SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)
FOR INSTITUTIONAL CLIENT USE ONLY
As we inch our way toward the end of 2021, there are many mixed emotions I am sensing broadly. Given the increasing infection rates of Omicron, there is a growing state of exhaustion and melancholy across investors, colleagues, family and friends. There was “hope” we were closer to the end of this pandemic but this dream seems to be fading as cases rise at record rates in NYC and around the world. That said, optimism and enthusiasm are two emotions I would rather embrace than exhaustion and melancholy. Could this be the last wave that brings us to herd immunity or the catalyst we needed to push for broader vaccinations? Either outcome would certainly be a ‘win’ for many of us seeking a complete return to normalcy, as long as this variant continues to cause mild symptoms.
As we enter this holiday season, I am thankful for many things but it is hard not to take stock in just how challenging the last 12 months and nearly 2 years have been. I wish you all a restful, healthy and happy end of the year with the “hope” that 2022 will be a better year for humanity in getting through this global pandemic. May we be closer to a period without the anxiety of having to meaningfully adjust our daily lives or worse yet, be faced with any illness as we combat this current wave that has particularly swept up NYC over the last week.
The markets of late haven’t helped anyone feel ‘joyous’ during this holiday season. The “Powell Pivot” has solidified a Fed that, like many central banks around the world, is now committed to making sure inflation is addressed before it becomes ‘too late’. While Chairman Powell has done his best to show pragmatism, the reality of the trajectory of tightening is being accepted by markets here as multiples adjust quickly. Ultimately, fundamentals, valuation, and positioning have always driven markets and each are being challenged as we adjust into 2022: the rapid spread of Omicron has many questioning the durability of economic growth, the Fed’s pivot on tapering and rate hikes has upended valuations, and the lack of investor PnL cushion going into December casts a wave of uncertainty around positioning. This confusing blend of market factors is certainly not the ‘holiday cocktail’ that anyone had hoped for going into this time of the year.
These past few weeks have left many of us with little time to react to a flurry of news headlines and volatility. I’d like to take a step back here to emphasize that revenues and earnings matter, while the expectations of durability of revenues & earnings drive multiples. Let’s not discount what is still a positive outlook for Q4 and beyond for earnings. Thus far, earnings expectations in the US into Q4 and 2022 remain buoyant and earnings revisions breadth has halted its decline over the past 2 weeks. The market will dictate whether this is delusional or the guiding light amid a volatile period just as this new variant takes hold and investors come to terms with a hawkish Fed stance. I would argue we have never been better positioned medically to address the virus and this variant may in fact help drive herd immunity. Furthermore, the Fed is notably optimistic that prevailing economic strength anchored by a healthy consumer balance sheet should withstand the normalization of rates. Of course, this debate will unfold very quickly.
The timing of all these factors converging hasn’t been constructive to say the least, as few feel inclined to buy any dip given little alpha capture from investors. The average investor in most markets is capturing less than 25% of index returns for nearly 60% net exposure, while the spread between longs and shorts remains firmly negative at -14% (when the average year’s spread is closer to + 6-7%). While the spread between longs and shorts in the US remains firmly negative, this week was particularly challenged as the spread in the US for most crowded longs and shorts was -3.5%. Now you can see again why so many are exhausted and melancholy. Positioning data from our PB Strategic Content Team reflects much of this sentiment: US Equity L/S gross leverage now sits at 188%, the lowest since July 2020, with net leverage near 12-month lows at 57%. More on this below.
With some time to rest going into the holidays, many investors are now preparing for 2022. It remains unclear where prices will land once all the dust settles from this recent turbulence, and there could be plenty of mispriced assets that have gone under the radar as of late. With this, I’m excited to share our 2022 MS Sales & Trading Global Single Name Stock Ideas, with 22 longs and 20 shorts in this year’s edition. Please see below for the full list of ideas and ask for the 2022 full deck!
I continue, like many of you, to have several observations that crossed my mind this week including…
- As the coldest months of the year approach, I tend to find comfort in movies that are filmed on the beach. For a good laugh and a glimpse of summer time, make sure to watch the Savone Family Movie of the Week: Weekend at Bernie’s.
- If you are still very much in the holiday spirit, grab some hot chocolate and watch the Holiday Bonus Movie of the Week: Dr. Seuss’ How The Grinch Stole Christmas.
- Typically I’d be excited for a trip over the holidays, but given the prevailing circumstances we will be staying local and going to Vermont to ski—which my family seems to prefer more than me. Once we get the green light to travel again, I would love some suggestions on new places to go!
- For those who keep tabs on the world of mixed martial arts and the UFC, make sure to speak with Media & Entertainment Analyst Ben Swinburne for thoughts on his new OW rating on Endeavor (EDR). As the owners of the UFC, they are well positioned to take advantage of the growing popularity of this sport.
- My Cowboys returned home from DC last Sunday with a win and a ‘comfortable lead’ in the NFC East. They head New York this week for another division matchup with the Giants. It’s remarkable how quickly this season has gone by!
- Will we ever hear the end of supply chain issues? Make sure to read our global macro team’s note on supply chain repair, restructuring, and investment implications here
- In the college basketball world, my Hoyas played a fantastic game against Syracuse last Saturday and took home a much needed winagainst an old big east rival. Although I don’t like to play favorites, it’s hard to not love my Bruins a bit more this season. They’ve managed to stay in the top 4 ranked teams in the US thus far. It’s always great to watch them play!
- Despite the recent spread of Omicron, Transportation Analyst Ravi Shanker reiterates his overweight rating and $62 price target on Delta Airlines (DAL), noting their plan to meet and execute pre-pandemic financial benchmarks by 2024 in his latest report. Reach out to Ravi and team to better understand why this name should double from here!
- When will International matter? Even after recent weakness, MSCI World's N12M PE of 17x (20% above its 20-year average) sounds quite high in the context of elevated inflation and a more aggressive Fed. However, the valuation picture for global equities outside of the US looks much less troublesome, with MSCI AWCI-ex-US on a N12M PE of 14.1, which is only just above its own 20-year average of 13.5. Of course, if the US de-rates further, this will very likely drag non-US equity valuations lower in the short-term; however, the fact that rest of world equity valuations have already normalized is important for the longer-term risk-reward picture.
- While I typically pay more attention to my Roma boys in Serie A, it’s hard to ignore a good Premier League fixture when you see one… especially when Roma isn’t playing! Sunday’s match between Tottenham and Liverpool should be a great match as Liverpool looks to take command of what has become a three-headed race to the top of the table. Let’s see if Liverpool can pull out 3 points at Anfield!
- Don’t miss out on the Morgan Stanley Virtual Global Insights Day on January 12th! This flagship macro outlook conference will present the latest from our top macro analysts. Make sure to be prepared for 2022 and register. Click here for the latest agenda.
As mentioned earlier, a series of data points I continue to follow closely relate to dispersion levels.Given the two drivers of the market of late have been concerns around the Fed and growth in the face of omicron, we have seen less stock dispersion coming to the forefront. Chris Metli and the QDS team highlight that dispersion levels both between and within sectors jumped meaningfully this week to the 38th (+33 %iles) and 37th (+29 %iles) 5-year %tiles, respectively. The ratio of dispersion between sectors vs dispersion within sectors now sits above median levels on a two-week basis at the 54th %ile (+29 %iles).Notably, on a 1-week basis the ratio of dispersion between sectors vs within sectors is the highest it has been since August: it now sits in the 91st %ile vs the last 5-years. According to Chris and the team, the ratio being high suggests more sector-driven dispersion, as opposed to single name dispersion. Taking a look at volatility on a two-week basis, it remains high at both the index and single-name levels (79th and 81st %iles vs the last 5-years, respectively). While last week’s tape featured Health Care, Consumer Staples, and Real Estate with the highest levels of single-name volatility, this week the tides have shifted to Tech (92th %ile vs the last 5-years) and Consumer Discretionary (80th %ile vs the last 5-years), with Health Care volatility still elevated at the 81st %ile vs the last 5-years (-9 %iles WoW). Please reach out to be connected with Chris Metli and the QDS team.
