MS's Global Reflections
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Deep breath…What a wild first two weeks we’ve seen to kick off the year. The news flow, volatility and macro events have come fast and furious, sending rates higher as the 10-year ended the week at 1.78% (up from 1.7% yesterday), the Nasdaq 100 finished down for a third straight week, and the S&P 500 and MSCI Index both ended flat. If the first two weeks are any indication of what is to come, it’s fair to say this could be a challenging year for many investors navigating valuations and fundamentals amid the ongoing pandemic and a tightening Fed cycle. However, investors may be relieved to see benchmarks breaking out of the ‘grind higher’ trend that highlighted a difficult 2021 for stock pickers. While there is certainly plenty of red across my screen, a flat benchmark may be just what investors need to generate alpha with last year in the rear view mirror.
There is growing anxiety that the chop beneath the surface is going to be here for longer. The carnage underneath was driven by highly topical macro prints in CPI and PPI—one in line and one slightly below consensus…dovish investors would think yields were rather unchanged yet duration took another leg lower. The jury is out on if we are getting close to “peak” inflation as the market prices 4-5 rate hikes for ’22 and a balance sheet runoff that highlights just how different these tighter financial conditions are compared to a few months ago.
As rates and inflationary pressures have marched higher, other ripple effects seen throughout the week include the rest of world outperforming the US, a softer dollar down 1% to end the week, a consumer digesting higher prices coupled with omicron shut downs and more factor rotation with value outperforming growth. Thankfully earnings season is upon us where we can focus more on the micro as we navigate this uncertainty. S&P consensus EPS expectations for 4Q21 and 1Q22were standing at $53/share for both quarters, ticking higher to 25%, which many think should reinforce a positive tilt on the current backdrop for equities. With financials kicking off the earnings seasons, it is clear the bar is high. One would hope we see a normalized response function with companies that deliver on accelerating topline growth and ample margins rewarded, while those that don’t meet expectations will be penalized. We saw this notion play out as Wells Fargo (WFC)* traded up nearly 4% after posting a strong beat on NIM and loan growth, while JP Morgan Chase (JPM) fell over 6% as a result of their guidance for negative operating leverage for ’22.
Taking a step back to look at fundamentals and valuation, MS Chief US Equity Strategist Mike Wilson notes that a tighter Fed policy regime historically means lower returns and more uncertainty at the index level. Pointing to the nearly 30% correction in expensive stocks since November 2021, Mike reiterates his cautious view that valuations are likely to come down in this stage of the mid-cycle transition. For now, many investors continue to weather the storm and look to companies with reasonable valuations and strong fundamentals for safe haven.
For others, the question at hand remains whether they are willing to catch the falling knife as growth and tech continue to challenge investor’s nerves. With the drawdown in Software stocks hitting new lows relative to prior rate resets, bulls look to these names with intrigue and hope to ‘begin fishing’ for the best ones. Looking at the data, there looks to be promise as high multiple growth names particularly in software have hit new lows relative to prior rate resets (average now down ~32% and to <9x ’23 EV/Sales and the most expensive names now down ~40% from highs). Meanwhile, bears remain cautious that this correction is far from over and continue to wait on the sidelines for even better discounts given the absolute starting point for valuations and the amounts of sheer market cap in this growth/software cohort has been unprecedented.
After what felt like an exhausting earnings season for 3Q21, let’s hope this time around will not bring the same unwanted ‘surprises’ that made for a challenging Q3 earnings session. Supply chain challenges dominated conversations around earnings for Q3 and since then, Omicron and a Fed Pivot have taken center stage. This has made for an environment with further headwinds as we navigate what hopes to be the inventible full reopening of global economies.
I continue, like many of you, to have several observations that crossed my mind this week including…
- With the start of an exciting slate of NFL playoff games this weekend, I want to highlight one of my favorite football movies to pair with the battles we will see this weekend. The Savone Family Movie of the Week is Remember the Titans.
- I boarded my first international flight this weekend to escape the cold in New York. While it was a bit anxiety ridden, it ended up being fairly seamless. It’s nice to see airports more full. Hopefully this is a ray of optimism for what is to come!
- As mentioned, my Cowboys have quite the battle this Sunday against the San Francisco 49ers…I have faith in the Cowboy at home with those roaring fans in Dallas. Don’t miss it!
- Got Engineers? While Amazon (AMZN) spending ~19bn annually on engineering costs seems like a setback for operating expenses, find out why this could be the next major catalyst in Internet Analyst Brian Nowak’s latest piece here.
- In all my years I’ve seen some painful outcomes for my favorite teams...adding to the list was A.S. Roma’s 4-3 loss against Juventus last weekend after blowing a 3-1 lead in 6 minutes…I look to this weekend’s Coppa Italia game against Lecce for a hard bounce back win. Forza Roma!
- Despite my UCLA Bruins loss to Oregon last night, they sit at number 3 in the nation. This team is shining bright and always keep a smile on my face. Every good team needs a lesson or two before March Madness…
- Among many of the lunch options around MS headquarters in Times Square, it’s hard to pass up a Chipotle (CMG) burrito during the mid-day slump…Make sure to read John Glass’ 2022 outlook for restaurants and why he is bullish onthe name.
- Looking to London and the EPL, it’s safe to say everyone’s attention is turning to Chelsea’s matchup with Man City, who sit 10 points ahead of second place. Will Chelsea chip away at their lead tomorrow? I hope to see our US star Christian Pulisic make a statement for The Blues!
- As AI and automation continues to advance exponentially, it seems that we will inevitably begin to completely rely on autonomous vehicles. Be sure to read Auto’s Analyst Adam Jonas’ ‘trailer preview’ of the industry that will soon reach >1trillion hours/year on the development of the ‘mobile metaverse’ here.
