SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)
FOR INSTITUTIONAL CLIENT USE ONLY
Despite another week of earnings prints met with meaningful price reactions, macro headline risks continue to drive movements at the index-level. The slate of headline risk factors is nothing new to investors, but many struggle to reach a high level of conviction with respect to how these events will unfold and what the effect on markets will be.
Markets have been highly sensitive to any incremental news around geopolitical tensions in Russia/Ukraine yet sentiment remains split on where this path will take us. This week, a relatively benign reaction to FOMC minutes confirming a markedly hawkish Fed suggests much of the fears around tightening have been ‘priced in’. Markets are now leaning toward a 25bp hike in March after expectations for a 50bp hike surged last week. Taken together, bulls would point toward these developments as clearing events for investors looking to move their chips back onto the table. Bears, on the other hand, would contend recent PPI and CPI prints coming in above expectations signals the Fed has more on its plate than what is currently being discounted. Let’s not forget, we still live in a global pandemic and while it’s been encouraging to see cases & hospitalizations decline since Omicron peaked, there’s no guarantee that we are fully ‘out of the woods’ yet. While clearly important, these macro cross-currents hide much of what’s happening beneath the surface.
Earnings this week struck a resoundingly different tone for companies reporting in the US vs Europe. After a busy week of Q4 results, 29% of European equities have thus far posted EPS beats and overall we’ve seen a record breadth of sales beats (55%), leading many to shake off growth concerns in the region. In the US, an intense focus on guidance amid tightening conditions has driven some of the most significant changes to stock prices post-print. While Q4 results have thus far been positive on fundamentals, it has certainly been more of a ‘mixed bag’ with respect to expectations for growth going forward. The debate for a growth scare has currently come to the forefront after what has been a tumultuous week, particularly for growth tech. Even for companies beating on Q4 expectations, missing on guidance has been met with a startling amount of selling pressure. Roku (ROKU) and Shopify (SHOP), names that many thought had properly de-risked following the recent growth sell-off, missed on guidance and fell more than 25% after reporting earnings. Covid/WFH beneficiaries are quickly becoming a battleground for investors, as bulls and bears debate which demand trends are structural vs pull-forward as these companies lap on blowout quarters from last year. Bears would reference the above as evidence to the downside while bulls would point to beats from Airbnb (ABNB) and DoorDash (DASH) to highlight secular demand trends emerging from Covid after both companies beat growth expectations. All this has been happening while investor positioning has meaningfully contracted, with nets drawing down in the most significant pace we have seen in the US since the beginning of the pandemic.
As investors consider how to approach fundamentals, positioning and valuation for equities against a tightening financial backdrop and flurry of macro headline risks, the strength of the US consumer balance sheet has been a key debate guiding these views. Last year, robust levels of consumer demand (particularly in goods) helped absorb many of the price increases we saw from companies looking to preserve margins after facing supply chain challenges. Following these heightened levels of spending and the roll-off of fiscal stimulus, bears point out a decline in consumer demand could coincide with inventory finally hitting the market as supply chain pressures ease and wallet share shifts back toward services. While this could create a ‘perfect storm’ of misaligned supply and demand for some companies, bulls argue that wage growth should anchor sustained levels of consumer demand and pricing power should allow companies to ‘weather the storm’ as supply chains normalize in 2H22. With a full slate of retailers set to report earnings results over the next few weeks in the US, it remains to be seen how and when this dynamic will play out. Notable companies reporting next week include Macy’s (M), TJ Maxx (TJX) and Home Depot (HD).
Given what has been a turbulent week for tech, I’m keenly looking forward to our San Francisco TMT Conference in a few weeks (March 7-10). I am particularly excited for this event to be held in-person for the first time since the pandemic began. Hearing direct updates from companies that have been at the forefront of investor debates around tech and growth could not come at a better time. While it has been so refreshing to be reconnecting with clients in person for some time now, this feels particularly special as a major step forward for the first large-scale conference we’ve held since Covid. Let’s hope this is the first of more to come for events being held in-person as we emerge from this pandemic. I hope everyone reading this remains healthy and safe during these times and I look forward to seeing many of you soon!
I continue, like many of you, to have several observations that crossed my mind this week including…
- Looking back on a week marked by investors quickly moving their heads back and forth between updates on the economy and geopolitical tensions, it feels as if we are watching a ping pong match...if only we were watching Tom Hanks play at the Olympics instead…The Savone Family Movie of the Week is Forrest Gump.
- As consumers continue to shift their habits away from the pandemic era, many names are beginning to face strong headwinds for growth moving forward…MS IT Hardware Analyst Erik Woodring highlights new MS AlphaWise data suggesting Logitech (LOGI) might soon experience growth headwinds…make sure to reach out to Erik for additional insight!