On positioning as of 12/16, US Equity L/S gross leverage fell ~4% WoW to 188% (a low since July 2020) and net leverage decreased ~2% WoW to 57%. On a YTD basis, absolute performance for US L/S funds remains positive, albeit at low single-digit returns (down from +7.2% last month). Yet, relative to the S&P 500 up 24.86%, that upside capture rate remains challenged vs historical averages. Across other regions, gross leverage for EU L/S funds fell ~3% WoW to 179% and net leverage remained flat WoW at 47%. Asia fund gross leverage remained flat WoW at 135% and net leverage increased ~2% WoW 71%. The crowded longs in each region were a negative driver behind the challenged hedge fund performance as they underperformed the crowded shorts in each region. Specifically, the crowded longs in North America fell ~4.5%, while crowded shorts were down only ~1.1%. The crowded longs in Asia and Europe fell ~4% and ~1.3% through Thursday, respectively.
Taking a deeper look, North America Tech struggled this week and finished notably in the red through Thursday: MS Unprofitable Tech Basket (MSXXUPT) -7.4%, MS High EV/Sales Basket (MSXXEVSA) -6%, and MS Large Cap Tech Basket (MSXXLTCH) -2.8%. From all of the selling that equity markets have seen, it is starting to feel like positioning is a bit ‘cleaner’ going into year-end. Even the MS US-listed China Internet Basket (MSXXITCH) faced declines, down ~8.9% this week; keep in mind though that hedge fund net exposure to these names was still hovering around the lowest levels since around April 2019 coming into the week. Noah Bramlage on our MS Prime Brokerage Strategic Content desk highlights that while there is certainly a difference between ‘trimming the edges’ and ‘a rotation’, net exposure to North America Real Estate, Materials and Energy have all been rising on the back of hedge fund net buying in recent weeks. Notably, net exposure to North America Real Estate is now at the highest level. Please reach out to be connected with our PB Strategic Content Desk.
As we continue to get updates on the new Omicron variant, Biotech Analyst Matthew Harrison highlights that Omicron is becoming the dominant global strain and expects it to drive an accelerating global wave of new cases. Matthew’s base case is that the new variant will peak in 10-12 weeks with daily cases ~2-3x the Delta wave or ~300-500k daily US cases. If the current rate of new case growth deceleration in South Africa persists, the time to peak could be as short as 5-6 weeks. However, given the high absolute transmission rate, Matthew assumes a slower decline. If the vaccines prove even less effective than first estimated, Matthew points to his bear case forecast that Omicron cases will peak in 3-3.5 months with daily cases ~3-5x higher than the Delta wave or ~500-750K daily US cases. Please reach out to Matthew and the team for more updates.
Looking to the economy, MS Chief US Economist Ellen Zentner highlights that a speedier taper concludes in mid-March, providing optionality for the Fed to begin hiking soon after the taper ends "should conditions warrant". She thinks that decision will be taken "in coming meetings", which puts June in play, one quarter earlier than her call for 3Q22 liftoff. Ellen points out that inflation has run higher for longer and labor market conditions have continued to strengthen "rapidly", leading to a marked hawkish shift in the dots showing a median 3 hikes in 2022. She also notes that her call for liftoff in 3Q22 is tied importantly to her forecast that core inflation begins to cool from February next year, providing the Fed with more breathing room after the taper ends. Powell emphasized differences between the strength of this cycle vs. the last, which Ellen thinks means there is no playbook for how long the Fed waits to hike after tapering ends, or to reduce the balance sheet after it begins hiking. She continues to expect more details on the process of balance sheet normalization early next year. With the near-perfect pricing of the Fed's policy path into 2022 and Omicron-driven uncertainty in the near term, Ellen keeps a light, neutral stance into year-end. Please reach out to be connected with Ellen and the team.
MS Chief US Equity Strategist Mike Wilson points out that the tapering we will see now is different from 2014 and worse for stocks. He highlights three main reasons: 1) rampant inflation has led to a faster taper at 4.5 months vs 10 months in 2014 2) the market has a much higher valuation vs 2014 with the SPX at 21x vs 14x 3) and most importantly, we have decelerating growth vs accelerating growth nearly 8 years ago. While institutional clients have de-risked, positioning is fully for retail. Mike believes if the 20 year dips below 1.3%, then we may see a double dip scenario. With respect to dispersion, Mike notes that it has fallen some in 2021 but remains at unusually high levels across a number of styles given the strong recovery in the economy. This supports his less encouraging view that the market remains in a mid-cycle transition when it's more difficult to capture alpha. He notes that dispersion has been particularly high in the quality/junk, value/growth, small/large, and low volatility/high volatility continuums. Looking into next year, Mike is still positive for earnings growth going forward, as he forecasts 10% earnings growth in 22 and 8% in 23. These estimates are roughly in line with consensus and ultimately point to next years’ debate around equity prices being largely driven by multiples. Given this backdrop, Mike likes the following single names for investors in 2022: McDonalds (MCD), Lowe’s (LOW), Schwab (SCHW), CVS (CVS*), Humana (HUM), Adobe (ADBE), and Comcast (CMSCA).
Looking across the pond, MS Europe Equity Strategists Graham Secker and Ross Macdonald released a Country Chartbook that provides a summary of key performance, sentiment, valuation, and fundamental trends for European countries and major global regions. Among the countries mentioned, they highlight that Switzerland is the most overbrought country in Europe and is currently trading at its highest level since May-2020: 1.8 standard deviations above the 12-month average. Its stocks’ valuations are currently leveled at approximately the 76th %ile of the 10Y range across PE, DY, and PBV, however EPS revisions have now continued to come in negative, suggesting a narrative that outperformance in the region may be overdone. In contrary, they mention that Spain is the most oversold country in Europe and is down 2.8 standard deviations below the 12-month average. Spain’s market leaves investors with a different sentiment, as valuations sit below the long run average and EPS trends have demonstrated solvency. Graham also released a note this week with key observations that caught his attention: 1) Omicron is influencing bond markets more than the Fed, 2) Value stocks may be turning more defensive 3) 2021 may actually have been a good year for value 4) 2021 has seen record EPS upgrades, but with high concentration and 5) The next 12 months PE for MSCI ACWI-ex-US has normalized within range of its 20-year average (14.1x versus 13.5x respectively). In light of 2022 approaching, MS Europe Equity Analysts Fulin Liang and Louise Miles highlight that they believe the Insurance sector in the region will continue to offer stable capital returns and they have Prudential plc (PRU LN) as the top pick since it screens the most attractive risk/reward with 48% upside. They believe the shares are now trading at a depressed valuation with little credit given for its new business capability. Please ask to be connected with the respective teams for more detail.
Continuing our way around the world, dedicated EM equity funds (ex-China A) reported the largest outflows in 2021 of $5.4bn, led by both ETF and non-ETF funds. This is the second consecutive week of outflows in EM, taking YTD net inflows to $110.0bn. Regarding specific updates with China, MS Asia Equity Strategist Jonathan Garner highlights that institutional investors were responsible for virtually all of the inflows to Chinese ETFs this week: totaling $2.3bn. The direction of flows between institutional and retail investors stands to be a topical area as we head into the new year.Speaking of the new year and outlooks for stock picking, the latest clear shift in policy toward monetary easing continues to support MS Asia Equity Strategist’s Laura Lang’s preference for A-shares within the China equity space. Keep in mind that these stocks are subject to: 1) Rising volatility caused by fluid US/China non-trade tension 2) Property market uncertainty and 3) Potentially more hawkish turns by the Fed. Moreover, South Korea Healthcare Analyst Mi Hyun Kim added Samsung Biologics (207940.KS) into her APxJ and GEM focus lists: a stock pick that she believes would be useful in hedging the risks posed by Omicron. She forecasts that Samsung Biologics will be the premier biologics CDMO in terms of capacity and its sales may double to KRW3.2trn in 2026. MS Asia Equity Analyst Shawn Kim shares his conviction on the 12-month risk/reward for Asia Tech stocks screening as unattractive at current prices; he prefers stocks with secular growth and pricing power in 1H22, i.e Samsung Electronics (005930.KS) or Delta Electronics (2308.TW), and is considering a re-engagement with cyclically depressed Tech in the back half of the year. Among his list of stock preferences, he also notes the names that are least preferred: i.e Acer Inc (2353.TW) and Novatek (3034.TW). Please ask to be connected with the respective teams for more detail.