- As the CFB season comes to an end with a fantastic Championship game, I would like to congratulate all of those who believed in me when I predicted Georgia to win it all! Never forget that while offense sells tickets, defense wins championships…
- With new Macau gaming laws out overnight removing structural overhands for many names, which story are you most focused on?
- As we head into the long weekend dedicated to the bravery and resilience of Dr. Martin Luther King Jr., I would like to honor those who have sacrificed their lives for the wellbeing and development of this country and the world.
A series of data points I continue to follow closely relate to dispersion levels. Chris Metli and the QDS team highlight that dispersion levels this January are above January averages for the last 10 years, and in fact are at the highest level it has been in January (since 2010). Comparing dispersion across all months, January 2022 so far is exhibiting the highest level of dispersion since November 2020. Both between and within sector dispersion leveled this week at the 75th (+24 %iles) and 61st (+23 %iles) 5-year %tiles, respectively. The ratio of dispersion between sectors vs dispersion within sectors is now at the 83rd %ile (-8 %iles), suggesting that dispersion between sectors is dominating more than dispersion within sector (on a relative basis). With regards to sectors, dispersion was notably high in defensive sectors (Utilities, Staples, Healthcare, and Real Estate all have dispersion %iles > 70) in the last two weeks. Notably, single-name volatility levels remained highest in Tech (73rd %ile), Consumer Discretionary (90th %ile) and Healthcare (80th %ile), with the SPX at the 74th %ile relative to the last five years. Please reach out to be connected with Chris Metli and the QDS team.
As of 1/13, flows for the week have shown a willingness of hedge funds to withstand near-term volatility in defense of their growth oriented posture. US Equity L/S gross exposure rose ~7% WoW to 193% and net exposure leveled at 12 month lows off to 54% but still remain elevated at 62nd %-tile on a 5-year basis.Regarding gross exposure, the 7% raise is driven heavily by month-to-month impacts, rather than active re-grossing efforts. According to our PB Strategic Content Team, the selling of US equities continued this week, though sector level flows were more mixed compared to last week. Despite the continued volatility in the ‘Unprofitable/Expensive Tech’ space (MSXXUPT and MSXXEVSA Indices down -3.3% and -4.1%, respectively), net flows to the constituents of these baskets were relatively paired off this week. Similarly, despite Growth’s continued underperformance this week (MSZZGRVL Index -3%), funds were small net buyers of the Growth factor again. Noah Bramlage on the desk highlighted that despite the Growth vs. Value pair down ~12% YTD, Expensive Tech down ~17% YTD, and Unprofitable Tech down ~14% YTD, hedge funds have been net buyers of the Growth factor in the US for each of the last two weeks and the net flows to Unprofitable/Expensive Tech tilt toward hedge fund buying YTD. Even though hedge funds were net sellers of ‘growthier’ TMT industries (Semis, Tech Hardware, Software, Interactive Media, Entertainment), net flows to names falling within the ‘Unprofitable/Expensive’ TMT space were paired off. The bottom line here is that the ‘Value over Growth’ rotation has taken hold to start the year, but based on the flows we have no evidence to suggest hedge funds are legging into Value, even though it is an area of the market that generally outperforms in a rising rate environment.
Across other regions, gross leverage forEU L/S funds fell ~1% WoW to 177% and net leverage decreased ~1% WoW to 45%.Asia fund gross leverage rose ~1% to 135% and net leverage remained flat WoW at 70%. Noah highlighted that there has been consistent buying of EU Financials (specifically banks) as net exposure to EU Rate Sensitive Financials (MSSTERSF) is at a peak since January of 2019. Looking at Asia, hedge funds were buyers of AxJ and Japanese equities; there were heightened levels of long buying, amidst the region’s outperformance. Keep in mind that the Asia Pacific Index is up 1% this week. Japanese Health Care and Industrial had the most interest from long buyers. Looking at hedge funds’ absolute performance, the PB Strategic Content Team highlighted that the result of recently volatility and ‘Value over Growth’ rotation has been that the average US Equity L/S fund is down ~3.8% to start the year on an absolute basis. The top 50 crowded longs in the US have weighed on returns, down ~8.6% YTD vs. the crowded shorts down ~6.6% for a -2% spread. Please ask to be connected to our PB Strategic Content Team.
Diving deeper into Omicron updates, Biotechnology Analyst Matthew Harrison expects a US peak by the end of January. Some large US cities, including NYC appear to have reached their peak. Looking at vaccine uptake data, the number of administered US vaccines is ~522M as of Jan 11, among which ~248M (~75% of US population) were given as the first dose. Also, booster vaccinations are broadly higher than the rate of primary vaccinations. Matthew is paying more attention now to the expected case growth in the mid-west and northeast as the weather has turned colder. He mentioned that if the effective reproduction rate decreases at the same rate as Delta (-0.25/month), then he predicts Omicron cases will reach a peak in ~3-6 weeks and the peak daily cases would be ~6-7.5x higher than the Delta wave or ~0.9M-1.2M daily US cases. Notably, the transmission rate in the UK, US and Italy are increasing, indicating their Omicron waves will continue to grow rapidly for a while.
From a US Strategy perspective, MS US Chief Equity Strategist Mike Wilson highlights that with all the attention on rate moves so far this year, his focus now shifts to PMIs and earnings revisions to determine the eventual magnitude of correction from rate to growth. A tighter policy regime has historically meant lower returns and more uncertainty at the index level. Moreover, Mike notes that the market is currently 6 months past peak EPS growth, and this suggests that there is defensive leadership for the next 12 months. Mike updates his screens from earnings stability and margins perspectives that includes Yum Brands (YUM US), Medtronic (MDT), Netapp (NTAP US), APA (APA US) and Fiserv (FISV US). Please ask for the full lists or to be connected with the teams.
