investor positioning in Europe having room to improve from its current low state. At a sector level, Graham points toward the Banks/Financials space; Equity Analyst Izabel Dobreva downgraded the Glencore PLC (GLEN) to equal-weight since its ‘alpha’ levers have been exhausted and its risk/reward is not attractive anymore.
Something we continue to focus on is the effect of supply chain issues and whether or not they prove to be transitory or longer dated. MS Analyst Ed Stanley notes that in Europe, the “Great Resignation” could uncover potentially severe long term ramifications for higher wages and inflation. More than 1 in 3 people in Europe are earning ancillary income from each of: (1) content creation - 13%, (2) e-commerce - 15% and (3) NFT/trading platforms - 12%, and are planning to leave their jobs to pursue these activities full time. This, in turn, is leading to a sizeable portion of the European population to consider leaving their full-time job altogether. In the media's attempt to understand the "why" of the "Great Resignation" (i.e. Covid), Ed believes they miss the more pressing questions of "which" employees are dual earning, "where” people are at risk of leaving and "when" these dual earners are planning to leave. By understanding these issues, it reveals a far greater potential risk of structurally higher wages as employers exhaust efforts to retain employees. A continuation of this trend would favor Hays (HAS) and Pagegroup (PAGE).
Looking to Asia, Hong Kong has confirmed its second Nu variant case and barres non-residents from 8 countries of Southern Africa from entering the city. MS China Equity Strategist Laura Wang reiterates caution on China as the China Sentiment Index has underwent its deepest decline since 1Q2018 this earnings season. Macro disappointments, elevated PPIs, power shortages, and COVID shut-downs become key concerns and she argues that a quick rebound is unlikely unless concerns are alleviated. Meanwhile, MS Chief China Economist Robin Xing addresses investors’ concerns on policy easing, as the State Council called for more support on clean coal projects last week, covering a Rmb200 bn (~$31.3bn) relending program, tax and fee cuts, and local special bonds. Nevertheless, key overweight single names to highlight in light of HKEx relaxing secondary listing requirements are XPENG (XPEV) with its QoQ revenue increase at 52%, with Pinduoduo (PDD) reporting above-consensus profit, and Meituan (24551 HK) with in-line earnings results and resilient growth despite macro headwinds. Please ask to be connected with the teams.
Nevertheless, please find below a selection of this week's data points, charts and research from each region (Europe, US, LatAm, Asia, Japan, EEMEA) that I believe points to an inflection or material change for individual sectors, companies and/or the macro environment this week. I have tried to avoid the obvious beats and misses and instead highlight what I thought to be the more significant trends and inflection points.
Have a great weekend. Drink lots of fluids, take Vitamin C, and make sure to wash your hands!
#FORZA
Nick
*Included in my 2021 Global Ideas Deck. Please ask for the presentation.
Please see below the list of client webcasts MS is hosting over the next few days. Please note, these are widely attended events open to Morgan Stanley’s Institutional and Corporate Client base, and appropriate Morgan Stanley personnel. Webcast link information should not be forwarded or shared beyond intended recipients.
Source: Morgan Stanley US Alpha Team & Global White Phone Teams
Time (EST)
TOPIC & SPEAKERS
Monday, November 29, 2021
Morgan Stanley Cryptocurrency vs Traditional Finance
9:00 AM
Global Macro Forum: Initial Thoughts on the B.1.1.529 Variant
MS
Matthew Harrison, US Biotech Analyst
Jacob Nell, Head of European Economics
Andrew Sheets, Chief Cross-Asset Strategist
10:00 AM
MS Weekly Industrial Webcast: "MS PB Content Group Positioning Update & GE Resumption of Coverage OW"
MS
Josh Pokrzywinski, US Electrical Equipment & Multi-Industry
Bill Meany, US PB Content Group
Mark van der Pluym, US Industrials Specialist Sales
Tuesday, November 30, 2021 - Thursday, December 2, 2021
Morgan Stanley Virtual Global Consumer & Retail Conference
Tuesday, November 30, 2021
8:00 AM
MSQA: Inside the Mind of an Analyst - Autos
MS
Billy Kovanis, US Autos & Shares Mobility Research Analyst
Harald Hendrikse, EU Autos & Shared Mobility Research Analyst
Rikke Jacobson, EU Industrials Specialist Sales
Mark van der Pluym, US Industrials Specialist Sales
Reyna Venkat, Thematic Investment Strategist, Institutional Equity Division
2:30 PM
DTE Energy Fireside Chat Webcast with CEO
Expert
Jerry Norcia, President & CEO
MS
Stephen Byrd, Power & Utilities and Clean Energy Analyst
Wednesday, December 1, 2021
Morgan Stanley Energy & Clean Tech Symposium
Thursday, December 2, 2021
MS ESG Insights Conference 2021
8:00 AM
Morgan Stanley Research Global e-Learning: Chemicals
MS
Vincent Andrews, US Chemicals & Agricultural Products
Charlie Webb, EU Chemicals
Mayank Maheshwari, ASEAN Energy & Materials
Takato Watabe, Japan Chemicals & Textiles
10:00 AM
MS LatAm 2022 Outlook - Where Is Consensus Wrong?
MS
Guilherme Paiva, LatAm Strategy
Andre Loes, LatAm Economics
Simon Waever, LatAm Sovereign Credit
Ioana Zamfir, Latam Local Markets
Cat Foy, MS LatAm Sales
Tuesday, December 7, 2021
Morgan Stanley 4th Annual Space Summit
Thursday, December 9, 2021
8:00 AM
Morgan Stanley Research Global e-Learning: Battery
MS
Adam Jonas, Global Head of Autos & Shared Mobility
Shawn Kim, Head of Asia Tech
Grace Kim, US Autos & Shared Mobility
Tim Hsiao, Greater China Auto Parts
Jack Lu, China Specialty Chemicals, Battery & Components
Source: Morgan Stanley US Alpha Team & Global White Phone Teams
UPCOMING CONFERENCES –
Please reach out to your sales representative if you are interested in attending any of these conferences.