I want to highlight upcoming MS conferences including the 8th Annual Auto 2.0 Conference taking place in Las Vegas (Jan 5) and the Virtual 14th Annual Latin America Executive Conference (Jan 12-14). Companies confirmed to participate in this year’s Auto 2.0 Conference include Aptiv (APTV), Aurora Innovation (AUR), and General Motors (GM). The event will feature fireside chats and panel presentations as well as one-on-one/small group meetings for eligible investors. 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.
Even in a year like 2021, some things remain constant… As with years past, I have aggregated my thoughts on a select group of MS Covered Stocks where I believe Research has a differentiated and compelling view over the next 12 month period (often a challenge, especially on the short side). In doing so, I am fortunate enough to be able to leverage Morgan Stanley’s deep expertise from our global research analysts that in aggregate cover over ~3,000 securities. In bringing together the annual group of long and short ideas, I purposely take a global view using MSCI world as the prevailing benchmark, forcing myself to choose a handful of single names in regions where sometimes the Macro outlook is particularly challenging. While in some years this strategy of being globally diverse has added significant alpha (i.e. 2013), other years, particularly 2018, have proven to be just as challenging as many global investors have lamented to me. As I have done every year since this piece’s inception, it is worth reflecting on both the best and worst of ’21 before looking ahead to next year.
Against the backdrop where MSCI global indices were up ~17% this year, I want to reflect on the 2021 ideas. On the long side for 2021, the ideas generated a positive return of ~7%. While on the short side, the ideas went against me generating a return of negative ~11%. On the whole, in taking a 150% Gross / 50% Net assessment, the set of ideas generated a paultry positive ~1% return on the year. Needless to say, it was challenging to drive positive spread between longs and shorts in 2021. Underlying this performance was strong contributions from Long Diamondback Energy (FANG US, ~+112%), Long NARI Technology (600406 CH, ~+122%), Long AvalonBay Communities (AVB US, ~+53%), Short Vipshop (VIPS US, ~-71%), and Short DraftKings (DKNG US, ~-42%). While there were several alpha generating ideas featured in 2021, there were also too few names that didn’t fair so well, including Long Pagseguro (PAGS US, ~-56%), Long Jiangsu Hengrui (600276 CH, ~-46%), and Short Straumann (STMN SW, ~+76%) ugh! So goes the danger of taking a 12-month view into 2021…see below for the full breakdown of the 2021 ideas performance.
However, given this set of ideas is comprised of both Longs and Shorts, perhaps a more dynamic comparison to the HFR Global Equity Hedge Fund Index (HFRXEH Index) is more appropriate, although the 2021 Global Ideas still underperformed the index, which finished up ~3%. With 6/21 longs as well as 12/21 shorts generating positive returns, this lead to an overall hit ratio of 43%. Please refer to the latest deck as I do go further into detail as to “what worked” and “what did not work” of the featured Global Ideas for 2021 and assess, using the updated MS Research view, in determining whether or not to press forward with each respective idea..
This year, in keeping with tradition, I have refreshed a list of stocks looking forward into 2022, with an aggregate list of 42 stocks—20 shorts and 22 longs (appropriate for 2022!). The goal of this list is to find idiosyncratic alpha within the broader macro backdrop and MS house views. The list does contain a few ideas from last year given a renewed level of conviction in longs General Electric (GE), Nippon Steel (5041 JP), RWE (RWE GY) and shorts Kroger (KR), Rocket (RKT), ABB (ABBN SW). Without wanting to give too much away—each stock in the 2022 ideas has a unique pitch built on the view from MS Research as well as a thematic perspective from our Global Strategy teams. Again, I purposely take a 12 month perspective with a global view, and see more opportunities in longs with valuation support that may be unjustly priced ahead of a year that is bound to see global market inflections driven by shifts in global fiscal and monetary policy and COVID-19. See below table for the full list 2022 ideas and ask for the 2022 full deck!
A few key ideas that I am eager to see unfold this year on the Long side include Ferrari (RACE IM), Uber Technologies (UBER), Global-e Online (GLBE), XP (XP), Entain PLC (ENT LN) and SUMCO Corp (3436 JP). On the short side, we continue to be more focused on structurally challenged sectors, or companies with lofty valuations that doesn’t match the outlook for earnings/growth. I would highlight Crowdstrike (CRWD), Geberit (GEBN SW), Pentair (PNR), Lucid Group (LCID), Rakuten Group (4755 JP) and HelloFresh (HFG GR) because you know I love a good battleground stock. Please reach out to be connected to anyone on the broader Morgan Stanley team and as always I welcome all thoughts and discussion on any of the items in the deck.
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
Monday, December 20, 2021
9:00 AM
Brazil eCommerce Market Data Expert Group Call
Expert
Fabrício Dantas, CEO Neotrust
Andréa Fernandes, CEO Movimento Compre & Confie
MS
Andrew Ruben, LatAm Research
UPCOMING CONFERENCES –
Please reach out to your sales representative if you are interested in attending any of these conferences.
Jan 5 (Las Vegas) I 8th Annual Auto 2.0 Conference
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 10-12 (London) I Virtual EEMEA Conference
May 17-18 (Global) I 13th Virtual Saudi Arabia Conference
May 17-18 (Global) I 2nd Virtual MENA Conference
May 24-26 (China) I 8th China Summit
Jun 1-3 (Tokyo) I 2nd Virtual Japan Summit
Jun 7-9 (India) IVirtual India Summit
Jun 8-9 (Sydney) I 4th Annual Australia Summit
Jun 24-26 (New York) I China BEST Conference for US & EU Investors
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
Nov 16-18 (Singapore) I 21st Asia Pacific Summit
The following comments are a summary of Morgan Stanley Research by Morgan Stanley Equity Sales & Trading:
Global – 2022 Ideas – MS Sales & Trading 2022 Top Longs & Shorts
Global – 2021 Ideas – MS Sales & Trading 2021 Ideas Performance Review
SELECT COVID VIRUS AND TREND FOR RE-OPENING DATA POINTS
Global – Biotechnology – COVID-19 Outbreak Dynamics
Source: Nextstrain
Source: NICD, Morgan Stanley Research
Source: Morgan Stanley Research, Our World in Data, Department of Health and Human Services, JHU CSSE.