Looking at SPACs, the pace of issuances revived in the fourth quarter last year as deal terms became more investor friendly. Specifically, SPAC structures coalesced around a new normal featuring overfunded trusts and a shortened tenor to seed demand from investors. Through 2021 there were 613 SPAC IPOs, totaling over $160bn in gross proceeds raised. DeSPACs had a more linear trajectory, with announcements continuing throughout the year; there were 276 deSPAC merger announced for over $600Bn in total aggregate value and over $63Bn in PIPE capital raised. Nonetheless, Azhar Richmond on our US Sales Desk detailed in her semi-monthly MS SPACtator’s Digest today that investors became increasingly selective and the deSPAC market environment steadily became more challenging, particularly for early-stage and pre-revenue companies that had previously found success with the deSPAC formula. Looking forward to this year, Azhar highlighted that we may see some premier sponsors attempt to push investors back to more traditional terms… contingent on if the start of 2022 catalyzes a more “risk-on” approach among fundamental investors to help revive interest in some of the upcoming PIPE opportunities. Please ask to be connected with our SPAC team.
Shifting over to the economy, MS Chief Economist Ellen Zentner expects four hikes this year (March, June, September and December) plus initiate balance sheet run off, with the total amount of tightening to be ~25bbp hikes in fed funds this year. As the FOMC kicked off 2022 with a clear signal of its intent to begin the process of normalizing policy this year, Ellen and team see strong likelihood that the Fed will deliver its first rate hike at its March meeting and expect FOMC choosing larger caps but still acknowledge the practical limitations. The team expects the FOMC to set maxim caps for reinvestment at $50 billion for Treasures and $30 billion for MBS. Looking at upside surprised CPI and downside surprised PPI, Ellen and team see December core PCE inflation up 0.5% on the month, putting the year-over-year rate on track to hit 4.8% from 4.7%.
Taking a look at global trade, MS Chief Global Economist Seth Carpenter highlighted this week thatglobal exports have decelerated due to a decrease in goods. He thinks that heightened supply-chain disruptions, rising inflation fueled by higher commodity prices, and new Covid flare-ups are some of the reasons to blame. Data has illustrated that real (versus nominal) trade volume has decelerated in recent months, while the nominal value continues to be fueled by higher prices from supply chain disruptions. In recent months, export volume has actually decreased, while export value continues to increase. There has been continued strong demand, seen from shipping rates continuing to increase (to and from the US). His expectations for global trade have changed due to a combination of lower commodity prices, decreasing good prices, and subdued capital goods. Although services trades continue to rise, going forward, he no longer expects a continuation of trade expansion. Regarding supply chains, he believes that we are just past the peak of market disruptions, and are starting to improve. This shift reflects the fading stimulus to consumer spending and a slight normalization of supply chains. He also highlighted that capital goods are flattening, after recovering earlier in the year.
Looking across the pond to Europe, MS Chief Europe Equity Strategist Graham Secker expects inflation in an extended slow decline from an April 2022 peak on the next utility cap hike as goods and commodity prices switch from drivers to drags. He highlights that the broadly flat print confirms that industrial production in the Euro area remains impaired by global supply chain issues, but sees positive signs from auto sector that has picked up from 4Q21’s -42% to -27% YTD and energy price index of +71%. Furthermore, Equity Strategist Ross Macdonald notes that the MSCI Europe is already priced for higher real yields, but risks come from US stocks that do not. Graham and Ross remain overweight on Autos, Commodities and Financials and updated a list of overweight rated stocks that include Ageas (AGS BB), Eni (ENI GR), Heidlbercement (HEI GY), Valeo (FR FP), and Vinci (DG FP).
MS European Travel and Leisure Equity Analyst Jamie Rollo upgraded his sector view on Leisure from cautious to in-line; he sees 15% market cap-weighted sector upside if stocks under his coverage hit their price targets, which is more than the 8% upside he sees to his MSCI Europe target of $2080. It is interesting to recognize that European reopening stocks have lagged their US peers—Rollo believes they offer an attractive risk-reward. While recent outperformance of Value has been global in nature, the bottom up drivers for US and the EU are different. In EU, Value rally driven by cheapest stocks outperforming versus US where expensive stocks are underperforming. His top picks are Whitbread (WTB LN), Entain (ENT LN), Compass (CPG LN), Edenred (EDEN FP) and Evolution (EVO SS). On the flip side his bottom picks are TUI (TUI LN), Carnival (CCL LN), Royal Caribbean Group (RCL US), Cineworld Group (CINE LN), and La Française des Jeux (FDJ FP). Please ask for the full list or to be connected with Jamie and his team.
Turning to Asia, MS Chief Asia Economist remains constructive on Asia’s growth outlook. Even though uncertainty still lingers, he thinks that China’s policy cycle is easing, Omicron’s less severe diseases, and US’s ramping up of Fed tightening path. However, MS Chief China Economist Robin Xing sees 60-70bps downside to the original forecast of 4.9%Y 1Q22 growth, as the costs of China’s Covid-Zero strategy could outweigh its benefits in light of rising Omicron cases. China could double down on fiscal support to public capex, which is similar to the front-loading of RMB 1.45 trillion in local construction bonds to support key projects in 2019. MS China Equity Strategist Laura Wang added China Yangtze Power (600900 CH) and Qi An Xin Technology (688561 CH) to the respective focus lists. Please ask to be connected with the teams.