Nov 30-Dec 2 (New York) I Virtual Global Consumer & Retail Conference
Nov 30-Dec 3 (London) I Virtual Nasdaq Conference
Dec 1-3 (Tokyo) I Inaugural Virtual Japan ESG Conference
Dec 7 (New York) I 4th Annual Space Summit
Dec 7 (London) I Business Services, Leisure & Transport Corporate Access Day
Dec 7-9 (China) I Virtual China Wind & Solar Symposium
Dec 9-10 (Global) I Virtual Global Metaverse Symposium
Jan 5-7 (China) I Virtual China New Economy Summit
Jan 11-12 (China) I Virtual HK/China 2021 Top Picks Outlook Seminar
Jan 12-14 (New York) I Virtual 14th Annual Latin America Executive Conference
Jan 13-14 (China) I Virtual China Cyclicals Corporate Day 2022
Jan 18 (Asia) I Virtual Asia ESG Symposium
Mar 7-10 (San Francisco) I TMT Conference
Mar 15-17 (London) I European Financials Conference
Mar 22-24 (Hong Kong) I Virtual Hong Kong Summit
May 24-26 (China) I 8th China Summit
The following comments are a summary of Morgan Stanley Research by Morgan Stanley Equity Sales & Trading:
SELECT COVID VIRUS AND TREND FOR RE-OPENING DATA POINTS
Global – Biotechnology – Initial Thoughts On The B.1.1.529 Or ‘Nu’ Variant
Source: Our World In Data
The B.1.1.529 variant (which is expected to named Nu) has emerged as a variant of concern in Botswana / South Africa because it contains more than 30 changes in the spike protein and therefore may have immune escape properties when it comes to protection offered by COVID-10 vaccines which directed against the spike protein (ie potential for reduced effectiveness as we saw with the Beta variant in South Africa). It is possible that the Nu variant has been circulation for some time, with commentators such as Francois Balloux suggesting the Nu variant or closely related variants might have been in circulation for 2-3 months. Patient zero is speculated to have been an HIV patient, heavily immunosuppressed, to account for the significant number of spike protein mutations. Cases have been reported in Belgium (with no apparent link to South Africa), Israel and Hong Kong. One of the mutations allows the Nu variant to be easily identified by PCR testing (as opposed to gemone sequencing), which suggests Nu variant cases might be disproportionately reported in the coming weeks. At this stage it is not known how much the Nu variant can evade vaccine-induced immunity (unlikely to be entirely based on real-world efficacy with COVID-19 variants against the Gamma and Beta variants, which out-performed concerns raised from attenuated efficacy in in vitro studies) – data from in vitro studies for COVID-19 vaccines and antibody therapeutics directed against the Nu variant are expected in the next two weeks. At this stage it is not known how much the Nu variant can evade acquired immunity from prior infection (which is directed against 29 proteins, not just the spike protein) – it will be important to watch the evolution of COVID-19 cases and hospitalisations in South Africa over the coming weeks, given acquired immunity levels appear high and the vaccine rollout remains relatively low (28% first dose, 24% second dose). At this stage it is not known whether the Nu variant is more transmissible than currently circulating strains (viruses typically evolve to be more transmissible/less virulent). We have been here before with the C.1.2 variant several months ago in South Africa, which was heavily mutated and was initially believed to have a >30% transmission advantage over the Delta variant, but today the C.1.2 variant represents <5% of cases in South Africa and the transmission advantage versus the Delta variant is believed to be <10%. Governments have reacted with an abundance of caution to restrict travel until more is known about the Nu variant, including whether it is more or less pathogenic – we should know more from the WHO in the next 7-10 days and have more data on the evolution of daily infections and hospital admissions in South Africa over the same timeframe. Investor questions have included: (1) Will the oral COVID treatments remain effective? – yes; (2) Will the initial COVID-19 vaccine and antibody therapeutic data suggest immune escape – most likely, with computational work suggesting reduced effectiveness against the LLY, GSK/Vir, ROG/REGN antibodies and not the AZN antibody; (3) Is the Nu variant driving the increase in cases in Europe? – unlikely, late emerging Delta variant waves and seasonal effects more likely explanations; (4) what data should we follow? – daily COVID-19 infections and hospital admissions in S Africa, reports of Nu variant infections in other countries, the initial in vitro data on COVID-19 vaccine / antibody effectiveness, early estimates of transmissibility and pathogenicity. Download the Complete Report / South African daily COVID-19 cases: here / Nature Article on B.1.1.529: here
Global – Biotechnology – B.1.1.529 Variant FAQs – What is the B.1.1.529 lineage? On 22 November 2021, we detected a group of related SARS-CoV-2 viruses in South Africa named the B.1.1.529 lineage. B.1.1.529 has been detected in Gauteng at relatively high frequency, with >70% of genomes sequenced (n =71) from specimens collected between 14-23 November 2021 belonging to this lineage. This lineage possesses a high number of mutations previously seen in other SARS-CoV-2 variants of interest (VOI) or variants of concern (VOC) but also other mutations which are novel. One of these changes can be detected through standard diagnostic tests that target the S gene, which allows detection of this lineage in South Africa without sequencing data.The World Health Organization and the South African National Department of Health were alerted to this lineage earlier this week. The NGS-SA is continuing to monitor the frequency of this lineage, and laboratory tests to assess the functional impacts of these mutations are underway. Thus far the virus has not fulfilled the WHO criteria for VOC or VOI. This will be revisited, especially as the virus spreads and data is accumulated. How do the C.1.2, Beta or Delta variants differ from the B.1.1.529 lineage? While the B.1.1.529 lineage shares a few common mutations with the C.1.2, Beta and Delta variants, it also has a number of additional mutations. At the present, the B.1.1.529 lineage is relatively distinct from the C.1.2, Beta and Delta variants and has a different evolutionary pathway. Does infection with B.1.1.529 result in similar symptoms as with other variants? Currently no unusual symptoms have been reported following infection with the B.1.1.529 variant and as with other variants some individuals are asymptomatic. What are the implications? Will these mutations affect vaccine effectiveness, disease severity, and transmissibility? SARS-CoV-2, like all viruses, changes with time, with mutations that afford the virus some kind of advantage being selected for in recent infections. While some of the mutations in the B.1.1.529 lineage have arisen in other SARS-CoV-2 variants of concern or variants of interest, we are being cautious about the implications, while we gather more data to understand this lineage. Work is already under way to look at the immune escape potential of B.1.1.529 in the laboratory setting. We are also establishing a real time system to monitor hospitalisation and outcome associated with B.1.1.529. Based on our understanding of the mutations in this lineage, partial immune escape is likely, but it is likely that vaccines will still offer high levels of protection against hospitalisation and death. We expect new variants to continue to emerge wherever the virus is spreading. Vaccination remains critical to protect those in our communities at high risk of hospitalisation and death, to reduce strain on the health system, and to help slow transmission. This must be in conjunction with all the other public health and social measures, so we advise the public to remain vigilant and continue to follow COVID-19 protocols by: ensuring good ventilation in all shared spaces, wearing masks (which cover your nose, mouth and chin), keeping 1.5m distance from others as much as possible and washing or sanitising your hands and surfaces regularly and keeping 1.5m distance from others as much as possible. These non-pharmaceutical interventions (NPIs) are still proven to prevent the spread of all SARS-CoV-2 viruses. Will these mutations affect test sensitivity? The B.1.1.529 lineage has a deletion (△69-70) within the S gene that allowed for rapid identification of this variant in South Africa and will enable continued monitoring of this lineage irrespective of available sequence data. However, most other targets (including the N and RdRp genes) remain unaffected from specimens tested in over 100 specimens from testing laboratories in Gauteng so it is unlikely that overall PCR test sensitivity is affected. These PCR tests typically detect at least two different SARS-CoV-2 targets, which serves as a backup in the case of a mutation arising in one. Analysis of the mutations in the nucleocapsid (N gene) of B.1.1.529 viruses suggests that rapid antigen tests should be unaffected, however verification of this is underway. Download the Complete Report