MS Research Analyst Matthew Harrison’s base case is that is Omicron will peak in 10-12 weeks with daily cases ~2-3x the Delta wave. Matthew estimates it is taking ~11-12 days for Omicron to become dominant (i.e., ≥50% of COVID cases) vs. Delta which took around 18-20 days. In the near-term, increasing the penetration of booster appears to be the best way to increase protection against symptomatic infection, but given the speed of the Omicron wave and limited penetration of boosters, he does not expect a significant portion of the US population to be protected (less than 20%). Preliminary data from the UK and SA support his view that 2 doses have limited efficacy against infection (~30%) while 2 doses do provide efficacy against hospitalization (~70%). Three doses or two doses and prior natural infection provide decent protection against infection (~75%).. Download the Complete Report I Download the Complete Report
US – Retail – Total Discretionary Retail Traffic
Source: Prodco, Morgan Stanley Research
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìî US – Big Debates – This annual edition highlights key debates that the MS Research Team thinks will shape industries and drive stocks in the coming year. They emphasize debates that are likely to matter, that are likely to be settled (or significantly advanced) in the coming year, and where they have a view that differs meaningfully from the current market consensus. One for each sector. Download the Complete Report
ìîAsia – Big Debates – Asian markets had a mixed year in 2021, with Taiwan, India and China A-shares notching gains of around 10-20% YTD, while MSCI China was a regional laggard amid China’s regulatory reset. Asia EM strategists expect continued equity market divergence in 2022, preferring ASEAN versus EM and North Asia, and remaining equal-weight on China. This report emphasizes debates from macro to strategy to individual sector level, that are likely to matter, likely to be settled (or significantly advanced) in 2022, and where our view differs meaningfully from the current market consensus. Download the Complete Report
ìîEurope – Big Debates –Higher Real Yields Favour Value Over Growth But Are Less Relevant For Cyclicals Versus Defensives
Source: MSCI, Refinitiv, Morgan Stanley Research
Two key debates seem to dominate MS Analysts’ thinking – the rise of real yields and the reversal of the great supply squeeze. Higher real yields are likely to drive more volatility below the index level. While it is tempting to assume supply bottlenecks of 2021 will be ephemeral, the ESG-related effects of energy transition and decarbonisation could prove more inflationary, for longer. MS Analysts explore what it could mean for Autos, Shipping, Semis, Industrials and Commodities. From a disruption perspective, they look at the risks presented by Shein, and Crypto (and Gold). Download the Complete Report
ìUS – Oil & Gas – MS Research Analyst Devin McDermott highlights that with the industry's recovery now well underway, he sees a path for continued outperformance in 2022. The key pillars from his 4Q20 E&P and Integrated Energy sector upgrade remain intact: (1) a step-change in the industry's FCF profile, supporting higher shareholder returns; (2) attractive valuations (~65% discount to the S&P 500, 2x the historical average); and (3) macro & commodity price tailwinds. While he thinks valuations and financial metrics across the North American Energy sector generally screen compelling versus the broader market, US E&Ps and Canadian Integrateds continue to offer stronger FCF and lower leverage than other sub-sectors in 2022 at strip commodity prices. Devin also prefers liquids exposure over gas. His key picks include APA (OW, $37 PT), COP (OW, $95 PT), OXY (OW, $48 PT), and OVV (OW, $52 PT). On the gas side, he continues to prefer EQT (OW, $31 PT) over peers and remains UW RRC ($26 PT). Download the Complete Report
ìUS – Internet – MS Research Analyst Matt Cost highlights that smartphone use has seen significant growth in recent years, as he believes that from '14 to '20 the installed base has risen more than 2x, while time and dollars spent on mobile apps have each grown ~5x in the U.S. That said, advertising to promote apps has been playing catch-up to user spending over much of the same period, as he estimates that the average ROI on paid app install has fallen from 17x in '14 to 4x today, while his channels checks indicate that some online ad expenditure categories can have ROIs of 2x or lower. Put another way, he believes that emerging mobile ad networks are still 3-5 years behind the mobile game industry, with room to close the gap. Given the long growth runway still ahead for consumer spending in apps, he believes that some additional growth in ad pricing can combine with ongoing growth in volume to drive app install ad growth at a 21% CAGR, reaching $130bn by '24. Matt upgrades U to OW with a $185 PT as he sees its unified game engine and ad network as the leading "picks and shovels" offerings for gaming and interactive content.Matt upgrades APP to OW with a $120 PT as he sees its vertically integrated ad network as likely to extend its strong organic growth into '22 and beyond, with mediation/MoPub an additional source of upside ahead. Also, Matt initiates coverage of IS at OW with a $10.50 PT as he believes its leading network is well positioned for continued share gains, with app publishing and telco solutions driving upside and synergies ahead. Download the Complete Report
ìîEurope – Communication Services – Emmet Kelly and the Team publish their Outlook for 2022. For 2022, the Team explore the three core themes of investor focus: 1) Telco consolidation, especially in Spain (5 to 4 combination), could drive significant cost synergies (eg. Spain: €4.4bn - €6.4bn, UK: £4.2bn - £6.1bn). 2) Telco pricing power, given they have noted a number of Telcos seeking to pro-actively raise prices. 3) Towers M&A. Download the Complete Report
ìî US – Media & Entertainment – MS Research Analyst Ben Swinburne highlights that approximately 70% of the companies in his sector should see 10% or higher revenue growth in '22. At the macro level, he notes that this is being driven by strong demand from the two key customer segments: 1) the global consumer and 2) the global advertiser. However, while this demand strength is largely in place across the 25 companies in his coverage group, the ability to translate that strength into earnings upside varies widely. Ben notes that the primary factor that will dictate a company's ability to deliver earnings or margins in line or ahead of expectations next year is the ability to navigate rapidly appreciating content costs. This is most acute in the streaming video space, where OW-rated NFLX ($700 PT) and DIS ($185 PT) will have to deliver on both net adds and earnings expectations in '22 to outperform, in his view. He thinks that it is less acute in streaming audio where OW-rated WMG ($53 PT), his Top Pick, and OW-rated SPOT ($350 PT) are benefiting from the global growth in music and podcast consumption. Having seen outsized benefits in 2020 and lapping those benefits in 2021, streaming video faces a bit of a reckoning in 2022 when Ben thinks the contenders will be separated from the pretenders. In advertising, Ben notes that cyclicals led the way for his group in '21, up 30-80% YTD. He remains bullish on the US ad market in '22, although he acknowledges this is as much a macro call as reflecting a view on particular supply/demand dynamics across any particular media. In audio entertainment, Ben highlights WMG as his Top Pick following the 15% decline in shares since F4Q earnings in November. In sports and live entertainment, Ben thinks that the "roaring 20's" consumer is real, and he can see that in per capita spending across concerts, sporting events, and theme parks. Download the Complete Report
ìî Asia – Strategy –Focus List Changes – Jonathan Garner added Sonic Healthcare (APxJ) and Samsung Biologics (APxJ, GEM) to his regional lists and add China Construction Bank and Baosteel to his China/HK list. He switched into Baosteel from WuXi AppTec in his China A-share Thematic List and remove WuXi Biologics and Sun Hung Kai Properties from all lists. Download the Complete Report
ìUS – Brokers, Asset Managers, & Exchanges – Three Key Themes For 2022; Overweight APO Top Pick
Source: Company data, Morgan Stanley Research, Visible Alpha for consensus estimates as of 12/2/2021
MS Research Analyst Mike Cyprys highlights 3 key themes he is watching for 2022. First, he assesses sensitivity to rising rates across his diversified financials sub-sectors coverage. He notes that brokers benefit the most given the boost to NIMs and revenues and prefers SCHW (OW, $115 PT) and LPLA (OW, $226 PT). He also thinks that exchanges could experience a cyclical uplift, particularly for those exposed to rates trading and prefers TW (OW, $113 PT). For the traditional asset managers, he sees modest negative impact from rising rates, given higher sensitivity to macro volatility and risk sentiment that could weigh on flows. In his view, private markets models are likely resilient in a rising rate environment given strong structural support. Second, on navigating secular growth themes he prefers business models with strong structural growth dynamics underpinning superior earnings power. 3 key secular themes to focus and his most preferred stocks include: 1) fixed income electronification where he prefers TW, 2) growth in private markets where he prefers BX (OW, $180 PT), APO (OW, $90 PT), STEP (OW, $60 PT), BRDG (OW, $27 PT), and PX (OW, $18 PT), and 3) recurring revenues with large TAMs where he prefers NDAQ (OW, $250 PT). Third, Mike expects to see continued M&A activity across both asset management and exchanges/market infrastructure looking to 2022. Looking forward, he prefers OWs APO, BRDG, PX and VRTS ($392 PT) as firms with strategic levers to pull that could enhance value and is not reflected in the share price currently. His top OW for 2022 is APO given secular growth of private markets, cyclical uplift in exit activity, and Athene merger that bolsters asset growth trajectory. Download the Complete Report
ìUS – Telecom Services – 2022 Outlook; Upgrading to In-Line After Sustained Underperformance With Positive Catalysts Ahead
Source: Refinitiv, Company data, Morgan Stanley Research
MS Research Analyst Simon Flannery highlights that the Telecom Services group now offers the highest dividend yield among all 24 industry groups in the broader market, while also looking attractively valued on a variety of other measures such as absolute and relative PE. He notes that earnings estimates have also shown a generally positive trend recently. Simon sees several important catalysts to support improved performance in 2022, including AT&T ($28 PT) completing its merger with Discovery (Covered by MS Research Analyst Ben Swinburne, EW, $27 PT), and T-Mobile (OW, $152 PT) completing the Sprint integration and commencing a large buyback program. Simon does points out that ongoing secular and competitive concerns keeps him from raising his sector rating to Attractive, and he continues to prefer the Communications Infrastructure sector overall. Simon remains cautious on the Wireline sector and notes that broadband growth is slowing sharply, CAF-II support is ending, and rising capex for fiber upgrades is pressuring free cash flows and in some cases dividend payouts. Simon views the Canadian Telecom fundamentals more favorably than those of the US market, but believes that premium valuations already reflect this, while elevated leverage creates additional risk with Canada’s C-Band spectrum auction in the wings. T-Mobile is Simon’s top pick in the Telecom Services sector with 2022 set to be a pivotal year as the company seeks to largely complete the 5G network upgrade, Sprint integration, and synergy realization, with improving credit trends setting the stage for the possibility of a major buyback program to launch as early as 2H22. Simon also upgrades AT&T to OW as he believes that the recent underperformance has driven valuations to attractive levels while the stock should rally as the pending WarnerMedia transaction is completed. Download the Complete Report
ìîEurope – Materials – EU Chemical Has Outperformed MSCI Europe...