- On the other hand, MS Gaming and Lodging Analyst Thomas Allen highlights a few names that look well positioned to benefit from the return to normalcy including Sunstone Hotel Investors (SHO), Gaming and Leisure Properties (GLPI), and Membership Collective Group (MCG).
- My Hoyas are looking to break their losing streak against Villanova, who are ranked 10th in the nation. While many of my Villanova colleagues will probably sleep soundly tonight, I have my fingers crossed for the upset! However, I would not be taking the moneyline by any means…
- What an exciting Super Bowl this year! It’s fair to say that Alabama head coach Bear Bryant was right when he coined the phrase ‘defense win championships’. What a great time to be in LA for this new super team…hopefully this win keeps the momentum going for my Bruins as they fall outside the top 10 for the first time this year. Although, I’m feeling better as we make out way closer to March Madness!
- A combined audience of 112.3 million people watched the Super Bowl on various outlets, a 16% jump from last year’s lower viewership. Some of the ads this year were particularly great. I really enjoyed Jim Carrey’s revival of the Cable Guy in the Verizon (VZ) commercial! If you’re interested in the communication services space, make sure to connect with MS Telecom Analyst Simon Flannery!
- Other commercials I loved were the one with Larry David and the E-Trade one as they brought back the talking baby from retirement! In no attempt to self-serve here but I thought the ad was fantastic, especially since the meme craze has been such a big factor in stock moves in the last year. For a good laugh take a look at the video here.
- As the Winter Olympics wrap up, I find it shocking to see the US team in third place…although my Italians are in 13th, they are only a few medals away from catching up! While Italy is normally known for its excellence on the pitch, it’s exciting to see them win at the Olympics!
- Walmart (WMT) reported that shoppers have been coming in seeking relief from inflation…as we continue to debate the strength of the consumer, make sure to reach out to MS Retail Analyst Simeon Gutman for more color on why he continues to be overweight WMT!
- What an exciting round so far in the Champions League! Man City looking incredibly dominant already with a 5-0 win...although my money is on dark horse PSG. I find it hard to imagine anyone stopping Messi, Neymar, and young superstar Kylian Mbappé when their time comes…
- It is to no surprise that Death and Taxes are the two certainties we experience in life. Chris Metley and the QDS team estimate at least $325bn will be due – a 75% increase (+$140bn) over what was due a year ago – and that estimate could be conservative. Reach out to Chris and the team for more info!
- Is the latest Roblox (RBLX) print a sign that investor enthusiasm around the metaverse is slowing down or simply an attractive opportunity to buy in at a depressed valuation? Reach out to MS Internet Analyst Brian Nowak for more insight!
A series of data points I continue to follow closely relate to dispersion levels. Amanda Levenberg and the QDS team highlighted that a mix of macro and micro drivers contributed to high volatility in the last few weeks. With that being said, it seems as though this week the macro tape has taken over most of investors’ attention; the ratio of dispersion between sectors versus dispersion within sectors is now at the 72th %ile on a 5-year basis (+22 %iles WoW). Overall, the mix of geopolitical headlines, varied growth expectations, and increased anxiety around rising rates has challenged the risk appetite for investors struggling to avoid losses and generate alpha in an unpredictable tape. Notably, volatility has been particularly elevated Cyclicals/Growth names (Discretionary, Materials, Communications, and Tech): for each of the aforementioned sectors, 2w volatility levels are now above the 80th %ile on a 5-year basis. Pease reach out to connect with Amanda Levenberg and the QDS team.
Noah Bramlage from our PB Strategic Content Team notes that with the pullback in global equity indices on Thursday, hedge funds returned to adding to shorts, causing net leverage across US L/S funds to fall to 48% (the lowest level we have seen since June 2020). Perhaps more importantly, we are at the 28th %ile for net exposure since 2010, which demonstrate the meaningful risk reduction we’ve seen in the market the last several weeks. This brings into question whether we have had an intermediate clearing event as capitulation seems to have happened in several segments of the market. As for performance,the average global fund was down -40bps through Thursday while the average Global L/S fund was down -70bps, but that all compared to the MSCI AC World Index ending down -80bps for the same period. Year to date, the average global fund is down only -2.3% while the MSCI is down more than twice that (-5.1%). The average Americas-based L/S fund posted the weakest returns relative to the other major strategies we track for the week, with the average fund down -0.9% vs. the S&P down -0.8%. For the year, the average fund is now down -5.1% vs. the S&P -7.9%. Funds in other regions were down less this week (EU-based -40bps, Asia-based -20bps), and they also continue to outperform Americas-based funds on a YTD view (avg. EU-based fund +0.2%, avg. Asia-based fund -2.2%).