Global – Biotechnology – COVID-19 Outbreak Dynamics
US – Retail – Total Discretionary Retail Traffic
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìUS – Internet – Three Bullish Macro Factors For Online Ads; Stay OW SNAP, FB, GOOGL, PINS
Source: Company data, Thomson Reuters, Morgan Stanley Research
MS Research Analyst Brian Nowak and the Internet team highlight three bullish macro factors for online ad markets heading into 2022. First, the team believes that the addressable market for online ad dollars continues to expand (now starting to include retailer rent dollars) with online penetration arguably still below 20%. Second, the team thinks that the relationship between e-commerce and online advertising remains an important indicator of ad growth and e-commerce is holding on strong. Third, the team expects that platform-level innovation will continue to more directly link ad dollars to transactions and pull dollars into the online ad ecosystem. That said, the team also believes that in 2022 the platforms will also have to navigate through IDFA and ATT adjustments, other macro/micro-level changes, and difficult Y/Y comps. Given these evolving factors, in the team’s view it will be particularly important to focus on sequential growth rates vs history (pre-pandemic) to properly analyze how the platforms are improving/evolving and evaluate whether expectations are achievable/beatable. Brian comes away bullish on SNAP (OW, $65 PT), FB (OW, $365 PT), GOOGL (OW, $3200 PT), and PINS (OW, $53 PT). Download the Complete Report
ìChina – Property –China Property sector has been on roller coaster several rounds since October. Elly Chen reiterates her positive stand on the sector and looked at what relaxation measure are already in place, and the progress of mortgage releasing, and development loan lending so far. Key upcoming policy signposts Elly is watching: 1. More countercyclical measures: more fine-tuning to protect against downside risks for the property sector; 2. Property tax: property tax trial runs may be softer than market expectations, with either smaller scope for taxation or a later starting date; 3. New mortgage quota on Jan 1: There are just five weeks until the 2022 mortgage quota is released, which should significantly help developers' cash inflows and liquidity situations. Download the Complete Report
ìUS – IT Hardware – MS Research Analyst Katy Huberty highlights that she came into the second round of Hardware earnings expecting to hear that supply and logistics constraints were building during the seasonally strong period of demand, however this is not the conclusion she walked away with.First, Katy notes that storage appears to be less impacted by constraints than other categories and neither Pure Storage (EW, $33 PT) nor Dell (OW, $68 PT) grew storage backlog as a result of supply challenges; this makes Katy bullish into NTAP (OW, $102 PT) earnings on November 30th. Second, she points out that Dell saw PC backlog shrink across all categories, including commercial PCs. While HP (EW, $34 PT) didn't comment as specifically on backlog, her read is that backlog at least didn't grow sequentially as it did in the July quarter. Katy expects a more significant PC backlog flush in C1Q that could loosen supply, begin to normalize component and logistics costs, and create a demand air pocket in 2H CY22. Outside of PCs, Katy thinks that enterprise demand remains strong as businesses accelerate digital transformation efforts and catch-up with paused spending during the early stages of the pandemic. Download the Complete Report
ìîGreater China – Technology – Featured Companies
Source: Refinitiv, Morgan Stanley Research. e = Morgan Stanley Research estimates. Share prices as of the closing of November 22, 2021.
Sharon Shih and team see 3Q21 inventory hike could result in divergent outlook for tech hardware supply chain in coming quarters. ⅔ of our covered tech hardware supply chain reported 6-year high inventory. This is caused by certain component supply constraints as well as rising input cost from material cost hike, COVID disruption and power control in China. Going forward, most tech hardware companies indicated a seasonal uptick in 4Q, although the sequential increase remains below average since 2013. We therefore expect iPhone assemblers to deliver stronger shipments in November and December and data center hardware vendors to post accelerating QoQ growth in 4Q. Our top ideas in the next 6-12 months: We suggest focusing on 1H22 shipment strength; top OW ideas include: 1) favorable supply demand trend (AUO, Innolux, Unimicron and NY PCB); and 2) share gainers (Delta, Luxshare, Xiaomi, Transsion). The stocks we believe that might suffer from share loss and PC/NB demand slowdown are Catcher, Compal, China TransInfo and Tianma.
Xiaomi 3Q21 Earnings Recap: Despite weaker-than-expected smartphone shipments in 3Q21, Xiaomi's recurring profit of RMB5.2bn was 8% ahead of consensus, mainly thanks to upbeat margin in the smartphone and Internet segments. New demographics, premium, and offline are Xiaomi's key growth drivers in the Chinese smartphone business. In overseas markets, we expect the component shortage to ease gradually in coming quarters, which could support a volume recovery from 1Q22 to 4Q22.
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ìîUS – Software – SaaS 3Q21 Off-Quarter Preview; Strong Fundamentals; Positive OWs DOCU, PLAN, SMAR, & VEEV
Source: Company data, Thomson Reuters, Morgan Stanley Research
MS Research Analyst Stan Zlotsky highlights that the SaaS group valuation has continued to trend higher over the past three months, helped by robust IT budgets. Although interest rate concerns have recently resurfaced, he thinks that SaaS remains an area of focus for growth-minded investors, without the supply chain issues impacting other segments of tech. He notes that the overall software group (ex. new additions) is now at 17.2x EV/NTM sales, more than double the 5-year average multiple of 8.5x. Stan points out that the hunt for growth remains in effect, as the cohort of SaaS names growing >30% is up 10.3% over the last three months, well ahead of the 6% average for the entire group. His checks are mostly positive for Q3, reaffirming the strong IT spending environments and business fundamentals. Stan and the software team expect strong quarters from CRM (Covered by MS Research Analyst Keith Weiss, OW, $360 PT), DOCU (OW, $350 PT), PLAN (OW, $80 PT), SMAR (OW, $98 PT), and VEEV (OW, $350 PT). Stan is slightly more cautious on COUP (OW, $337 PT), as he sees a more challenging set up in Q3 given the noise around billings. Download the Complete Report
ì LatAm – Food & Beverage – Brazil Volume Share of Chinese Beef Imports
Source: China Customs, Morgan Stanley Research
MS LatAm Research Analyst Ricardo Alves highlights that China Oct. beef imports were again very strong, near all-time highs. Surprisingly, in spite of the beef suspension to Brazil, the data did not show major weakness from Brazil (still representing 37% of total imports of China). The US continued to gain ground, but Uruguay was the main highlight. Download the Complete Report
ì Mexico – Strategy – Ms Model Portfolio vs. Last portfolio –Key Weight Increases
Source: Bloomberg, Morgan Stanley Research.