Source: MSCI, Morgan Stanley Research
Looking into 2022, Charlie Webb and Lisa De Neve think the sector faces a normalisation in terms of both profitability and demand, particularly as supply tightness eases YoY; at a time when inflation continues to filter through. Looking across the traditional Chemical sector, they continue to like stocks with pricing power that can deliver YoY margins, earnings growth and FCF progression. This draws them to Linde (OW), given the strong pricing model, upside to margins and attractive balance sheet; as well as Akzo Nobel (OW) with favourable 2022 pricing vs raws, underappreciated late cycle demand, and strong FCF and balance sheet optionality. As it relates to the Cyclical and Specialty Chemicals, they remain highly selective, favouring Evonik (OW) where returns, FCF and earnings growth should align positively in 2022; and Covestro (OW), offering deep value on mid-cycle earnings and attractive gearing to favourable secular and ESG-geared market trends. They also strike a positive tone for European Fertilizers heading into 2022, especially for nitrogen, and favour OCI (OW), given significant earnings upside risks, cheap valuation and increased cash return potential. On the negative side they see downside in Synthomer (UW), as NBR latex utilisation rates correct sharply as supply additions weigh on the market; and on a relative basis Arkema (UW), where risks from a normalisation in acrylics are not appropriately discounted when compared to peers. Download the Complete Report
ìUS – Multi-Industry – 2022 Outlook; Supply Chain Response Leads Capex Supercycle; Overweight ETN Top Pick
Source: Morgan Stanley Research
MS Research Analyst Josh Pokrzywinski sees supply chain investment driving some of the best capex and automation growth in a decade over the next several years, driven by convergent factors, including material and labor inflation, longer lead times, trade and tariff risk, and technology advancements. While near-shoring and automation are both topical market themes, he believes that growth expectations for 2022 and beyond fail to capture the magnitude of the opportunity. Josh sees ~$65B of manufacturing equipment capex spend, representing a ~7.5% CAGR over the next 3-5 years. He looked at 18 major industries' aggregate US demand across imports and domestic production and sees the need for significant capex spend as companies shorten supply chains back to historical levels. Josh also sees automation outpacing capex as technology shortens paybacks and new production seeks out higher automation content to increase competitiveness with low cost countries. Overall, he sees the market growing at 10% over the next 3-5 years compared to historical growth rates of ~5%. Josh expects near-shoring capex spend to include significant share gain from domestic suppliers that had consistently lost share due to offshoring. Josh sees discrete and hybrid automation significantly outpacing process industries. Josh thinks that important product lines with intellectual property and pricing power are more likely to be near-shored or sourced from domestic players and can price to parity on margins. Collectively, he sees price/cost, backlog, inventory replenishment, and capex as underappreciated (but not unknown) drivers of strength in 2022. There is sufficient scarcity in manufacturing capex exposure and/or secular growth in names like Eaton Corp (OW, $195 PT), Johnson Controls (OW, $87 PT), Ingersoll Rand (OW, $68 PT), and Rockwell Automation (OW, $395 PT) such that to the extent that these companies also benefit from the 1H supply chain accordion effect Josh continues to like them (in that order). Download the Complete Report
ìîUS – REITs – 2022 Outlook; Focus On Earnings And Dividends; Favor Value And Growth Barbell
Source: Bloomberg, Haver Analytics, Datastream, Morgan Stanley Research
MS Research Analyst Richard Hill expects REIT returns to normalize to 10% following their best year ever in 2021 (+38% ytd), but the path won't be easy given a mid-cycle transition. Richard models '22e/'23e FFO growth of ~14% / ~8%; that, coupled with a ~3% dividend yield, supports solid returns, even if FFO multiples de-rate 1-2x for the more expensive cohort as growth decelerates, corp credit spreads widen and rates rise. MS’ 6-factor quant model suggests headwinds, but he sees reasons to be constructive. Richard notes that REITs work in a bear flattening yield curve and have been the best-performing group when PMIs decelerate, and inflation is strong — the macro conditions he expects in 1H22. Record "dry powder" targeting CRE may push M&A toward historical highs, in his view. Starting with growth, Richard likes AVB (OW, $168 PT), INVH (OW, $48.50 PT), and WELL (OW, $98.50 PT) in Rentership, as outsized growth potential mitigates relatively expensive valuations. Industrials are also expensive, but there's undervalued secular growth in OW PLD ($175 PT), in his view. Given the potential for decelerating growth, Storage sits on the rich side of fair value where he is UW EXR ($175 PT). Download the Complete Report
ìîUS – Software – MS Research Analyst Keith Weiss highlights that with increasing volatility, a scoreboard littered with stocks down 25%+ for the year and the average returns across the coverage a negative 2%, software appears to be limping across the finish line in 2021. In reality, he thinks that the (2%) average stock performance for software hides the more poignant trend seen over the past two years, an increasing separation of the wheat from the chaff -- with the top quartile names up 25% YTD versus the bottom quartile down 35%. Keith notes more broadly that software fundamentals remain as strong as ever as: 1) CIOs expect software spending to accelerate further, from 4.9% growth in 2021 to 5.2% in 2022 according to his most recent survey, 2) core secular growth trends remain firmly in place, with Cloud Computing, Digital Transformation, Security, AI/ML and Analytics dominating the top of the CIO priority list, and 3) software business models continuing to improve with consumption models better matching revenue to customer value and product led distribution models garnering increased efficiencies for vendors. However, Keith thinks that there does exist significant risks to be navigated in the year ahead, with software multiples still well elevated versus historical levels, difficult compares for many names in 1H22, a return to work and labor shortages pressuring margins and the risk of rising interest rates the risk side of the equation remains robust as well, framing a continued stock pickers' market in 2022. Keith’s favorite names for 2022 include CRM (OW, $360 PT), MSFT (OW, $364 PT), and PANW (OW, $660 PT). Additionally, MS Research Analyst Josh Baer is upgrading TOST ($53) to OW. He sees this as a compelling opportunity to invest in a high quality, rapidly growing asset, addressing a large market, winning share, with several powerful growth vectors to support durable growth and a conservative forward model well positioned for positive estimate revisions. Download the Complete Report
ìîUS – Communication Software – MS Research Analyst Meta Marshall highlights that heading into 2022, communication software has multiple catalysts, namely: large TAMs, cloud transitions in early days, anniversaring tough COVID comps, expanding portfolios, moves up market and maturing go-to-market channels. However, as she has seen in 2021, large TAMs and being in early days of cloud transitions are not enough to support valuations if competitive dynamics are being questioned. That causes her to favor TWLO ($350 PT), FIVN ($180 PT), and ZM ($265 PT) in 2022 as these names have the most attractive setups, more differentiation and are expanding offerings / market opportunity. While she believes that RNG ($220 PT) could easily see excess returns vs general software set, management turnover plus a lack of NT catalyst causes her to move to the sidelines. For much of the 2H of the year, the results on many comm software names were better than expected, notably RNG and FIVN, but Meta points out that there was a lack of valuation follow-through. Focusing on her coverage list heading into 2022, Meta remains OW TWLO, FIVN, ZM, moves to EW from OW for NICE ($315 PT) and RNG, remains EW BAND ($85 PT), VCRA ($60 PT), and EGHT ($18 PT). Download the Complete Report
ìUS – Internet – MS Alphawise Shows Rebound In Social Engagement; Bullish OW FB, SNAP
Source: AlphaWise, Morgan Stanley Research
MS Research Brian Nowak highlights that the percent of surveyed people using social media platforms on a daily basis rose by anywhere from ~74bp (Clubhouse) to ~500bp, Facebook (OW, $365 PT) since the last MS Alphawise survey in May '21. Brian points out that social media daily usage per the MS survey still largely remains ~200bp-400bp below December '20 shelter-in levels. He also notes that the survey speaks to the breadth of engagement across FB (beyond core newsfeed and stories) as 40%+ of monthly active users are using FB Watch, Instagram Shops, IGTV, Reels, and FB Marketplace. Brian sees a path for Reels, Instagram Shopping, and FB Marketplace to potentially add ~$3bn (~3%) to '22 FB ad revenue using current engagement levels. The short-form video battle continues as the MS survey shows that TikTok now has 67mn US daily active users, Reels has 43mn, and Snapchat Spotlight (OW, $65 PT) has 19mn, as Brian points out. He notes that the user overlaps here are notable too, as ~60% of TikTok users are using Reels, 70% of Reels users are using TikTok, and ~80% of Spotlight users are on TikTok. While Chat and Camera remain the most commonly used products on Snap (84%+ of monthly active users engaging with the products), Brian thinks that Snapchat's other use cases continue to show traction with ~50% now using Spotlight (monthly) and 66%+ using Discover and Maps. Brian notes that for Pinterest (OW, $53 PT) ~20% of users have purchased items on Pinterest (flat vs May) which speaks to the still-long runway for growth – consider that 44% of Instagram users have used Instagram shopping – the extent to which Pinterest can continue to increase the user relevancy and merchant/SKU availability on the platform provides potential upside. Download the Complete Report