With inflation prints continuing to weigh on the consumer, understanding how the Fed will carefully raise rates has been a focal point for investors. MS Chief US Economist Ellen Zentner now sees the FOMC following its 25bp rate hike in March with consecutive 25bp rate hikes at its May, June, and July meetings. Ellen continues to see the FOMC targeting aggregate balance sheet runoff caps of $80 billion/month ($50 billion in Treasuries, $30 billion in MBS), with those caps phased in over a two-month period. While kicking off the tightening cycle with a 50bp hike would send a strong message, Ellen ultimately thinks that the Fed can ultimately achieve the same effect by guiding for more rate hikes across the cycle. Looking to 2023, Ellen sees four 25bp rate hikes, which would put the fed funds rate at 2.5% by year end.
Turning to credit, IG and HY spreads continued to widen this week and reached the highest levels since November 2020. IG and HY spreads have widened 23bps and 80bps YTD, respectively, as high inflation, Fed tightening, equity markets selling off and Russia headlines brought volatility back to credit markets after spreads barely moved last year. As investors are becoming more concerned around a possible growth slowdown, overconsumption catch-up, and rate hikes, Treasury and corporate bonds may present a more compelling risk-adjusted return profile. Coming off of a record year of credit issuances, investors are searching for ways to hedge against highly levered companies that are vulnerable to widening spreads. For those looking to play this theme, John Storey and our US Baskets Team recommend shorting the MS HY Debt Sensitivity Basket (MSXXHYDS Index), which includes Underweight-rated names such as: Xerox (XRX), Royal Caribbean Cruises (RCL), Tenneco (TEN), Carnival (CCL), Penske Automotive (PAG), US Steel (X), American Axle & Manufacturing (AXL), Nordstrom (JWN), Norwegian Cruise Line (NCLH), Nielsen Holdings (NLSN), Delek (DK), Gogo Inc (GOGO), Equitrans Midstream (ETRN) and US Silica (SLCA).
Amid a period of elevated attention to macro headlines, MS Chief US Equity Strategist Mike Wilson highlights that the duration and depth of the incomplete correction he forecasts will be determined by how much growth disappoints rather than incremental news on inflation. Mike notes that last week the University of Michigan Consumer Sentiment Index registered its lowest reading since 2011 (61.7) largely due to high prices combined with lower real income and household net worth. As a result, Mike continues to see depressed consumer sentiment, high prices, and negative real wage growth posing a risk to consumption in the first half of this year. As growth slows, Mike thinks the market is likely to favor high-quality companies with earnings stability and a strong ability to execute. Within this theme, Mike highlights Mondelez International (MDLZ), Simon Property Group (SPG), and Welltower (WELL)* as single-names he favors. Please reach out to Mike and team for more color!
Taking a look at how Financials have fared this year, it has been increasingly difficult to find directional trends in flows for the sector. While last week’s net-selling brought the group to net exposure lows last seen in 2010, some would argue the slate for investors left in the space may be as ‘clean’ as it has been for a while. Keeping in mind that (1) certain Banks are capable of growing their loan books throughout the Fed hike campaign, (2) alternative asset managers can continue to fundraise/support FRE growth and (3) the normalization of credit closes may not match up with the pace of lending levels, MS US Banks Analyst Betsy Graseck points out an opportunity to generate returns within high vs low beta stocks across credit, rate, and equity market risk. Fitting this theme, Betsy likes (1) Charles Schwab (SCHW) as a company that has a low credit beta and equity market beta, (2) State Street (STT) as a beneficiary of 10-year yields and with a low credit beta and (3) Wells Fargo (WFC)* since it has the most exposure to Fed Funds, with American Express (AXP) being second in line. Globally, we also continue to see more interest within Financials in Europe and Asia. For example, in the EU, Banks Analysts Alvaro Serrano and Izabel Dobreva spotlight CaixaBank SA (CABK SM) and Commerzbank (CBK GR) as their top picks respectively. In Asia, Banks Analyst Richard Xu and Katherine Liu have Lufax (LU) and East Money Information (300059 CH) as two of their Overweight picks, respectively. Please reach out to be connected with our Financials teams.
On a more thematic front, MS Global Head of Sustainability Research Analyst Jessica Alsford published a note this week highlighting “Solution Stocks” for 2022 that can help to solve key sustainability challenges such as climate change, inclusion, and resource management. Jessica’s interactive model maps 2022 and 2024 expected revenue and EBITDA exposure and highlights 50 companies with the greatest exposure to these positive transition themes. To Jessica, transition is an important element of Sustainable Investing as it indicates that companies are moving to a more sustainable business model. Some Overweight-rated single name stocks include: Plug Power (PLUG) for Green Hydrogen transition, Li Auto (2015 HK) for the EV transition in Green Mobility, and On Holding (ONON) for Resource Management. With this list, it is definitely important to remain mindful of where markets are in the near-term from a macro perspective as many will likely benefit from Sustainability tailwinds for the long-term. Please reach out for the full note or to be connected with Jessica!