MS US Public Policy & Municipal Strategist Michael Zezas published a note overnight assessing three potential geopolitical risks. For US and China, there could be further expansion of non-tariff economic barriers. The US Congress continues to push forward legislation aimed at competing with China, such as the US Innovation and Competition Act of 2021 (USICA). New regulatory actions have followed suit, such as the expansion of the Committee on Foreign Investment in the United States (CFIUS) rules and finalized rules for the Holding Foreign Companies Accountable Act (HFCAA). Companies recently named to US export controls lists further suggest the US is broadening its definition of the types of commerce in scope for non-tariff barriers, a trend initially forecast in our "Slowbalization" playbook. For US and Russia's sanctions for Ukraine, Michael sees more scope for upside going into the talksas Russia equity market has priced in the possible outcomes. Lastly, if "Build Back Better" legislation is restructured to gain enough votes to pass, Michael thinks there could be upside for the clean tech sector and tax-driven headwinds for others.
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
Tuesday, January 18, 2022
11:00 AM
State of CRE Webcast: (CRE)volution: Perspectives from the Boardroom with Mary Hogan Preusse
Expert
Mary Hogan Preusse, Board Member of Digital Realty, Host Hotels & Resorts, and Realty Income; Lead Independent Director of Kimco Realty; Senior Advisor, Fifth Wall
MS
Richard Hill, Head of US CRE Research
Wednesday, January 19, 2022
10:00 AM
MS LatAm Conference Recap: Top Ideas
MS
Jorge Kuri, Latam Financials
Andrew Ruben, Latam Retail & Ecommerce
Carlos de Alba, Latam Metals & Mining
Josh Milberg, Latam Transportation & Infrastructure
Cesar Medina, Latam TMT
Javier Martinez, Latam Restaurants, Healthcare, Lithium, Agribusiness
Ricardo Alves, Latam Food & Beverage
Nik Lippmann, Latam Real Estate
Bruno Montanari, Latam Oil & Gas
Roberto Browne, Latam Leisure
11:00 AM
Cybersecurity Outlook – Can The Acceleration Continue in 2022?
Experts
Atif Ghauri, Chief Operating Officer, Hervajec Group
Steve Shaffer, Founder & CEO, Zunesis
MS
Hamza Fodderwala, US Software Analyst
Thursday, January 20, 2022
MQSA Sponsored Event: Neudata Alternative Data Trends Deep Dive
11:00 AM
Consumer Sector 2022 Outlook
MS
John Glass, US Restaurants & Food Distribution Analyst
Kimberly Greenberger, US Specialty Apparel, Footwear & Dept. Store Retailers Analyst
Simeon Gutman, US Hardlines, Broadlines and Food Retail Analyst
Thomas Allen, US Gaming, Lodging & Leisure Analyst
Dara Mohsenian, US Household Products, Beverages and Food Industries Analyst
Pam Kaufman, US Tobacco and Packaged Food Analyst
Sarah Wolfe, US EconomistUPCOMING CONFERENCES –
Please reach out to your sales representative if you are interested in attending any of these conferences.
Jan 18 (Asia) I Virtual Asia ESG Symposium
Feb 7 & 10 (New York) I Chemicals, Agriculture & Packaging Corporate Access Days
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 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:
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
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìUS – IT Services 2022 Outlook – Growth Durability Pushes Sector Upgrade
Source: AlphaWise, Morgan Stanley Research; n=100 (US and EU data)
MS Research Analyst James Faucette is upgrading his sector view on IT Services to Attractive (from In-line) as he expects elevated growth — above pre-pandemic levels — across the sector to persist for the foreseeable future (contrary to growing investor concern of a pull-forward in demand), driven by secular demand trends, continued VC-fueled innovation, and a shortage of skilled IT talent. As highlighted in his most recent survey of CIOs, digital transformation and cloud computing remain top priorities, consistent with commentary across his sector, as corporations look to execute on transformation and technology-adoption initiatives. However, in his most recent survey of CIOs, 85% of respondents noted they are short-staffed of IT professionals, while 60% of respondents noted that IT staffing shortages are resulting in an inability to deploy current IT budgets on projects, forcing companies to turn to IT Services firms to assist with execution and implementation. With demand for services exceeding supply of capable talent, James believes that IT Services firms with digital-led capabilities that are adept at acquiring, hiring, and retaining talent should be able to demonstrate pricing power. With the Attractive sector view, James remains OW ACN ($475 PT), EPAM ($830 PT), and TASK ($60 PT) and is upgrading DAVA ($185 PT) to OW. James also downgrades CTSH ($95 PT) to relative EW and downgrades TTEC ($90 PT) to relative UW. Download the Complete Report
ìUS – Tech – 4Q21 CIO Survey – Digital Transformations Roll On, IT Growth Expectations Sustain Well into 2022
Source: AlphaWise, Morgan Stanley Research; n=100 (US and EU data)