ìUS – Communications Infrastructure – MS Research Analyst Simon Flannery retains his constructive outlook on Communications Infrastructure heading into 2022 and sees total returns in the ~10% area. He continues to favor the Communications Infrastructure stocks over the Telecom carriers despite another year of significant relative outperformance. Simon expects that the secular tailwinds of wireless broadband growth, 5G rollouts, and IT outsourcing/cloud computing to drive healthy demand growth across the sector. He expects the sector to deliver high single-digit AFFO/share growth along with an average dividend yield of ~3%, providing low double-digit total returns assuming stable forward multiples. While absolute valuations do remain elevated in a historical context, Simon thinks that Towers and Data Centers look attractive on a growth-adjusted basis relative to REITs, trading at just a 5-10% premium to the sector, well below recent highs. SBAC (OW, $407 PT) is Simon’s Top Pick in Communications Infrastructure given its leading exposure to domestic tower leasing, supportive contract structures, and capital allocation optionality. He continues to recommend CCI (OW, $208 PT) with constructive 2022 guidance already provided and a ~3% dividend yield growth 7%+ annually. Simon has updated his estimates for Digital Realty (EW, $154 PT) and Equinix (EW, $773 PT) and are rolling his PTs forward to 2023e multiples and to reflect recent trading performance. Download the Complete Report
ìUS – Healthcare Services & Distribution – MS Research Analyst Ricky Goldwasser publishes her 2022 outlook for the Healthcare space, noting that the industry is reinventing itself, and presenting investment opportunities across all market caps. She is focused on three key themes and prefer platforms and a select group of innovators. First, she notes that tech disruption will come from within established healthcare platforms via internal initiatives and selective M&A. Second, biosimilar pipelines are poised to inflect. Ricky thinks profits from biosimilars could expand almost 5x, from 1-3% of distributors' operating income today to as much as 10-15% by 2025. Lastly, regulatory threats are receding. Midterm elections loom and consensus proves elusive, so major healthcare reforms appear stalled in Washington, resulting in managed care multiples potentially expanding. Ricky’s key Overweights across her alrge cap coverage are: CVS, UNH, CNC, ANTM, MCK. She also likes the following portfolio of new entrants that look attractive over the medium to longer term: ONEM, GDRX, AMWL, ACCD, ALHC. Ricky also makes several ratings changes: 1) Upgrades DH to OW, 2) Downgrades OSH, CI and HUM to EW, and 3) Downgrades WBA and BHG to UW. Download the Complete Report
Negative
îìUS – Equities – Percent Off YTD Highs
The MS US Equity Strategy team highlights the percent off the YTD highs for each index and the percent of members off 10/15/20% from the YTD highs within each index (as of Monday’s close). The most damage broadly (both at index level and under surface) is in RTY and MSCI EM. SPX is holding up the best vs. YTD highs.
îìGlobal –Supply Chains – New Series On Repair, Restructuring, Investment Implications
Source: Bloomberg, Morgan Stanley Research. Monthly data as of October, 2021
MS Equity Strategist Daniel Blake, MS Chief US Public Policy Strategist Michael Zezas, and the global research team highlight that the complexity of modern supply chains and the scale of demand and supply shocks in the 2020s has fueled brisk investor debate about the inflation/growth outlook, the appropriate policy response, profit margins and investment prospects for key chokepoints and related sectors, as well as the long-term implications for the structure of the global economy. In this new series, the team aims to help navigate these debates through collaboration across the global breadth of MS research (>460 analysts covering >3,600 companies across 44 markets, capitalised at US$95trn). The team notes supply chains remain vulnerable, particularly as the spread of new variants including Omicron is assessed/managed, while uncertainty about unmet demand vs. reversion remains high. In the team’s base case, the most acute disruptions are already easing and will be more fully resolved by 1H22. However, orders have surged amid anxiety about sourcing product, thus inflating backlogs and setting the scene for a sharper-than-expected short-term unwind, particularly for consumer electronics and segments facing demand destruction risk, in the team’s view. Over the longer term, the team sees companies and policymakers investing around an Automate/Secure/Control strategy for supply chains. The team also sees supply remaining tight in semi components, including ABF substrate, throughout 2022, while shortages of key chips (including MCUs and PMICs) should ease somewhat over 1H22. In terms of what’s in the price, the team points out that consensus earnings growth expectations for global Industrials, Semis, and Tech Hardware broadly anticipate a continuation of 2021 boom conditions in both 2022 and 2023. Download the Complete Report
îìLatAm – LatAm Retail & eCommerce – Apparel Operators Have Lagged Other Sub-Sectors For 2022E EBITDA Revisions
Source: Thomson Reuters, Morgan Stanley Research
MS LatAm Research Analyst Andrew Ruben favors select eCommerce and food retail share gainers into 2022. Conversely, the rise of cross-border operators (led by Shopee) drives margin risks for apparel retailers and other marketplaces. He upgrades FAL, CRFB3 to OW & CEN to EW; downgrade VIIA3, LREN3 to UW. MELI (OW) remains our Top Pick. Download the Complete Report
îUS – Telecom & Networking Equipment – 2022 Outlook; Large Backlogs ’22; Favor OW FFIV/AXON; U/G IIVI OW
Source: Morgan Stanley Research estimates
MS Research Analyst Meta Marshall highlights that the biggest challenge she sees to 2022 performance is the interplay between the revenue / margin acceleration the names will see as supply chain overhangs lift with a slowing of order growth and clarity on how much doubling ordering took place. The extent of double ordering and slowdown in orders makes her more cautious heading into '22, particularly the 2H, even as certain cloud and service provider cycles remain healthy and costs associated with supply chain should go down. Meta heads into '22 more cautious on her universe than she entered '21 given ~23% performance of the space YTD vs. ~22% for the NASDAQ (Covered by MS Research Analyst Mike Cyprys, OW, $250 PT), performing in-line like her rating into the year. She thinks that the best opportunities remain software transition stories like FFIV (OW, $280 PT) and AXON (OW, $180 PT), names where questioned M&A can potentially turn more beneficial like IIVI (OW, $82 PT) and COMM (OW, $14 PT), or names where operating leverage is possible like NATI (OW, $50 PT). She is more cautious where tough comparables or valuations are stretched like ZBRA (UW, $510 PT), TRMB (UW, $76 PT), and JNPR (UW, $25 PT).Download the Complete Report
îìEurope – Materials – 2022 Yeah Ahead piece from Harald Hendrikse and Victoria Greer. While they are constructive on sales (+7% yoy, easy comps) and production volumes (+10%-11% yoy) for 2022, assuming no further supply chain issues, they are more worried about price mix and raw materials costs as well as residual values/other one-offs are all headwinds for OEMs. Consensus EPS look very high (they model Daimler and BMW EPS down yoy for 22E and 23E) - much less so for tires, suppliers and Renault. Their 2022 call is for laggards to catch up. Despite their caution on investor risk appetite and on high consensus EPS expectations, they maintain Overweights on Renault (top pick), Aramis, Stellantis (top pick), Michelin, Faurecia (top pick), Valeo. They also downgrade Daimler to Equal-weight simply as the risk-reward has deteriorated after its significant run since March 2020 - the truck spin-off catalyst has largely played out; consensus earnings expectations are very high; and execution improvement has now become consensual. BMW remains Underweight as a hedge. Download the Complete Report
îìLatAm – LatAm Oil & Gas – Historical Volatility for PBR Stock in the Past 24 Years
Source: Bloomberg, Morgan Stanley Research
MS LatAm Research Analyst Bruno Montanari thinks PBR's high div. yld. is not enough to fully compensate the volatility during the elections in Brazil, as well as the risks of energy policy becoming less market friendly in the future. He prefers to play safe, with Junior E&Ps' direct commodity exposure, and defensive fuel distributor VBBR. Download the Complete Report