Shifting to Europe, MS European Equity Strategist Ross MacDonald highlights the overall beat rate for 4Q21 earnings has been better than expected and recent upgrades suggest an earnings growth scare is unlikely in the short term. Recent upgrades include Banco BPM SpA (BAMI IM) to Overweight and Commerzbank (CBKG.DE) named as a Top Pick with ~27% upside to MS EU Banks Analyst Izabel Dobreva. ENGIE (ENGI FP) also posted a notable beat with net income coming in 2.6% ahead of consensus. Despite recent signaling around a potential hawkish ECB pivot, Ross asserts that 2022 EPS growth expectations are too low; the 6% in consensus numbers is below MS economists' European nominal GDP growth estimate as well as consensus forecasts for sales growth. Value stocks are outpacing growth from a breadth of beats perspective with a net 31% of value stocks surprising positively so far. Please reach out to Ross or Izabel for more!
Looking to Asia, MS Chief Asia Economist Chetan Ahya highlights that despite aggressive repricing of Fed’s policy path, Asian currencies have been remarkably stable. Headline CPI inflation in Asia is the lowest across all regions, running at just 2.5% YoY, which is far below 7.5% in the US. MS Chief China Economist Robin Xing emphasizes his positive outlook on China as broad credit growth beat expectations by a large margin in January, up +10bps YoY to 10.6%, while the market remains skeptical as the uptick in bank loans has been largely driven by bill financing since household and longer-term corporate loans remain subdued. MS Chief Asia Equity Strategist Jonathan Garner notes that aggregate net income misses for MSCI EM is 4.3% and MSCI APxJ is 2.5%. Misses were seen broadly across sectors except Financials, which reported relatively stronger results vs other sectors, yet Jonathan notes that China will be key to this earnings season. Reopening in Asia has been a trade that is gaining a lot of traction and MS China/Hong Kong Transportation Analyst Qianlei Fan also raises her estimates on the Beijing/Shanghai High Speed Rail (601816 CH) and Spring Airlines (601021 CH). The ADR favorite on China’s re-opening will be Trip (TCOM US), as the stock is up 40% since December lows. Three key baskets for reopening are Japan‘s MSAPJOPN Index, Asia Ex-Japan’s MSAPOPN3 Index and ASEAN’s MSAPAENO Index. Please ask to be connected with the teams.
A few conferences I wanted to highlight include the Global Energy and Power Conference (Feb 28-Mar 2), the Morgan Stanley 2022 Technology, Media, Telecom Conference per above (Mar 7-10), and the Triple Net REIT Day (April 5), all set to take place in-person. This year’s TMT Conference returns to San Francisco and will feature over 300 companies through fireside chats, panels, and one-one-one/small group meetings. Corporates confirmed in the lineup include Airbnb (ABNB), Coinbase (COIN), Databricks (Private), Microsoft (MFST), PayPal (PYPL), & Uber (UBER). These conferences are always in high demand, so be sure to reach out to your sales coverage for more information. Thank you again to the MS Global Corporate Access team for such great work around the world! Please see below for all upcoming MS Conferences & Events.