The MS US Tech team highlights that 2021 IT budget growth expectations decreased modestly in the 4Q21 CIO Survey. However, the team notes that 2022 expectations were revised higher, highlighting Digital Transformation initiatives sustaining growth in the IT spending environment into the year ahead. At +4.5% Y/Y (up from +4.3% in 3Q21), the team thinks that 2022 IT budget growth expectations are tracking ahead of the 10-year average (+4.1%). The data should bolster confidence in strong demand trends in Services and Software. The team highlights key themes including: 1) Industry expectations, 2) Cloud computing remains CIOs’ top priority, and 3) Security software is the most defensible spend category, widening its lead. The team notes that expectations for software spending growth in 2022 remain ahead of historical levels, refuting the notion of a pull forward in demand in CY21. Download the Complete Report
ìJapan – Economics – MS High-Frequency Personal Consumption And GDP-Based Private Consumption (QOQ, %)
Source: Cabinet Office, Morgan Stanley Research
Hiromu Uezato notes that high-frequency personal consumption index improved for a third straight month in Dec. Mobility data declined in the first week of Jan, but he needs to wait for upcoming data to assess the underlying mobility trend. Download the Complete Report
ìîUS – MLPs & Midstream Energy Infrastructure 2022 Outlook – MS Research Analyst Robert Kad expects midstream to sustain outperformance in 2022 (and maintains his Attractive industry view), but expects the year to be volatile. At a high level, he sees target-rich opportunities within the midstream sector to capture inefficiencies through discerning stock selection in what has become a less institutionally crowded sector. Looking ahead, he sees a continuation of four key themes that he expects to sustain strong midstream performance in 2022 (his price targets now show +27.0% median one-year total return across his coverage) and attract renewed interest to the sector: 1) Inefficiencies from an institutionally under-owned sector create opportunities for alpha capture, 2) Continued commodity inflation broadly attracts capital back to traditional energy and drives scarcity value where positive estimate revisions exist within midstream, 3) Durable, above-market FCF generation could force value recognition if capital structure reduction (particularly share buyback) action is taken, attracting new investors open to underwriting views on FCF yield compression, and 4) Energy transition – from problem to solution for midstream as the sector's essential role in supporting decarbonization becomes clearer. Robert resumes coverage of ET as his Top Pick at OW with a $12 PT. He downgrades ENB (ENB CT, CAD60 PT), EPD ($27 PT), and HESM ($32 PT) to EW from OW. He upgrades ENLC ($9 PT) to EW from UW. He also downgrades DTM ($54 PT) and MMP ($50 PT) to UW from EW. Robert’s PTs now show +20.7% median one-year price return and +27.0% total return (+38.6% total return for his OWs, +15.7% for his UWs) across his coverage. Download the Complete Report
ìîUS – Airlines 2022 Outlook – Recovery Delayed, Not Denied
Source: Company Data, Morgan Stanley Research
MS Research Analyst Ravi Shanker remains bullish on the US Airlines space and is upgrading AAL ($21 PT) from UW to EW. After the COVID resurgence affected the Airline recovery in 2H21, he expects “normal service” to resume in 2Q22 and accelerate in 2H22, setting up for a strong 2023. While the rising tide will lift all the boats, he is adjusting his order of preference by bringing up Legacy airlines and pushing ULCCs down the order (LCCs continue to remain his preferred subindustry). He notes that this change is a reflection of the pent-up demand expected from corporate/international and the operating leverage that Legacy airlines should see when traffic comes back as well as emerging concerns about ULCC capacity growth in 2023 and beyond. Looking ahead, given how strong the demand for air travel was in the 1H of 2021 (when conditions were conducive), he believes 2H21 risks have only coiled the spring even tighter for 2022. Ravi is tracking 3 main focus areas for Airlines in 2022: 1) Pace (and quality) of the rebound, 2) Cost inflation vs revenue, and 3) Capacity discipline into 2023. He continues to believe that the LCCs are the best positioned Airlines into 2022 and LUV (OW, $65 PT), ALK (OW, $78 PT), and JBLU (OW, $23 PT) are his preferred stocks in the space. Next in his order of preference are the Legacies including DAL (OW, $60 PT), UAL (EW, $60 PT), and AAL as the "high beta" trade for 2022. Download the Complete Report
ìîEurope – Industrials – Backtesting Shows Best Business Models Would Have Consistently Outperformed The Rest Of The Sector...
Source: Datastream, Morgan Stanley Research; The performance data provided is a hypothetical illustration of mathematical principles, it does not predict or project the performance of an investment or investment strategy. Past performance is no guarantee of future results.
Valuation spread between the top 5 and the rest is at extreme levels. While higher quality service stocks should remain at the core of long-term portfolios, for now MS Research Analyst Anvesh Agrawal sees value outside the top 5. He highlights Hays, Babcock, Elis and TPK as preferred names; move Experian and BV to Equal-weight. Download the Complete Report
ìJapan – Financials – F3/21 EV sensitivity to interest rates
Source: Company data, Morgan Stanley Research.