îChina – Internet – For The 15 Largest Companies By Market Cap Under Our Coverage, We Forecast Aggregate Revenue And Non-GAAP Operating Profit To Grow 21% And 25% In 2022e
Source: Morgan Stanley Research (E) estimates
Gary Yu, Alex Poon and Eddy Wong think it is too early for industry-wide bottom fishing, so recommend being selective. They think the impact of regulatory changes on earnings has mostly been reflected in consensus, but they still see further earnings downside risk arising from operational headwinds (particularly for non-game entertainment, advertising and e-commerce) and strategic investment losses (except for community group buy). MS Analysts project aggregate revenue and OP for the 15 largest stocks (by market cap) under theircoverage to grow 20.7% and 25.1% in 2022 (vs. 26.7% and 3.7% CAGR in 2019-21). For fundamental (earnings downside) and sentimental (ADR delisting risk) considerations, they prefer food delivery > games > e-commerce > verticals > advertising > non-games entertainment. Their top picks are Meituan, Tencent, NTES, PDD; and they have avoided non-game entertainment and advertising proxies such as HUYA, DOYU, IQ, TME, WB. Download the Complete Report
îìUS – Freight Transportation – MS Research Analyst Ravi Shanker highlights that resolving the current global transportation/supply chain bottleneck will take time, slow but deliberate action, decisive leadership/direction, and co-operation from all parties involved. Ravi sees three main reasons for the current supply chain bottlenecks: (1) strong demand in Asia-to-US lanes related to peak season restocking, (2) structural supply constraints in the US, and (3) pandemic-driven labor constraints on the ground in the US. Ravi sees three potential solutions including: (1) Natural easing of demand as peak season winds down in early 2022, (2) the Chinese New Year in Feb 2022 should see manufacturing in China largely shut down but supply chains continuing to run and should give markets a 4 week window to clear the logjam, and (3) an unprecedented effort to clear the backlog. He notes that with everyone from the federal government to local infrastructure operators to global transportation companies and shippers – even the military in some cases – trying to "clear the intersection", markets should see some relief by end of 1Q22. But Ravi thinks that this is only likely to bring limited and temporary relief due to: (1) Apart from Air freight, supply in Ocean and Trucking/Rail is hard to increase, (2) As the US clears its congestion, new constraints may emerge, and (3) weather, resurgence of the pandemic and other disruptions (port strikes) may lurk in 2022. Ravi’s preferred global transportation picks are: OW-rated KNX ($77 PT), WERN ($70 PT), SNDR ($36 PT), ARCB ($140 PT) and UW-rated EXPD ($95 PT), CHRW ($60 PT), UPS ($135 PT) in the US; Deutsche Post AG (DPW GR OW, €73 PT) and AP Moller-Maersk (MAERSKB DC OW, DKK27000 PT) in EU; and Cosco Shipping Holdings-H (1919 HK OW, HKD21.20 PT), SITC (1308 HK OW, HKD38.60 PT), and China Merchants Port (144 HK OW, HKD17.40 PT) in China.Download the Complete Report
îAsia – Technology –Tech Earnings Growth Decelerate In 2022
Source: Refinitiv, Morgan Stanley Research
Shawn Kim and MS Asia tech analysts are out with 2022 outlook piece for Asia Tech, discussing three investor debates for the sector and top picks for the year. 2021 has been another good year for tech but 2022 setup appears more challenging, particularly for semis, as recent outperformance and extended valuations will limit the potential upside when supply and demand conditions deteriorate late in the cycle – all of which makes stock picking more important in the coming year. For 2022, MS analysts recommend technology leaders with a strong financial position as well as companies with the potential to become future leaders and prefers stocks with secular growth and pricing power in 1H22 and would look to re-engage with cyclically depressed tech into 2H22. Download the Complete Report
ìîJapan – Industrials – Stock Price (¥): Upside/Downside To Our PT Are Toyota +19%, Honda +10%, Nissan -5% (as of Dec 10)
Source: Thomson Reuters, Morgan Stanley Research
Shinji Kakiuchi maintains in-line industry view. He expects tailwinds from rising used car prices and low incentives in F3/22 to fade in F3/23. Overall, he looks for global production volume of the three firms in combined to increase by 2%/14%/2% in F3/22-24e, and maintains his outlook of US and China autos market. He expects Nov-Dec recovery off an Oct bottom, with catch-up production at normal utilization in Jan-Mar. He however believes that it is unlikely to call a full recovery given limited utilization change in Dec. He forecasted operating profit of the three automakers to total JPY3.9/4.6/5.0 trn in F3/23-24e. He stays OW on Toyota with production recovery and steady progress in electrification and raised PT by 7% to JPY2,450. He is EW on Honda, cutting PT by 3% to JPY3,500 and UW on Nissan, raising PT by 6% to JPY520. Download the Complete Report
îìGlobal – Semiconductors – MS Research Analyst Joe Moore and the global semis team highlight that the industry view remains in-line on US semis, as the fundamental recovery appears to be fully discounted in most stocks, but 2022 should still be a solid growth year. At least from the standpoint of the US semiconductor team, Joe sees the recent supply chain conditions setting up substantial revenue growth in CY22, but that revenue growth will be driven by a substantial restocking as customers react to the first major semiconductor shortage in history that was severe enough to materially impact industrial GDP. Further, as he looks at 2021, Joe saw multiple expansion – somewhat surprisingly to him – because of the nature of the supply chain, as unfulfilled demand leads to exceptional backlog and visibility. Even if overall conditions stay healthy, which Joe expects, by 2H22 there should no longer be unfulfilled demand, and it should become increasingly clear that fundamentals are being driven by stockpiling at key customers. Joe tends to see 2022 as the peak, and while he thinks that it's too early – and out of phase with current data points – to be negative on that, he thinks it is quite likely to see headwinds in CY23. Joe is naming QCOM (OW, $215 PT) as his Top Pick in US semis. While he does see smartphone as an area less impacted by current supply chain disruptions, the stock continues to trade at a discount to peers and should benefit from significant price increases that have continued around 5G. In Asia, the team believes that Samsung (005930 KS, OW, KRW97000 PT) offers one the most compelling re-rating stories once the memory cycle stabilizes. In Europe, ASML (ASML NA, OW, €800 PT) is the Top Pick and the team believes that the company's LT revenue targets may ultimately prove conservative as the company is poised to benefit from enduring secular growth trends. Download the Complete Report
îChina – Property – Major Correction In HSI Drives Property Prices Lower
Source: Centaline, Refinitiv, Morgan Stanley Research
HK Property valuation is cheap (10x P/E, 5.7% forward dividend yield), but Praveen Choudhary is downgrading his 2022 HK Property industry view to Cautious from Attractive. The recent decline in the HSI (down 18% since July 1, 2021) generally should be followed by property sector underperformance due to a negative wealth effect, based on historical data. Other drivers for underperformance are market expectations of rising interest rates, coupled with decline in residential sales volume and price decline (see chart below) . Sector preference Office>Residential then Retail. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – TaskUs, Inc. – MS Research Analyst James Faucette upgrades TASK to OW as he sees a compelling valuation at current levels. TASK’s cloud-native approach to delivering customer care, content moderation, and data labeling and annotation services to high-growth “new economy” customers remains closely aligned with the digital-native nature of the companies it services, avoiding the use of legacy infrastructure that may encumber more traditional BPO players. James sees TASK's exposure to high-growth digital-native companies as a key differentiator. The cultural alignment James hears from TASK's customers, as well as the ability for TASK to grow with its customer base, underpins the +35% revenue CAGR (CY20 – CY23E) he forecasts. He also notes that acquisitions may deliver incremental upside and allow TASK to expand into higher-value capabilities, new geographies, or deeper into existing verticals and offerings. With shares down over 49% from September 2021 highs, James sees valuation as compelling at these levels, particularly given TASK’s potential to grow into higher-value services while still maintaining its focus on high-growth technology customers. Download the Complete Report
ìUS – Sweetgreen, Inc. – Best-In-Breed Fast Casual; Powerful Emerging Consumer And ESG Dynamics; Initiate At Overweight
Source: Company data, Morgan Stanley Research estimates