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 2022 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
WEBCAST LINK
Wednesday, February 23, 2022
Morgan Stanley Blockchain Gaming Symposium
Tuesday, March 8, 2022
9:00 EST
Sustainable Packaging Webcast
Experts
Jessica Vieria, Vice President of Sustainability at Apeel
Tuomas Mustonen, CEO at Paptic
John Bissell, Co-CEO at Origin Materials
MS
Jessica Alsford,Global Head of Sustainability Research
Tuesday, March 15, 2022
Virtual India Financials C-Suite Seminar
10:00 PM
Australia Sustainability: Webcast With Katharine Tapley, Head Of Sustainable Finance At ANZ Banking
RSVP to: Sydcorpac@ms.com or contact your MS sales rep
Expert
Katharine Tapley, Head of Sustainable Finance at ANZ Banking
MS
Rob Koh, Australia Sustainability Research
Wednesday, March 16, 2022
Virtual India Financials C-Suite Seminar
Thursday, March 17, 2022
Virtual India Financials C-Suite Seminar
UPCOMING CONFERENCES –
Feb 28-Mar 1 (London) I EMEA HealthTech Conference
Feb 28-Mar 2 (New York) I Global Energy & Power Conference
Mar 7-10 (San Francisco) I TMT Conference
Mar 15-17 (London) I European Financials Conference
Mar 15-17 (India) I Virtual India Financials C-Suite Seminar
Mar 22-24 (Hong Kong) I Virtual Hong Kong Summit
Apr 5 (New York) I 7th Annual Triple Net REIT Day
Apr 6-7 (Sydney) I Alpha ex 100 Conference
Apr 12-13 (Shanghai) I Virtual China CXO Corporate Day
Apr 26 (Sydney) I Australia Private Health Forum
May 10-12 (London) I Virtual EEMEA Conference
May 11-12 (Shanghai) I Virtual China Smartphone and Supply Chain Corporate Day
May 17-18 (Global) I 13th Virtual Saudi Arabia Conference
May 17-18 (Global) I 2nd Virtual MENA Conference
May 24-25 (New York) I Sustainable Futures Conference
May 24-26 (China) I 8th China Summit
Jun 1-3 (Tokyo) I 2ndVirtual Japan Summit
Jun 7-9 (India) I Virtual India Summit
Jun 8-9 (Sydney) I 4th Annual Australia Summit
Jun 16 (London) I Europe & EEMEA Property Conference
Jun 24-26 (New York) I China BEST Conference for US & EU Investors
Jun 27-28 (Shanghai) I Virtual China SaaS Corporate Day
Jun 29-30 (Singapore) I ASEAN Conference
Aug 31-Sep 1 (Beijing) I Asia TMT Conference
Sep 5-6 (London) I Asia BEST Conference for EU
Sep 7-9 (London) I Industrial CEOs Unplugged
Sep 12-14 (New York) I Global Healthcare Conference
Sep 12-15 (Cape Town) I RMB Morgan Stanley Big Five and Off Piste Investor Conferences
Sep 14-15 (Shanghai) I Virtual China EV & EV Battery Corporate Day
Sep 14-16 (New York) I Global Healthcare Conference
Sep 28-30 (Asia) I Virtual North Asia Conference
Nov 16-18 (London) I Barcelona TMT Conference
Nov 16-18 (Singapore) I 21st Asia Pacific Summit
Dec 6-7 (London) I Nasdaq
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 – COVID-19 Outbreak Dynamics
US – Retail – Total Discretionary Retail Traffic
Source: Prodco, Morgan Stanley Research
Global Benchmark Table
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìîGlobal – Consumer Economics – Assessing Consumers’ Resiliency In Light Of Tail/Headwinds
Source: Bureau of Economic Analysis, Morgan Stanley Research
MS Economists Sarah Wolfe and Bruna Skarica highlight that US and UK consumer spending is compositionally very similar and significant to each country's economic growth. The team notes that the pattern of spending over the last two years has closely mirrored each other, and they are constructive on the path forward. The team forecasts another year of healthy spending growth for both the US and UK consumer, but sees more obstacles in the UK. The team notes that the decline in desired savings there has nearly twice the impact on consumer spending growth as it does on nominal disposable income growth. In both the US and UK, the roll-off of fiscal support and rising energy prices loom as drags on the consumer, which the team expects will be largely offset by labor market strength and some further drawdown in still-elevated levels of “excess saving”. The team expects further labor market strength will continue to lift labor compensation as inflation rounds the corner, turning real wages positive by mid-22 in the US and 4Q22 in the UK. In both the US and the UK, the team forecasts negative real disposable personal income in 2022 as markets experience payback after outsized household-directed fiscal stimulus in 2021. Additionally, the team expects higher prices for utilities and gasoline in both the US and UK to make up a larger piece of the consumer spending pie this year, putting more pressure on growth rates in discretionary spending. Download the Complete Report
ìEurope – Financials – MS Research Analyst Magdalena Stoklosa Sees Room For Re-Rating, As Rate Hikes Materialize..