MS LatAm Research Analyst Nikolaj Lippmann sees two key themes of growth in Mexico and of exposure in his Model Portfolio: 1) the transition toward online (including eCommerce) and 2) The Mexico Link with the US. First, transitioning towards tech has found a catalyst in consumers staying at home. This should drive secular growth and investments in several industries across Mexico. Second, the link is alive and getting stronger. Nikolaj thinks Mexico´s manufacturing revival could be underway as it continues to benefit from the integration and restructuring of global supply chains.He adds Pinfra and GMXT and delete TX and Peñoles. Download the Complete Report
ìChina – Healthcare – Top4 ICL Players Accounted For 56.8% Market Share By 2020 Icl Revenue (Incl. Covid-19 Testing)
Source: Frost & Sullivan, Morgan Stanley Research
Alexis Yan initiates coverage on Kingmed and Dian Diagnostics, two leading ICLs (independent clinical laboratory) in China, at OW. China's ICL industry is poised to sustain volume growth, as it takes share from hospital-based labs. China’s ICL penetration rate in 2020 was merely ~6%, vs. US at 35% and Japan at 60%, owing to a relatively short development history in China and more concentrated patient traffic from higher-tier hospitals. A key investor concern about ICL players has been the potential impacts from VBP (volume-based Procurement) on IVD (in vitro diagnostics) reagents with corresponding patient-level testing charge cuts later on. Alexis conducted the first-on-street scenario analysis and sees the direct margin impact to ICLs could range from anywhere between ~1ppt to over 10ppt for the affected items, hence the overall company level impact should be manageable for leading ICLs, in her view. Kingmed and Dian Diagnostics are the two largest ICLs in China, with 25.6% and 16.6% market shares in 2020, respectively, per F&S. Download the Complete Report
ìUS – Industrial REITs – MS Research Analyst Ron Kamdem sees undervalued growth in both PLD operating segments and reiterates his OW view. His new PT of $165 (up from $138) is based on 31x 23e FFO and supported by DCF analysis using 5.75% cost of equity, 7.0% second stage growth, and 2.0% terminal growth. He notes that PLD collects rent from customers through operating leases, including reimbursements for the majority of property operating costs. He also points out that the company then generates internal growth by increasing rents, maintaining high occupancy rates, and controlling expenses. Ron expects 7.0%/6.2% same-store NOI and 11.0%/11.2% total NOI growth in 22e/23e, which is 100-200bps above consensus. Despite a record 2021 for industrial REITs that saw total returns of +52% (vs. RMZ +36%) and record multiples of 32.2x (vs. REITs' 23.4x), Ron is positioning for continued fundamental acceleration in 22e. Indeed, he notes that availability is at a record low of 6.0% and net asking rent growth accelerated to +10.4% YoY in 3Q. Over the last 12 months, he points out that demand has accelerated and is now outpacing supply by over 100 million SF (0.7% of total inventory). Ron also raises his PT EGP (EW) PT by 23% to $215, applying a 30x multiple (vs. 26.6x previous) on 23e FFO and raises his DRE (EW) PT by 18% to $60, applying a 30x multiple (vs. 24.8x previous) on 23e FFO. Download the Complete Report
ìASEAN – Consumer Discretionary – We Expect A Full Recovery In Profits In 2022 (vs. 2019)
Source: Company data, Morgan Stanley Research. E = Morgan Stanley Research estimates.
Divya Kothiyal gives us 3 reasons why discretionary should outperform staples 1) More levered to reopening mobility dynamics; 2) Quicker profit normalization as restructuring over past 2 years to yield productivity gains & 3) Lesser cost headwinds given lower cost exposure to CPO & Crude derivatives. Our MS Alphawise survey (Sep/Oct-21) reveals rising household income vs 2020, with next 6-12m looking strong. Country order preference: Indonesia (+ve outlook, income level had improved in past 6-12mo and spending to improve in next 6-12mo). Philippines (coming out from 2yrs long quarantine, upcoming election helps). Thailand is tourism play.
Stock Top picks:Astra International (ASII IJ, OW, PT Rp7,300, 17% upside) given strong proxy to Indonesia domestic demand through autos amid new model cycle after a decade, while also benefitting from rising commodity prices via its exposure to coal, CPO & gold. Jollibee Foods Corp (JFC.PS, OW, PT PP280, 15% upside) key beneficiary of Philippines improved mobility & dine-in resumption, while election year typically bodes well for F&B spend. Also prefer MAPI(strong mall recovery and Alpawise survey showing electronic & fashion recovery YoY) & CRC (Thai/ Vietnam/ Italy reopening focused on Food, hardline omnichannel). Download the Complete Report
ìChina – Strategy – Stock Screen Of Chinese ADRs With Primary Listings In The US Newly Qualified For HK Secondary Listings Under HKEx Listing Regime Reforms
Source: FactSet, DataStream, HKEX, Morgan Stanley Research. Data as of November 23, 2021. The stock screen above takes into account quantitative criteria of HKEX's profit test in rule 8.05(1), the market cap/revenue/cash flow test in rule 8.05(2) and the market cap/revenue test in rule 8.05(3) as set out here. Listing rules for Biotech companies are not taken into account in the screening process
HKEx published conclusions on listing regime reforms, following its consultation paper in March 2021. It features 1) relaxation of secondary listing requirements for Greater China issuers without weighted voting rights ("WVR"), and 2) greater flexibility for issuers to dual-primary list with their existing WVR and variable interest entity ("VIE") structures, amongst other reforms to enhance the listing scheme for overseas issuers. The new rules will take effect from 1 January 2022. Download the Complete Report
ìAsia – Strategy – We have written extensively on the topic – from upstream content to emerging technology in downstream to enable the experience. While the realization is still at its early innings, there is no doubt it is here to stay for the capital market. Our cross product desk sees plenty of tactical trading opportunities will emerge over the next five months, and we have consolidated inputs from across Research, sales and trading, and local market commentary to arrive at 5 baskets will help investors gain exposures across 3 perspectives:
- Through gaming and content creation – the most tangible existing user case and source of new monetizable IP creations, as articulated by our gaming analysts here Download the Complete Report
- Through key emerging technology trends central to the Metaverse immersive experience development – which can lead to potentially higher sales, acceleration and upgrades across headsets, mobile graphics, cloud computing infrastructure, motion tracking technology for companies involved. More in-depth analysis here Download the Complete Report
- Through physical VR / AR headsets – that serve as the entry tickets of the virtual reality world, which is still at its infancy in terms of general adoption by the regular consumer given limited present-day application scenarios beyond gaming. Our analysts’ thoughts here Download the Complete Report