MS Research Analyst John Glass is initiating coverage of Sweetgreen (SG) with an OW rating and $39 PT. He sees Sweetgreen as a differentiated asset in restaurants, benefitting from multiple consumer tailwinds, including increased plant-based food consumption, digital adoption and its multichannel model, and interest in mission-driven brands with a strong ESG ethos that connect well with a youthful and enthusiastic consumer base. John notes that SG's healthier salad-focused menu allows for high frequency of use, which in turn allows for greater store densification. From its still small unit base of 140 stores across 13 states, he sees the potential to sustain 25%+ unit growth for years to come, if executed well, supported by strong unit-level economics. But he points out that there's also a catch: heavy up-front investments in G&A have resulted in an unprofitable business today, a rarity in public restaurants, and the company is not expected to be adjusted EBITDA positive until '24 or FCF positive until possibly '30. Rapid top line growth is needed to leverage this expense load, something John thinks investors should be willing to underwrite but that is a key risk nonetheless. Download the Complete Report
ì Brazil – Brazil Financial Institutions –XP management hosted its first-ever investor day. Key topics included: expectations on new vertical revenues, most notably banking & credit, expanded TAM, share of wallet, impact of higher Selic on the business, and overall strategic and operational outlook. Reiterate OW on XP, Jorge’s Top Pick. Download the Complete Report
ìUS – CVS Health Corp – MS Research Analyst Ricky Goldwasser highlights that since Karen Lynch took the CEO reins in February 2021, she has methodically set the stage for last week’s analyst day. Ricky notes that Karen’s moves included welcoming back Shawn Guertin as CFO, promoting key personnel, conducting bottom-up strategic review of existing assets, infusing new energy into the employee base, and improving communication with the Street including increased transparency. Ricky believes the investor day presentations helped contextualize the opportunities embedded in the integrated-at-scale CVS platform and offered visibility around and commitment to near- and long-term earnings streams. Taking into consideration all these developments, she believes the stage is set for multiple re-rating as management executes on this scorecard. While shares are up 45% year-to-date outperforming the S&P, at 12x CVS (OW, $125 PT) shares are still trading at a meaningful discount to MCO peers (16x) and leading consumer and technology franchises (24x) and she sees a long runway for multiple expansion. At a 3.5:1 risk reward skew, Ricky views CVS as one of the most compelling large cap stories in healthcare. Download the Complete Report
ìChina – WuXi Biologics Cayman Inc – WuXi Bio announced before market open Dec 16 a resolution from its board to utilized the Repurchase Agreement Mandate authorized in June 2021 for stock repurchase not exceeding 10% of total issued shares, for an aggregate price up to US$500mn, given recent unusual price movement. Management indicated that at this point it has not uncovered elements that would negatively alter the regulatory regime and company operations after conducting reasonable enquiries on the matter. Sean Wu noticed that the biotechnology names currently on the list, such as BGI and AGCU ScienTech, have a common theme of having activities in genetic sequencing or involvement in military industries. WuXi Bio and other CXO companies’ overseas involvement primarily facilitates the advancement of global biotechnology firms and MNCs, which rely significantly on the Chinese CXO sector for cost-effective R&D and manufacturing services. Sean Wu remains OW. Download the Complete Report
ìUS – Walt Disney Co – Spending Content Deep Dive; Legacy Earnings Trim; 20% Upside, Remain Overweight
Source: Company data, Morgan Stanley Research
MS Research Analyst Ben Swinburne highlights that relative to every other player in the entertainment business, Disney (OW, $185 PT) boasts a portfolio of iconic global brands and franchises that stands apart from the competition. He notes that in just two years, this advantage has helped attract 75mm high-ARPU subscribers to Disney Plus. The opportunity (or challenge) ahead for the company and the stock is to double the customer base, triple the revenues, and break-even by '24, in his view. Strategically, he thinks that this puts the largest global content company in the position to have a direct customer relationship with hundreds of millions of households around the world, structurally enhancing long-term earnings power. For the stock, he believes that this can deliver a 20%+ return by YE22. While a draconian case in his view, if it cannot scale DTC to profitability at all, he sees roughly 30% downside from here given the pivot it has made from legacy distribution and monetization to streaming. On valuation, his fiscal YE22 PT values Disney's DTC businesses at roughly $100/share, plus a 15-16x P/E multiple on his core FY23E EPS, excluding the impact of DTC dilution. Download the Complete Report
ìUS – Toast, Inc – MS Research Analyst Josh Baer upgrades TOST to OW given the stock has pulled-back >50% from its high, with shares dropping 45% since its 3Q21 earnings release, just over a month ago, where the company beat consensus gross profit dollars by ~55%. He sees this as a compelling opportunity to invest in a high quality, rapidly growing asset, addressing a large market, gaining share, with several powerful growth vectors to support durable growth and a conservative forward model well positioned for positive estimate revisions. Josh sees >50% upside to our new $53 PT, with shares trading at 0.7x EV/CY23 Gross Profit / Growth vs. the Commerce Software and FinTech/Payments average at 0.9x. Download the Complete Report
Negative
îUS – Frontier Communications Parent, Inc – While MS Research Analyst Simon Flannery believes that Frontier’s fiber-first strategy makes good strategic and financial sense, an unfavorable risk-reward, combined with an extended period of negative top-line growth and free cash flow burn, leads him to initiate coverage at UW with a 12-month PT of $24. The stock is still in the early stages of this story, which is reflected in the wide range of potential outcomes as evidenced by his Bull: $43 / Base: $24 / Bear: $7 risk-reward framework. He notes that the new Frontier management team is off to an impressive start following the company’s emergence from Chapter 11 in May. In his view, the restructuring allows Frontier to use its revamped capital structure to make significant network upgrades and other investments. While Simon is encouraged by the recent progress at the company, investors face some significant risks. He argues that valuation is a challenging exercise given the lack of FCF before 2026. In his view, visibility is further challenged by ongoing secular and competitive top-line pressures across the industry, while broadband industry growth appears to be slowing sharply following a pandemic-induced pull-forward in demand. Simon does not project Frontier delivering sustained revenue y/y growth until 2024, although EBITDA performance may improve earlier, while 2022 will see the loss of ~$275m of high margin CAF regulatory revenues (net of RDOF). On the equity side, his PT is based on 6.5x 2023e EBITDA, which represents a valuation discount to current levels at ~7.6x (on his 2023 numbers) but still a premium to other wireline companies overall trading in the 5-6x EBITDA range. Download the Complete Report
îUS – DocuSign Inc – MS Research Analyst Stan Zlotsky downgrades DOCU to EW and lowers his price target from $350 to $165. He sees three reasons why it will take time for DOCU’s changes to reverberate through the system, and for the stock to begin working. First, to hire, train and ramp additional sales enablement reps can take 6-9 months, especially if the efforts begin in the second half of the year. Second, renewals that were just completed in Q3, or are about to be done in Q4, appear to be challenged by the limited prospecting done ahead of the renewal, which would need a full year to pass before sales reps have another at-bat to upsize the renewal. Third, while first two points play out, Stan thinks management is likely to remain very conservative with their guidance, potentially setting up noise around buy-side/consensus expectations. Ultimately, Stan thinks this process could take time, likely leaving the stock range bound, despite undemanding valuation. Download the Complete Report
îNorway – BE Semiconductors–Hybrid Bonding Revenues Expected To Grow From 2021
Source: Company data for historicals, e = Morgan Stanley Research estimates
Dominik Olszewski initiates with an Underweight rating and a €70 price target on Besi. Besi is a leader in hybrid bonding technology as advanced packaging comes to the fore. His assessment implies a c$4bn hybrid bonding opportunity set, with Besi having c70% market share, driving c€2.3bn served available market. Even allowing a 1x SAM multiple (equivalent to 10x estimated hybrid sales of €230m in 2024), Dominik thinks this is fairly reflected within valuation. Meanwhile, risks to the existing assembly business build with cycle maturity as he enters the third year of growth. MS sales estimates 4-11% below 2022/23 consensus, despite the strong start likely for 1H22. He thinks valuation captures secular growth in hybrid bonding, with elevated implied multiples on the existing business, hence the UW rating. Download the Complete Report