Source: Eikon, I.B.E.S. Estimates, Morgan Stanley Research
Tightening global monetary policies are a potential paradigm shift for MS Research Analyst Magdalena Stoklosa. In this note she prices in +50bps ECB rate hike, exiting negative rates regime by March 2023. Magdalena fundamentally likes the sector, with these top picks across Europe: Intesa, Caixabank (New), Commerzbank (New), and SocGen. Download the Complete Report
ìUS – Telecom Services – MS Research Analyst Simon Flannery highlights that after a really tough 2021, when Telcos lagged the market by c.40%, he has seen a better start to 2022, particularly on a relative basis. He notes earnings season has reaffirmed his view that while Telecom Services providers face secular and competition challenges, especially in areas like business wireline, that the sector should still be able to deliver modest growth this year. Despite a modest recovery, and a back-up in yields, he still sees some good absolute and relative value for the sector, while rising rates tends to shorten duration, helping the sector. Simon notes that T-Mobile (OW, $150 PT) remains his Top Pick within Telecom services, while AT&T (OW, $28 PT) looks attractively valued on a pro-forma basis with the spin of new Discovery shares likely only a few weeks away. For Simon, 2022 guidance has been broadly supportive for the Telecom sector so far this earnings season. He notes that fears of a sharp deceleration in wireless growth and increased competition seem overdone for now, although cable’s wireless adds accelerated. Simon also points out that the carriers are spending billions of dollars on spectrum and capex for 5G, but the market remains somewhat cautious on their ability to generate a return on this investment. Simon awaits results from most of the Communications Infrastructure providers with only Crown Castle (OW, $207 PT) having reported so far. Download the Complete Report
ìîJapan – Economics – BoJ's "Around Zero Percent" Target On Long-Term Interest Rates And Actual 10-Year JGB Yields (%)
Source: Bank of Japan, Bloomberg, Morgan Stanley Research
The BoJ went ahead with the fixed-rate JGB purchase operation as previously announced, a clear indication of its intention to defend the 0.25% line of 10-yr JGB yields under YCC. Download the Complete Report
ìîChina – Economics – Longer-Term Credit Growth Tends To Lag Bill Financing By 6-9 Months
Source: CEIC, Morgan Stanley Research
Investors remain concerned on the effectiveness of China's latest credit expansion and Omicron strategy. By unpacking the complexity of current changes, Robin Xing & team explain why they are more in the glass half full camp. Download the Complete Report
ìUS – MedTech – MS AlphaWise Survey Points To SCS Recovery In 2H22 & Near Term Balance
Source: AlphaWise, Morgan Stanley Research
MS Research Analyst Cecilia Furlong highlights that a MS AlphaWise survey of ~100 SCS physicians points to SCS recovery occurring in 2H22, balanced by near-term, 1H22 relative softness. She notes that share stability is the expectation in 2022. For PDN, she notes that data points highlight reimbursement and patient willingness as keys to market development. For Cecilia, the results highlighted: (1) Volume growth recovery to pre-COVID levels is expected in 2H22; (2) SCS market growth can recover to up to low teens in 2022; (3) 2022 SCS competitor share is expected to be roughly stable vs. 2021; (4) PDN mix should ramp, but there's work to be done in many pockets and market penetration will take time; and (5) closed-loop systems are a key disruptive focus across the industry. For 2022, she thinks that survey results suggest the US SCS market can grow ~13% y/y, directionally ahead of her current market model estimate of 8-9%. While Medtronic (EW, $120 PT) 4CQ21 / 3FQ22 results remain outstanding, her current estimates imply 2021 US SCS revenue growth of ~13% vs. COVID-impacted 2020 and a decline of ~4% vs. 2019 (as well as a decline of ~9% vs. 2018). Download the Complete Report
ìEurope – Materials – Mining Equities Continue To Screen Attractively On Dividend Metrics, Against Robust FCF Yields
Source: Datastream, Morgan Stanley Research estimates (e)
Persistent supply constraints and a solid demand backdrop have prompted MS’ commodities team to further lift their price forecasts for Aluminium, Iron Ore, and Nickel. With sizeable consensus profit upgrades on offer and reasonable valuations, MS Research Analyst Alain Gabriel still see opportunities in Rio Tinto and Hydro. Download the Complete Report
ìî US – Off-Price Retail – MS Research Analyst Kimberly Greenberger highlights that potential 4Q21 EPS downside and ongoing stimulus/low income consumer risk likely explain Off-Price's YTD underperformance. She notes that TJX (OW, $88 PT) may be the only Off-Price retailer to meet or beat 4Q21 Street expectations, while BURL (OW, $385 PT) could potentially miss 4Q21 consensus EPS by the widest margin. Her conversations suggest investors are re-visiting the Off-Price sector following YTD de-rating, but most are hesitant to step in until 1Q22/2022 guidance is de-risked or high frequency intraquarter data improves. Kimberly continues to prefer Off-Price in 2022 and recommends adding to positions ahead of the 4Q21 prints. Kimberly reiterates TJX as her Top Pick in Softlines. Download the Complete Report