Negative
îKorea – Technology –Samsung Elec +6% and SK Hynix +8% in 3 days, seeing concentrated buying by both foreign and local institutions. There was no clear reason behind the strength though incremental positives could be 1) US semis setting new highs, 2) the "less bad" narrative", 3) better than expected demand for PC/Server, and 4) equipment is lacking components to supply DRAM capacity. Positioning remains a key driver as shorts placed ahead of the 3Q21 earnings period were squeezed earlier this month, and investors are seeking to top-up as they've been underweight the laggards. However, Shawn Kim remains unfazed and is not chasing the rally here - signposts he’s watching: demand growth, inventory levels and pricing trends – all provide little support to the "bottoming out" narrative. Shawn continues to see 4Q contract price declines of 7% for DRAM and 5% for NAND, and expects a double-digit DRAM price fall in 1Q22 before reaching trough levels entering the peak season in the back half of 2022. Shawn understands the market’s willingness to look beyond the valley given memory’s significant underperformance YTD but thinks it’s liquidity dictating the narrative more than fundamentals at current juncture. Shawn expects things to become reassuringly dull again and stocks to oscillate around trough and mid-cycle multiples. OW Samsung vs UW SK Hynix. Download the Complete Report | Download the Complete Report
îEurope – Strategy – Proportion Of All European Workforce Earning From Content Creation Platforms And The Number Planning To Quit Their Full-Time Roles – And When
Source: AlphaWise, Morgan Stanley Research
36% of Europeans earn additional income through content creation platforms, of which 25% plan to leave their job within six months and 41% within two years. This is not churn; these people are exiting the corporate workforce. Even if 1 in 10 sees these ambitions through, wage inflation looks set to persist. Download the Complete Report
îìLatAm – Strategy & Economics – Daily New Vaccines (‘000) – Selected EM Countries
*Data refers to a single dose, and may not equal the total number of people vaccinated, depending on the specific dose regime (e.g. people receive multiple doses).
Source: Our World in Data, Morgan Stanley Research
The 7-day m.a. pace of daily vaccination increased to 2.47m (from 1.37m wow; +80%) in Brazil and decreased to 169k (from 291k; -42%) in Mexico. The number of new infections was stable in most Latin countries over the past week. For instance, the 7-day moving average of daily new cases in Brazil reached 8k as of last Sunday, down 3k wow, and down almost 70k from the recent June 2021 peak, in favor of our “herd immunity thesis”, while for the other 5 main Latin countries it reached 10k, basically flat wow. ICU capacity utilization rates currently vary from a 21% low in Mexico to a 90% high in Chile (ventilators). Meanwhile, ICU usage is at 46% in Colombia and 35% in Argentina. Last, but not least, ICU capacity utilization rate was approximately at 38% -flat wow -in Brazil (93% recent peak on March 21). Mobility figures (7-day m.a.) deteriorated in both Brazil and Mexico vs the previous week. Download the Complete Report
îìGlobal – Strategy – This past year has been filled with false hope for EM investors. It promised so much, yet delivered so little. Expectations for 2022 are low. Markets will remain challenging near term and MS Strategist James Lord stays defensive, yet with a little patience by this time next year he'll be enjoying better returns. On EM FX, James’ expect more USD strength in the short term, and risks that it overshoots. James thus maintains his bearish FX and neutral rates view for now but think he is in the final phases of the FX sell-off and the next move would be to turn bullish on rates and neutral FX. Thus, full-year returns should look better in 2022 than 2021 in local markets, but some patience is required. Download the Complete Report
îìEurope – Financials – Russian Banks' Share Price Performance Has Historically Been Negatively Correlated To Inflation In Russia…
Source: Datastream, Morgan Stanley Research
Russian banks are down ~13-17% this month as a positive rate cycle, continued loan growth and benign asset quality into FY22 are overshadowed by geopolitical risks. Once current risk premiums recede, MS Research Analyst Nida Iqbal would expect the shares to rebound, and Sberbank remains her preferred play vs VTB Bank. Download the Complete Report
îìLatAm – Strategy – MS LatAm Strategist Gui Paiva forecasts c. +10% USD return for Latin American equities in 2022. Gui is overweight on Brazil & Chile, neutral Colombia, and underweight Mexico, Peru & Argentina. His top 10 stock ideas are XP, Itau, Minerva, Vale, Gerdau, Petrobras, Becle, Santander Chile, Falabella, and Mercado Libre. Gui believes presidential elections in Chile (4Q21), Colombia (2Q22), and Brazil (4Q22), along with political developments in Peru, Argentina, and Mexico, are key domestic events that should determine the direction of macroeconomic policy in 2022-23. Therefore, they are the potential catalysts that should determine if Latin American equity markets offer deep value or a value trap for investors.Download the Complete Report
îìPeru – Metals & Mining – Increased protest activity around Peruvian mines raises expectations of potential supply disruptions impacting the global metal markets. While Peru is an important supply source for several metals, MS LatAm Research Analyst Carlos De Alba’s historical analysis suggests the risk is limited. That said, situation warrants attention.Download the Complete Report
îLatAm – Steel – Monthly Production From 64 Countries Reporting To The World Steel Association
Source: World Steel Association, Morgan Stanley Research
MS LatAm Research Analyst Carlos De Alba’s M/M global steel output remained flat, but October was the third Y/Y drop in the last twelve months. According to the World Steel Association, global crude steel production fell 10.6% Y/Y to 145.6Mt in October. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – General Electric Co – Deleveraging, Aviation, & Underappreciated Strategic Value; Resume At OW
Source: Company data, Morgan Stanley Research
MS Research Analyst Josh Pokrzywinski resumes coverage of GE with an OW rating and a $125 PT. He highlights that GE has met the major milestones of his thesis over the past 3 years, whereby management significantly reduced the tail risk of Power, leverage/pension, and insurance. Josh viewed the post-COVID path forward as supported by earnings revisions from Aviation and continued deleveraging progress that would eventually allow GE to go on offense. He notes that the recently announced breakup is the logical extension of that, whereby the liabilities are well-managed enough for the pieces to stand on their own and realize the independent and strategic value of Aviation. Despite the major turnaround and milestones achieved over the past 2 years, Josh points out that shares have been range-bound outside of the low points of Covid. From a catalyst path perspective, Josh acknowledges the overhang of "split purgatory" as well as limited 1H22 seasonal cash flow will drive debt reduction. He understands that price and sentiment matter, however, he believes that both are dislocated relative to the fundamental and risk backdrop. Josh fully expects shares to be more volatile than most industrials around Covid trends given aero exposure, but he believes that the risk/reward over the next year is attractive with a ~2.7:1 bull/bear spread. Josh’s SOTP PT is based on ~14x 2023 EV/EBITDA, which is predominantly driven by 15.2x on Aviation and 15.7x on Healthcare. Download the Complete Report