Mia Nagasaka is re bullish on insurers & banks, and favor Dai-ichi Life, SMFG & Tokio Marine in stock selection. 2022 may be the year in which fintech business comes to the fore, and retail finance fields (incl. BNPL) bear watching. Download the Complete Report
ìASEAN – Utilities– We see PE margins supported by slowing supply growth as new projects are delayed or pushed into subsequent years
Source: IHS, Company, data, Morgan Stanley Research (e) estimates
Mayank Maheshwari highlights that de-geared balance sheets, two-decade high cash flows, supply discipline and demand resilience, and historically low global inventories set the stage for power and a 16% upgrade in 2022 street estimates for Mayank’s coverage. Multiples may catch up as skepticism on long term 'g' unwinds. Download the Complete Report
ìIndia – Industrials –Binay thinks India's auto industry is at a trough; volumes are set to rise in 2022. Improving supply-demand dynamics, led by 4Ws, and favorable valuations drive his Attractive industry view. EV scale-up is also likely in 2022. We prefer 4Ws and premium 2Ws to mass 2Ws in the current scenario. Download the Complete Report
ìEurope – Consumer Discretionary –5 top Overweights: Whitbread, Entain, Compass, Edenred, Evolution. 5 Underweights: TUI, Carnival, RCL, Cineworld, FDJ (downgraded from EW). MS Research Analyst Jamie Rollo upgrades his sector view from Cautious to In-line given a better risk-reward outlook and Omicron peaking. He also offers 5 possible surprises. Download the Complete Report
ìUS – Chemicals 2022 Outlook – Put simply, MS Research Analyst Vincent Andrews thinks that 2022 will be a better year than most expect for commodity chemical names and that it is a year to buy dips in high quality "luxury chemical" names. He highlights that the year is likely to be dominated by upstream versus downstream fundamental debates and positioning skirmishes, such as what's taken place in coatings at present, with a bit too heavy positioning trueing up into 4Q results. He also expects the market to increasingly focus on company-specific narratives (e.g., self-help) rather than just broader thematics like "reopening" et al. that have dominated discussions since COVID hit. In his view, cash will be king once again, and returns to shareholders will likely be rewarded to a far greater extent than alternative uses. Lastly, while ESG remains central to the overall investment debate, he thinks that focus on the margin is likely to shift away from already well valued / highly consensus areas like hydrogen/lithium/EVs to the chemical recycling of plastic. Sherwin-Williams (OW) remains Vincent’s preferred play here as he believes it has the greatest ability to hold price during deflation — he is raising his PT from $345 to $375 as he now sees a higher probability of his Bull Case playing out. Additionally, the team’s OW calls into 2022 include CTVA (OW, $60 PT), HUN (Covered by MS Research Analyst Angel Castillo, OW, $47 PT), and LIN (OW, $365 PT). Download the Complete Report
ìîEurope – Financials – MS Research Analyst Magdalena Stoklosa sees global IB revenues slightly down-2% YoY, although up ~18% vs pre-covid levels. Strength to be driven by healthy banking & capital markets activity led by M&A, up +12% YoY. Resilient Equities with strong secondary trading vols & IPOs, up +1% YoY. FICC normalization to continue, down -14% YoY. Download the Complete Report
Negative
îìUS – Restaurants 2022 Outlook – MS Research Analyst John Glass highlights that on the one hand, demand signals remain healthy from a macro perspective, supported by robust expected PCE growth and a continued rebound in services spending, which still sits well below pre-Covid levels. But on the other, he notes that the reopening trade is now long past, and sales for most restaurants have already recovered from pre-pandemic levels and in many cases are well above already, and lapping the pent-up demand experienced in the 2Q/3Q21 may present Y/Y challenges. John still leans toward fast food. John is upgrading CMG to OW ($1920 PT), a "risk on" call, but taking advantage of the opportunity as shares are off ~20% from highs and his long-term positive view on fundamentals is unchanged, as the best-in-class large-cap growth name in restaurants with pricing power, rising new store returns, and digital tailwinds. He downgrades DPZ ($535 PT) to EW on valuation with 11% upside to his PT. John also downgrades QSR to UW ($60 PT), which is a relative call given below peer and history valuation. In full-service restaurants, valuations are tempting in many cases, but he is not a buyer yet. John notes that food distributors still face margin challenges in '22, though he still likes the longer-term narrative on share gains and later stage top line recovery in 22/23. His pick here remains PFGC (OW, $62 PT). Download the Complete Report
îìUS – Life Science Tools & Diagnostics 2022 Outlook – MS Research Analyst Tejas Savant highlights that early stage stories continue to experience significant pressure and volatility with Omicron on the rise, inflationary pressures, and ongoing supply chain constraints presenting a hurdle for outperformance. Tejas sees these dynamics reinforcing the importance of selective exposure to high conviction names in 2022, and against an uncertain macro backdrop and tougher comps, continues to favor high quality/commercially mature names within Core Tools and CROs/CMOs that are better positioned (via scale/purchasing power) to navigate these challenges. That said, he notes that the significant pullback for growth stocks has created opportunistic entry points in certain high-conviction stories for patient longer term investors. Other key macro dynamics with industry-wide implications he is keeping an eye on in 2022 include supply chain disruptions, China, tax reform, and changes in the regulatory environment. He believes that Diversified Tools are best positioned to outperform in '22, with base businesses benefitting from recovery and COVID tailwinds providing room for further upside. Tejas’ top stock picks heading into 2022 include: TMO (OW, $700 PT), CRL (OW, $465 PT), and NTRA (OW, $148 PT). Download the Complete Report
îìChina – Strategy – Focus List Changes – Laura Wang highlights that add China Yangtze Power to her China/HK Focus List and Qi An Xin Technology to her A-share Thematic List. She removes Shanghai Putailai New Energy from both lists. Download the Complete Report
îìEurope – Strategy – Just 27% of respondents are currently running an above average level of risk which is the lowest since 2013. A strong majority expect Europe and Financials to be the best performing region/sector in 2022. Consensus sees higher oil, benign CPI and very small bias to Value. Download the Complete Report
îìGlobal – Cryptocurrency – Bitcoin Down From Peak As Central Banks Plan To Tighten Money Supply
Source: Macrobond, Coingecko, Morgan Stanley Research. Chart shows monthly data.