ìEurope – Energy –….And A FCF Yield Well Into Double-Digit Territory
Europe's oil & gas majors have finished an historic year. Free Cash Flow reached a record high, balance sheets are de-gearing fast, shareholder distributions are on the rise and energy transition plans are crystallizing fast. Stay 'Attractive'. Download the Complete Report
ìîEurope – Consumer Staples –MS Research Analyst Pinar Ergun sees renewed investor interest in buying profit warnings, which may provide short-term relative support for 2021's laggards. She maintains her preference for earnings visibility, while avoiding the most expensive names. Download the Complete Report
Negative
îUS – Food – Growing Risks As Low Income Consumer Tailwinds Fade
Source: Numerator, Morgan Stanley Research
MS Research Analyst Pam Kaufman highlights that investors are increasingly focused on the outlook for low income consumers, who are disproportionately impacted by rising inflation among essential items (food, energy, shelter) and are lapping sizable government stimulus benefits. Packaged Food demand elasticity has been minimal to date, but Pam sees increasing risk of downtrading among low income consumers, who traded up during the pandemic, are now facing accelerating food prices (+10.2% L4W), have greater spending alternatives, and should see minimal growth in SNAP benefits. Pam’s analysis of Numerator household income data indicates that low income consumers represent ~23% of branded food sales but drove ~30% of the growth in spending on branded food in 2020-21. Overall, she notes that branded food sales grew at a 10.6% CAGR in 2019-21, but low-income consumers grew branded food purchases by 14% annually compared to middle/high income consumers at +9/11%. Pam highlights the companies that saw the biggest topline benefit from low income consumers are K (EW, $67 PT), KHC (EW, $38 PT), GIS (UW, $56 PT), and CAG (EW, $36 PT), while CAG, KHC, and SJM (UW, $130 PT) saw the greatest sales mix shift toward low income consumers. She sees particular risk of downtrading at KHC, SJM, and CAG, which have high private label penetration in their categories and have experienced moderating market share trends. She notes that the companies with the highest overall exposure to low income consumers are TWNK (OW, $24 PT), CAG, KHC, and SJM. Download the Complete Report
îChile – Strategy – Global factors remain the key driver of higher inflation in Chile
Source: Morgan Stanley LatAm Economics Research
MS Strategist Gilberto A Hernandez-Gomez closes his 2y CLPxCAM receiver versus 2y US IRS payer trade as continued CPI pressure still exceeds expectations. Inflation is at its highest since level 2008, driven largely by global inflation factors which remain prevalent. He stays short 10y breakevens as near-term BCCh hawkishness supports long-term policy credibility. Download the Complete Report
îUS – Specialty Retailers – US Apparel Restocking Well Underway; Cautious 1Q & 2Q22 Margins
Source: OTEXA, Morgan Stanley Research. Footnote: Pre-Covid average reflects 2015-2019 y/y growth average.
MS Research Analyst Kimberly Greenberger highlights that U.S. Apparel Imports surged +27% in December (in dollars vs. 2019) following the +33% spike in November and +12% October. On a trailing 3-month basis (Oct, Nov, Dec), she notes that apparel imports increased +23% (in dollars vs. 2019). Kimberly points out that the last occurrence of 20% or greater growth in y/y imports was in May 2011 at +20% (full year 2011 imports rose 9%). Kimberly notes that the ongoing surge in U.S. Apparel Imports signals restocking is well underway, and makes her cautious on 1Q & 2Q22 margins. Kimberly highlights that the continued DD% growth in December U.S. Apparel Imports suggests retailers may have over-ordered inventory given demand is not rising at a 20%+ rate. All in, Kimberly thinks that if this level of imports growth persists, we could see a return to broad-based price promotions (discounts) in the apparel category as early as 1Q22. For reference, Kimberly’s February 11th store checks indicated select banners already began showing signs of healthy (higher) in-store inventory levels, including Kohl's, Old Navy, Urban Outfitters, and Anthropologie.Download the Complete Report
îJapan – Economics – BoJ Real Exports (2015=100, SA)
Source: Bank of Japan, Morgan Stanley Research
Japan’s exports—mainly to China—are sharply affected by the Lunar New Year, so Jan and Feb need to be considered in combination. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – Outset Medical, Inc – MS Research Analyst Drew Ranieri upgrades his rating of Outset Medical to OW (from EW) and reduces his PT to $50 (from $55). Drew was previously on the sidelines pending clarity on: (1) Acute care traction momentum; (2) Home market adoption “inflection”, and (3) gross margin expansion progress. The company’s recent commercial performance has resolved these prior reservations. Acute traction continues to be above expectations, home trajectory appears clearer, and gross margin is positioned to expand~10 pts y/y against a challenged macro backdrop; all remain meaningfully positive and should drive valuation. Given Outset’s recent 23% YTD pullback against clear signs the fundamental narrative continues to improve, Drew sees a clear disconnect in valuation vs. numbers. His $74 bull case represents 117% upside, while his $32 bear case represents only ~7% downside. Download the Complete Report