ì Mexico – Food & Beverage – FMX is one of Mexico's blue chips, and its core retail business is now trading at a 30% discount to historical. Given Morgan Stanley economists' relatively upbeat private consumption outlook near term, MS LatAm Research Analyst Ricardo Alves’ sees an attractive entry point for FMX at current levels and tactically upgrade from EW to OW. Download the Complete Report
ìChina – JOYY Inc. – Bigo Revenue To Grow 12% YoY in 2022E
Source: Company data, Morgan Stanley Research estimates
Alex Poon re-iterates OW on JOYY and raises target price to US$80, 42% upside. YY is doubling capital returns to US$2bn - with newly announced US$1bn share buyback last Thursday, on top of US$300mn buyback done in Aug, US$200mn newly announced in Sep, and ongoing US$500mn regular dividend through 2022. JOYY market cap is at US$4.4bn (1.4x 2022 PS), below its net cash of US$5.2bn (3.8bn end of 3Q, plus US$1.3bn for remaining YY proceeds net of tax). Bigo Live is a growing cash cow 20% OPM Since 4Q19, supporting diversification of Bigo group, and has started to bear fruit in 2H21. Co confidence in raising capital returns also indicates the likelihood of YY Live deal approval. Download the Complete Report | Download the Complete Report
ìî Japan – Nexon – We Forecast New Title Launches In 2022 To Drive A Top-Line Recovery
Source: Company data, Morgan Stanley Research estimates (E)
Seyon Park reiterates overweight rating raising target Y3000, 18% upside. Shares are up 45% from Oct lows on a combination of short covering + better-than-expected earnings driven by existing core franchise + Mobile DNF launch announcement in Korea in 1Q22 + share buyback (2.9% TSO). Yet, Seyon sees further upside as 2022 game pipeline is looking increasingly robust, after a long hiatus, with Mobile DNF in Korea, Kartrider Drift, and Pioneer from Embark all slated for launch in 2022 + recent launch of Blue Archive which has been met with positive reception. Despite the quick recovery in shares, valuation is still compelling at 20x ‘22e P/E ex-cash.Download the Complete Report
ìîUS – Globalfoundries Inc – GlobalFoundries Adjusted Gross Margins
Source: Gartner, Morgan Stanley Research.
Joe Moore see GFS as a key beneficiary of multiple important cyclical and secular trends in served foundry markets, a beneficiary of US semiconductor policy, and a substantial strategic asset. But stock +36% since recent IPO leaves less room near term, so initiates with an equal weight rating and PT $67, implies ~27x non-IFRS numbers for CY23 and 6pt premium to peers. Joe lays out 3 key debates of what would make us more bullish going forward, bull case OP margin upside to 21% in CY2023, would reach PT of $91. Download the Complete Report
ìîUS – Udemy Inc – Efficient Content Generation And Differentiated Learning Platforms; Initiate At EW
Source: Company data, Thomson Reuters, Morgan Stanley Research. Note: Ed Tech Comp Group includes educational software with a consumer/student buyer component – CHGG, COUR, DUOL, and TWOU.
MS Research Analyst Josh Baer initiates coverage of Udemy ($36 PT) with an EW rating given the headwinds from the Consumer segment, representing a majority of the business, with lower margins and uncertain demand given its primarily transactional business model. He highlights that Udemy attracts and incentivizes instructors to create relevant and high-demand content for individual learners and organizations and that learners gain technical and business skills and fulfill personal development goals. Through rapid growth in Udemy Business segment (~50% five-year CAGR), Josh believes that Udemy can sustain 20%+ growth through 2026 to ~$1.4B in revenue. He thinks that the durability of Udemy Business (30% CAGR through 2032) should help Udemy reach $3B in 2032 revenue, with FCF margins limited to high-teens. He notes that this combination of growth and margins suggests modest upside from current trading levels at 5.1x EV/CY23 sales and 0.22x EV/S/G. His PT implies 6.5x EV/CY23 sales and 0.28x EV/S/G, in line with Education Software average at 0.28x. In EdTech, Josh sees a more attractive risk/reward and favors the durability of growth and margin potential at COUR (OW, $53 PT). Download the Complete Report
ìîUS – MGM Resorts International – Attractive Valuation And A Clear Top In iGaming/Sports Betting; Resume At Equal-Weight
Source: Refintiv, State data, Morgan Stanley Research
MS Research Analyst Thomas Allen resumes coverage of MGM ($51 PT) with an EW rating as he balances what he sees as an attractive valuation on 2023e multiples with catalysts that could drive the stock lower in the near to medium-term. Ex sports betting, Thomas notes that MGM is trading at just 8.2x his 2023e EBITDAR, vs. its long-term historical NTM average 10.5x, despite sports betting taking US gaming from maturity to growth and expected higher long-term absolute margins. Thomas thinks that it has also proven itself as a leading sports betting/iGaming operator, with market share of ~25% vs. his 15% forecast. However, he notes that iGaming/sports betting market share has been a key determinant of stock performance, and MGM has started to lose share, which he sees as likely continuing as competition picks up and sports betting becomes a larger part of the mix. In addition, Thomas points out that MGM's core business has been able to meaningfully outperform expectations the past few quarters as Vegas/Regionals have recovered faster than expected. He notes that consensus 4Q21/2022e EBITDA is now 26%/31% higher than at January 1, 2021, making it harder to be a beat and raise story. Download the Complete Report
ìîUS – Zoom Video Communications Inc – MS Research Analyst Meta Marshall remains OW ZM ($365 PT) because she believes that their enterprise communications market opportunity and positioning to further expand TAM are being missed in conversations today focused on SMB churn and billings growth. While she would have liked to have seen more in terms of >10 employee customer adds, the fact that customers contributing >$100K in TTM revenue continues to grow 94% Y/Y and net expansion of the >10 employee set remains above 130% points to a platform that has only become more critical as the pandemic wanes and the market move towards a hybrid world. While near-term conversation is likely to remain dislocated around comm software softness and billings dynamics, which were well explained at the beginning of the year, she continues to be positive the name and sees the FQ4 print and FY23 outlook as something to be a buyer into. She notes that ZM reported FQ3 non-GAAP revenue / EPS of $1,051mm / $1.11, above her estimates of $1,017mm / $1.07. She points out that upside was driven by slightly lower than expected SMB (<10 employee customers), while Enterprise growth declined slightly Q/Q. Additionally, Meta’s PT represents 17x EV/FY24e revenue or ~0.6x EV/S/g, a ~0.05x premium to the SaaS peer median given ZM's higher relative operating margins and assuming ~28% growth. Download the Complete Report