MS Head of Cryptocurrency Research Sheena Shah highlights that low global interest rates, central bank balance sheet expansion, and government stimulus were all drivers of exponential cryptocurrency price rises in 2020 and 2021. Now that the Fed and other central banks look to slow their balance sheet expansion and prepare the markets for interest rate hikes, she believes that the leveraged crypto markets are weakening. Retail investor sentiment on social media has been becoming less universally bullish since late last year and now downward price momentum is adding to bearish sentiment, in her view. The yearly change in money supply peaked in February 2021 and bitcoin's annual growth rate peaked a month later in mid-March, which was no coincidence, she thinks. In the long run, she notes that cryptocurrency's usage as a payment vehicle/exchange of value is what should drive its valuation. Until now, however, she points out that the market has been trading most cryptocurrencies like speculative risky assets, as shown by the high positive correlation between bitcoin and equity markets over the past 6 months. Sheena thinks that 2022 should see lots of changes to cryptocurrency regulations for companies, retail investors, and coin issuers. Download the Complete Report
îìEurope – Strategy – MSCI Europe's N12M PE Has Arguably Priced In Higher US Real Yields Already…
Source: MSCI, Refinitiv, Morgan Stanley Research
MSCI Europe is already priced for higher real yields but risks come from US stocks that do not. MS Equity Strategist Ross MacDonald remains overweight cyclical Value, which has lagged the rise in real yields and has done little to narrow long-term dispersion trends. He highlights key Value stock ideas from MS Analysts. Download the Complete Report
îS.Korea – Media – Favorable Impact From New Ad Products Is Likely To Serve As A High Base Going Into 2022
Source: Company data, Morgan Stanley Research (e) estimates
Seyon Park highlights that a strong year for ads and commerce in 2021 is likely to serve as a high bar for 2022, and she expects content to play a bigger role in top-line growth. The lower margins for content coupled with election risk imply stocks will remain under pressure near term. Naver remains his preferred pick.Download the Complete Report
îìGreater China – Technology – ODM/EMS 3Q21 inventory in aggregate increased by 5% YoY, reaching 6-year high
Source: TEJ, Bloomberg, Morgan Stanley Research. Note: ODM/EMS in this chart includes Hon Hai, Compal, Quanta, Wistron, Pegatron, and Wiwynn.
Missing consumer electronics growth drivers, macro uncertainty and Covid impact might cap YoY earnings growth for the Tech Hardware industry in 2022. Sharon suggests focusing on structural change benefits or defensive plays (visible earnings growth, >5% dividend yield, net cash and compelling valuations). Download the Complete Report
îìArgentina – Economics – MS LatAm Economist Fernando Sedano highlights that tight resources, large upcoming debt maturities and divergent views on fiscal consolidation are key risks ahead. An IMF agreement is within reach yet it could come only in early 2Q. For credit, already low prices keeps him long. In equities, Fernando prefers regional plays such as MELI and GLOB. Download the Complete Report
îìLatAm – Economics – MS LatAm Research Analyst Gui Paiva highlights the 7-day m.a. pace of daily vaccination increased to 485k (from 418k wow; +16%) in Brazil, while there was no updated data for Mexico this week. Chile has already administered 234 cumulative vaccines per 100 people, followed by Argentina with 175, Brazil with 157, and then Peru with 154, Colombia with 129 and Mexico with 114. ICU capacity utilization rates currently vary from a 16% low in Mexico to a 88% high in Chile (ventilators). Meanwhile, ICU usage is at 54% in Colombia and 38% in Argentina. Last, but not least, ICU capacity utilization rate was approximately at 56% - up 10 p.p. wow - in Brazil (93% recent peak on March 21, 2021). Mobility figures (7-day m.a.) were mixed in both Brazil and Mexico vs the previous week. Download the Complete Report
îìEurope – Strategy – 2021 Rebased Performance - Thematic Average And US 10-Year Yields
Source: Thomson, Morgan Stanley Research
Rising yields continue to sort the Thematic wheat from the chaff, but synonymizing "unprofitable tech" indices with Thematics is reductive. While Blockchain funds' correlation break with history has been sharp, Battery and Mobility are providing the hedge MS Equity Strategist Edward Stanley had expected as yields rise. Download the Complete Report
îìGreater China – Technology – Global smartphone shipments – Y/Y trend
Source: IDC, Morgan Stanley Research (e) estimates
Charlie trims price targets for WIN Semi, Will Semi and Maxscend, and reiterates his contrarian calls – UW, EW and UW, respectively – given the coming inventory correction risk. Download the Complete Report
îìGlobal – Strategy– Our US public policy team published a note overnight assessing three potential geopolitical risks. 1) US/China – further expansion of non-tariff economic barriers; 2) US/Russia – further sanctions re: Ukraine; 3) Build Back Better legislation in the US; which if revived may still deliver equity sector impacts. Specifically regarding US/China trade tensions, the US Congress continues to push forward legislation aimed at competing with China, such as the US Innovation and Competition Act of 2021 (USICA). New regulatory actions have followed suit, such as the expansion of the Committee on Foreign Investment in the United States (CFIUS) rules and finalized rules for the Holding Foreign Companies Accountable Act (HFCAA). Download the Complete Report
îUS – Specialty Retail – MS Research Analyst Kimberly Greenberger highlights key takeaways from the ICR Conference where she lowers her 4Q EPS for AEO (EW, $29 PT), ANF (UW, $32 PT), CURV (EW, $12 PT), and URBN (OW, $40 PT) as she trims revenue and factors in higher inbound freight, expense deleverage on lower sales, and higher-than expected eComm shipping expenses as Omicron shifts revenue from stores to eComm. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – Amazon.com Inc – In MS Research Analyst Brian Nowak’s view, it’s time for more disclosure from Amazon (OW), this time into its ~$19bn spent per year on engineering. He thinks that AMZN has been a player in disclosure in the past (AWS disclosure in 2015). But with AMZN now having lagged GOOGL, FB, MSFT, and AAPL by anywhere from ~27% to 77% over the past 18 months due to concerns about decelerating growth, retail share loss, labor costs, the durability of retail top-line growth, and profitability, he thinks improved disclosure could be a positive (and needed) catalyst. Specifically, he thinks better visibility into AMZN’s estimated ~$19bn spent on engineers per year (excluding AWS) and emerging, "other bets" projects could help investors better understand the health of its core retail business. Brian estimates AMZN has approimately the same number of engineers (ew AWS) as FB’s total headcount; his in-depth analysis into AMZN’s ~1.5mn employee headcount leads him to estimate that the company already employs ~68k engineers (excluding AWS). Given Brian estimates a significant majority (80%) of these investments are allocated toward the N. America segment, the midpoint of his sensitivity would imply that core N. America retail margins are already operating at a 4.3% margin, ~160bp higher than the expected 2.7%. Brian rolls forward his valuation to YE '22, as his PT rises to $4,200, which implies ~18.8X '23 EBITDA compared to the long-term average of ~20X NTM EBITDA. Download the Complete Report
ìChina – Xiaomi Corp – Xiaomi's EV Project Intrinsic Value Versus Ev Delivery VolumeUnder Our Base Case Scenario
Source: Morgan Stanley Research (E) estimates.