ìUS – Palo Alto Networks – MS Research Analyst Hamza Fodderwala sees a favorable setup for PANW (OW, $660 PT) into the FQ2 print next week. He highlights that growing adoption of next-gen cloud security, higher software mix, and strong backlog/demand in core firewalls should deliver better than expected results, even with supply chain headwinds. Hamza notes that Palo Alto Networks' performance will be measured on 3 primary metrics: 1) Billings – Hamza sees potential for billings growth in the 29%-30% range ($1.59-1.60 billion), above consensus at 25% YoY and management guide between 24-26%; 2) Product revenue – Hamza thinks 20% YoY product revenue growth is achievable, given continued strong demand for firewall refresh and price increases, tempered by supply chain challenges; and 3) Next-Gen Security (NGS) ARR and Billings - Hamza thinks Next Gen Security ARR between $1.38-$1.385 Billion (+64%-65% YoY) would be a positive result given historically 2H-weighted seasonality in NGS ARR. Download the Complete Report
ìChina – Krafton Inc – Should the ban stay in effect, Seyon believes it would create a meaningful windfall for Krafton, which has both PUBG Mobile India and PUBG New State available for gamers to play. Our SEA analyst, Mark Goodridge, estimates that Free Fire generated US$475mn in revenues from India during 2021, which would be available for Krafton to win over.Download the Complete Report
Negative
îUS – Logitech International SA – Proprietary Data Signals Elevated Channel Inventory
Source: Company Data, Morgan Stanley Research
MS Research Analyst Erik Woodring highlights that a new MS AlphaWise analysis of proprietary channel inventory data suggests LOGI (UW, $74 PT) US channel inventory is 170% above pre-COVID levels. New insights uncovered after digging deeper into Erik’s proprietary US channel inventory data confirms hypothesis that channel fill has been a strong tailwind to LOGI's revenue growth in the last 12 months, with LOGI's US channel inventory units and values currently 170% and 570% above pre-COVID averages, respectively. If the expectation for a consumer slowdown is correct, a reversal of this channel inventory dynamic can become a material, incremental headwind to revenue growth that is not factored into consensus estimates. For example, if sell-through declines 5% Y/Y in FY23, sell-in would have to decline at an even greater rate to help re-balance channel inventories. While he maintains his $74 price target (16.5x FY23 EPS of $4.50), Erik takes this more bearish scenario into account in his bear case valuation of $48 and reiterate his Underweight rating. Download the Complete Report
îUS – Roblox Corporation – MS Research Analyst Brian Nowak downgrades RBLX to Equal-weight, and cuts his price target from $115 to $65. RBLX's disappointing global January results (bookings 15% below us) and the 1mn (8%) 4Q sequential decline in higher-monetizing N. America DAUs speaks to larger than expected reopening headwinds and forward growth uncertainty. The pace of growth deterioration from November to January and commentary to expect continued slower growth until the 2H:22 (when comps ease) further reinforces these challenges. In effect, RBLX has not been able to retain/grow engagement, bookings, or users as well as Brian had hoped through reopening. These results cause him to materially reduce his forward forecasts…he lowers '22/'23 bookings by 8%/11%. The flow through impacts profitability substantially, as '23/'24 EBITDA fall by 17%/22%. Brian highlights three catalysts to monitor from here including: 1) New developer tools leading to more, higher-fidelity experiences, 2) More branded/premium content experiences, and 3) Examples of successful integration of offline e-commerce within Roblox such as being able to purchase real-life Nike sneakers or merchandise from within Roblox. At a high level, Brain continues to view RBLX’s platform of ~50mn daily active users spending ~150 minutes per day as the best (and budding) example of what a next generation metaverse could look like from a use case and monetization perspective. Download the Complete Report
îUS – 3M Co – Implied Liabilities Have Downside Risk & Growth Still Insufficient; Downgrade To Underweight
Source: Company data, Morgan Stanley Research
MS Research Analyst Josh Pokrzywinski highlights that quantifying 3M's liabilities around PFAS and ear protection has been difficult, but limited information suggests what's implied in valuation has gotten smaller relative to rising Combat Arms risk. He notes that fundamentals are improving, but growth is still mixed and insufficient relative to liabilities. Josh is establishing a framework for Combat Arms ear protection liabilities based on judgments thus far with a base case of $14B and bull/bear of $2B to $53B. Josh is also downgrading MMM to UW from EW and reducing his PT to $150. He is lowering his PT from $185 prior as he lowers his multiple to account for an additional ~$15-20B of liabilities that he believes is not baked into the stock price today. His base case ~10x multiple assumes MMM derates to trade at a ~30% discount to peers, ~10% below current its current discount. Download the Complete Report
SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)