ìChina – Kuaishou Technology – Alex Poon had the sole UW rating on Kuaishou until now- today he upgraded to EW following better 3Q results and as valuation at ~4x FY22 P/S post today’s rally is no longer stretched. He raised PT by 75%to $105 implies 2022e P/S of 4x (Weibo 4.3x), P/GP of 9x (Weibo 5.2x) and nominal P/E of 20x (assuming 20% net margin). He is not OW yet as long term fundamental is still questionable as it is not immune to macro and regulatory uncertainties and competition with Douyin. 3Q was an all-round beat, driven by user engagement, reorganization and operational improvement. Looking into 4Q, he expects advertising revenue growth to decelerate from 76% in 3Q to 50%YoY in Q4, 10% below consensus, due to weaker verticals (games, education, financials, etc) and macro, which could extend in 1H22. On e-commerce GMV, he expects growth to slow to 35% in 4Q and take rate to stay flat at 1% in 2022. Overall, he projects FY22 revenue growth of 20%, but gross margins risks remain. Download the Complete Report
ìSouth Korea – L&F Co Ltd – L&F: What Happened In 2021 And Our Expectations For 2022
Source: Wisefn, Company data, Morgan Stanley Research
Ryan Kim maintains his high conviction OW on L&F, lifting 2022/23e EPS by 4%/11% and PT to W310k, implying 54x ‘23e P/E and 36% upside. Ryan believes the shares are yet to price in the recent MOU with Redwood Materials (which was overshadowed by Tesla’s LFP Announcement) and earnings upside, and sees the recent pullback from all-time highs as yet another buying opportunity. Further details around the JV (to be shared within the year) including capacity, locations and customers, should build expectations as it opens up opportunities for direct cathode sales to OEMs, leveraging Redwood’s existing customer relationships (Ford/Tesla), leading to accelerating earnings growth with high visibility. There’s also upside to margins driven by growing usage of recycle materials (that could help to reduce input costs by ~30%) as well as capacity ramp + utilization rate improvement. With 4Q earnings expected to be another record high (W400bn rev with 6% OPM), Ryan sees plenty of catalysts to attract further investor participation in the stock and recommends investors to buy. Top Pick. Download the Complete Report
ìChina – Xpeng Inc – Share price limits up today post good earnings. Xpeng reported 3Q21 revenue of Rmb5,720mn with an increase of 52% QoQ on the back of a 48% sales volume sequential increase. More conservative 4Q21 volume guidance with precaution about supply uncertainties, of 34.5-36.5k units, implies ~25.4k units for the remaining two months in 2021, vs. the company's guidance of peak monthly sales of 15k units towards the yearend. XPeng reiterated this monthly target backed by strong backlog and rising P5 sales. Management struck a more prudent tone on the gross margin trend for following quarters, with P5 rising in the mix, but an upward trajectory should resume in 2H22 as G9 sales kick in. XPeng is Tim Hsiao’s top pick in the space. He also published a tactical buy idea on the name this morning.
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ìIndia – Reliance Industries – RIL: Significant Integration Between Existing Energy Infrastructure And New Energy Assets
Source: Company data, Morgan Stanley research
RIL is setting the stage to extract synergies between existing energy infrastructure and its new energy plans, while expanding into more niche chemicals/materials. We see a value creation opportunity of up to US$60bn ahead as the path to decarbonization progresses for RIL. Reliance’s announcement to separate out its petcoke gasifier assets is another step towards monetizing the potential synergies between its existing energy infrastructure and new energy plans. RIL seeks to attract strategic investors for the gasification and new materials/chemical projects.Download the Complete Report
ìîFrance – L'Oreal S.A –MS Research Analyst Pinar Ergun considers L'Oreal as one of the best capital allocation success stories in Consumer Staples and continue to view the stock as a core long-term holding. However, after multi-year outperformance, she awaits a better opportunity to add. Moving to Equal-weight. Download the Complete Report
ìThailand – PTT Public Company –Thailand's EV Penetration Targets By 2030 Under Its Zero Emission Goals
Source: Company data
For the first time, PTT has laid out its strategy to emerge as a key player in ASEAN's electrification strategy by 2024. This will encompass partnerships across the value chain gamut from electron production, battery swapping, electric chargers and charging infrastructure as well as EV (4W and 2W) production between 2024-26. Key highlights would include a new flagship Arun+ to drive the Group’s EV efforts, which will house the JV with Foxxconn that targets a 50k unit production capacity by 2024. This rides well with Thailand’s 2030 target of 30% EV penetration, where the JV will targets to meet ~25% of government car production target. Join us for our 2022 Key Investment Ideas –South East Asia Energy, Materials & Consumer zoom call today at 2.30pm HKT. Download the Complete Report
ìFrance – Pernod Ricard SA – Top-line recovery: regional organic sales were +33% in 1Q22 driven by on-trade rebound and off-trade resilience. Off-trade volumes were 120% of pre-Covid levels in Q1 and on-trade at just over 100%. Download the Complete Report
ìFrance – OVH GROUPE SAS –OVHcloud is the #1 European cloud service provider, mainly offering Infrastructure-as-a-Service. MS Research Analyst George Webb forecasts accelerating revenue growth, reaching c. 21% by FY25, driven by significant capex plans, data sovereignty differentiation, and new offerings. He initiates at Equal-weight, price target €21.50 Download the Complete Report
ìDenmark – Novo Nordisk A/S – Three Key Wegovy US Launch Questions
Source: Morgan Stanley Research, IQVIA
A strong Wegovy sales ramp and market share gains for Ozempic should drive faster-than-expected gross margin uplift. Key focuses over the next few months include whether Wegovy prescriptions will inflect, US obesity market growth and competitive datasets, whilst net pricing remains a key question. Download the Complete Report
ìUnited Kingdom – Compass Group –MS Research Analyst Jamie Rollo cuts FY22e EPS 6% to reflect the new guidance, but upgrades FY23e 3% given strong contract win momentum. FY21 volume is only 71% of FY19, and CPG has won contracts adding at least 10% to FY19 sales, suggesting +50% to sales from here, making a share buyback seem increasingly likely this year. The shares trade on an undemanding 18x PE / 10x EBITDA / 5% FCF yield on cal 23e. PT up to £18, stay Overweight. Download the Complete Report
îChina – Hangzhou Changchuan Technology – Changchuan's Historical Stock Performance
Source: Refinitiv, Morgan Stanley Research