Andy Meng introduced a framework to track and value Xiaomi’s EV business, based on key inputs such as sales volume, ASP, capex, cost structure and system stability. In his base case, he forecast Xiaomi's EV volume to reach 60k/120k units in 2024/2025E (or 0.8%/1.3% of China NEV market share), with an ASP of ~Rmb150k, mainly targeting mid to low end. His probability weighted bull-base-bear valuation methodology yields an intrinsic value of Rmb70bn in 2022, implying ~4x 2025 P/S and ~18% of Xiaomi's current market cap. He assumes that Xiaomi will kick off its capex on the production center in 2022, followed by a prototype launch in late 2022/early 2023 and road test in late 2023, and ramp up in 2024. Phase 1 and 2 will be mostly manufactured in-house, but Phase 3 may shift to an asset-light outsourcing model. He projects EV/EBITDA breakeven three years after launch. Download the Complete Report
ìUS – Samsara Inc – Driving Toward A Vision Beyond Fleet Management; Initiate At OW
Source: Morgan Stanley Research, Company data
MS Research Analyst Keith Weiss initiates coverage of IOT at OW with a $30 PT. Keith highlights that by combining Internet of Things (IoT) connectivity, machine learning/AI-based analysis, and cloud-based application functionality into the Samsara Connected Operations Cloud, the company allows customers to collect data from physical assets in a timely manner, enabling the ability to monitor, visualize and optimize their physical operations. He notes that Fleet Management was the first domain IOT focused on, where a fast pace of innovation and strong customer services has enabled rapid share gains in a highly competitive market. In just 6 years, IOT has amassed >25,000 customers, including 715 with over $100K in annual recurring revenues (ARR), driving an annualized revenue run-rate of nearly $500 million. Keith’s PT for IOT assumes ARR grows at 29% CY21-CY31 CAGR, translating to roughly $5.4 billion in revenue in CY31. Improving sales productivity as reps mature, scaling of the revenue base ontop of the aggressive R&D investments, and a normalizing of G&A spend as Samsara matures should drive operating margin improvements from -13% in CY23 to 22% in CY31, yielding $1.2 billion of FCF (22% margin). Download the Complete Report
ìUS – Coupa Software Inc – Levels of controversy on COUP ($330 PT) are at the highest since the IPO in 2016, which MS Research Analyst Stan Zlotsky believes creates an opportunity for outperformance in 2022 as the company delivers clean growth numbers. At the same time, his call volume on COUP is magnitudes higher than any other stock in his coverage universe, further underscoring the healthy two-sided debate taking place among the investor community. Coming into FY23 he sees a much easier growth story, as Llamasoft becomes fully organic, billings/revenue growth calculations become clean, and the company can take a break from making sizable acquisitions to give themselves time to fully incorporate the Llamasoft and Bellin deals. With that backdrop, he sees a path for 30% billings in FY23 (calendar 2022). Download the Complete Report
ìUS – Microsoft – MS Research Analyst Keith Weiss highlights that the most recent 4Q21 CIO survey highlights Microsoft’s (OW, $364 PT) solid positioning in high priority and strategically important areas of spend. Keith notes that Cloud migration continues as CIOs anticipate 44% of workloads in the cloud by 2024, providing Microsoft with a long runway of growth through its strong hybrid cloud positioning. Equally important, he points out that Microsoft looks to gain share in Public Cloud as enterprises ramp up the build out of modern applications and is gaining share among those surveyed in the hybrid cloud space. Keith notes that Microsoft polls ahead of the #2 vendor AWS by 22% points as the most preferred hybrid cloud vendor today – this is the largest gap he has seen over the past six survey periods. Looking longer-term, Keith thinks that Microsoft remains the largest share gainer of IT budgets as workloads move to the cloud. All these factors, combined with a valuation still at a discount to peers: ~26.6x CY23e P/GAAP EPS (or ~25.0x on nGAAP EPS) vs >$50B peers at ~32.5x P/nGAAP EPS – sets MSFT up as a defensive name with share gain momentum in attractive markets supporting its durable growth. Download the Complete Report
Negative
îUS – Lululemon Athletica Inc. – LULU’s holiday update came in below expectations. Management updated its 4Q21 outlook to the low end of its prior revenue & EPS guidance range. More specifically, despite a strong start to holiday, management attributed softer-than-expected revenue in peak holiday weeks to consequences of the Omicron variant, including store capacity constraints, more limited staff availability, & reduced operating hours. This had a disproportionate impact on LULU’s Canada business (see more detail below). Management also highlighted: 1) higher-than-expected air freight costs, which caused them to lower the 4Q21 GM outlook to down slightly vs. 4Q19 compared to flat prior, & 2) no change to the prior 4Q21 SG&A guidance of 200-250 bps deleverage vs. 4Q19. Taken together, this resulted in LULU lowering its 4Q21 EPS outlook to the low end of its prior range, & suggests consensus’ 4Q21 EPS estimate needs to come down by ~3%. Kimberly amends our price target methodology for a less optimistic MIRROR outlook. Her EW view is unchanged, but she lowers her PT to $300 on a methodology change. Download the Complete Report