Changchuan is a leading backend testing equipment supplier, with 30% market share in the handler segment in China and 10% globally, but this is a small category at only 10% of total semi backend equipment, vs ATE at 70% and probe equipment 15%. Changchuan is a small player in the ATE space, supplying digital-analog hybrid testers and power semi testers, and a #2 in this niche category. Kevin believes Changchuan has the potential to gain share on the localization trend, but it would need a few years to catch up in terms of the technology. The global testing equipment TAM is $6bn and China accounts for $1.4bn, after growing at 31% CAGR in 2015-20, well above the global CAGR of 14%. But MS semi team believes back-end capex is likely to slow in 2022 on moderating demand from downstream products like desktop PCs, smartphones, and TV panels. They expect the logic semi cycle to peak in 4Q21. Kevin Luo initiated with UW and PT of Rmb35 as he believes valuation at 120x FY22 P/E is too demanding vs historical of 80x, given the risk of sector de-rating due to semi cycle. Download the Complete Report
ìUS – Rent The Runway, Inc – Market-Leading, Innovative Fashion Rental Subscription Business; Initiate At OW
Source: US Census Bureau, Company Data, Morgan Stanley Research
MS Research Analyst Lauren Schenk sees RENT’s market-leading, innovative fashion rental subscription business in the early innings with a clear path to profitability. She notes that RENT is the largest women's fashion rental business, with significantly larger share than all other players in the market combined. Lauren also sees the fashion rental space as a winner-take-most/all market with RENT building a deep competitive moat through its broad inventory assortment, strong brand relationships, complex reverse logistics network, and unique inventory models. With a ~3.8M consumer TAM, according to her analysis, and just ~100K current subscribers (implying 2.6% customer share), she believes that RENT has a long runway for growth and forecasts a +31% '20-'25E revenue CAGR. Notably, she also has high confidence in RENT’s path to profitability through: 1) leveraging its brand relationships to drive lower inventory costs, and 2) a rapidly growing subscriber base driving fixed cost leverage. Lauren believes that the market underestimates RENT's product-market fit and its ability to reach profitability. She initiates coverage at OW with a $28 PT, implying ~73% upside from current levels. Download the Complete Report
ìUnited Kingdom – Glencore PLC – MS Research Analyst Alain Gabriel expects Glencore's upcoming Investor Day to refocus the market's attention to the company's investment case, after the significant correction in coal prices. Capital returns, portfolio simplification/tail asset disposals, and consistent capital discipline are on offer. Stay Overweight. Download the Complete Report
ìNorway – Tomra Systems ASA – EV/EBIT Relative To ESG Plays – Tomra Long Term Average Is A 25% Premium To ESG Peers
Source: Refinitiv, Morgan Stanley Research. Note: ESG Plays = Nibe, Orsted, SIKA, Vestas
A unique stock in CapGoods, combining sustainability (60% of sales aligned with EU Taxonomy) and Quality characteristics (2020-25 core business EPS CAGR +14%, EBITA margins 17%, FCF margin 11%, ROCE 20%). New deposit return schemes could double TAM. With limited PT upside, Equal-weight. Download the Complete Report
Negative
îUS – BellRing Brands Inc – MS Research Analyst Pam Kaufman highlights that BRBR shares were -5.7% (vs. S&P 500 flat and S&P Packaged Food -1.4%) as the company reported softer than expected revenue/gross profit/EBITDA (3%/9%/1% below consensus) due to supply chain challenges, including labor shortages and equipment delays, that impacted its ability to meet demand. The Q4 miss was disappointing, but several factors give Pam comfort in BRBR's outlook for revenue/EBITDA +9-13% in FY22 : 1) Topline guidance is not predicated on ambitious volume targets and reflects MSD pricing growth. 2) BRBR pointed to better visibility on supply as it will be sourcing from existing co-mans, two out of three capacity expansion projects are underway, and the company has secured higher purchase levels based on existing manufacturing capacity. BRBR is pulling back on lower velocity SKUs, lower TDPs, and is pulling back on marketing/promotions. However, competitors are facing similar supply chain challenges /input cost pressures across both tetra packs/bottled products, which should mitigate an adverse impact on BRBR's market share. Overall, Pam is decreasing our FY22 revenue/EBITDA by 3.5/3.1%. Download the Complete Report
îUnited Kingdom – Julius Baer –In MS Research Analyst Izabel Dobreva views earnings 'alpha' levers are now mostly exhausted in her numbers, with strategic initiatives well-digested by the market. Further EPS upgrades may come from 'beta' factors, such as a market rally/trading, but with lower PE. She downgrades to Equal-weight, as her EPS is now below Street. Download the Complete Report
îìSpain – ACS Actividades de Construccion y Servicios – ACS shares have struggled since the refined binding offer of Vinci for ACS IS was announced, on lower proceeds and reinvestment fears. The latter should continue to weigh whilst the core Construction business shows signs of growth returning into 2022e. MS Research Analyst Nicolas Mora stays Equal-weight, with a PT cut to €28. Download the Complete Report
îSpain – BBVA –The 12% fall in Turkish Lira yesterday alone makes the valuation of Garanti in euros more uncertain. MS Research Analyst Alvaro Serrano factor-in a net zero valuation in his SoTP for BBVA to reflect this, and look at risks from further currency weakness. Trading on 7x P/E and 15% yield, he sees upside once dust settles. Download the Complete Report
îUS – J.M. Smucker Co – MS Research Analyst Pam Kaufman highlights that SJM’s shares were +5.7% (vs. S&P 500 flat) as the company delivered an ~19% EPS beat driven by better than expected revenue/EBIT (5%/16% above consensus). Results in the quarter reflected continued topline momentum due to higher food at home consumption with organic sales +8% (vs. consensus 2.4%), and improving market share trends as brands representing 76% of SJM’s sales held/gained share (up from 66% in Q1 and 48% in 2Q21).However, Pam remains cautious on SJM as she anticipates rising demand elasticity as pricing builds over the coming quarters, particularly given SJM's exposure to categories with higher private label competition (i.e. coffee), ongoing share pressure in dog food, and high retailer concentration. Pam forecasts organic sales +4.5%, in-line with guidance ~4.5% and is increasing her FY22/23 EPS by 5.1%/6.1% to $8.41/$9.04, below the midpoint of FY22 guidance of $8.35-8.75. Pam believes stronger demand will support organic sales at the high end of guidance, but are cautious on margins (particularly in pet/coffee). Given pronounced input cost pressure, SJM is anticipating ~150 bps of sequential GM contraction in Q3, but 100-300 bps of Q/Q expansion in Q4, which Pam views as optimistic and forecast FY22 GM of 34.9% (vs. guidance 35-35.5%). Download the Complete Report
Nick Savone, Managing Director
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