SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)
FOR INSTITUTIONAL CLIENT USE ONLY
I hope all of you are enjoying a happy and healthy holiday season! As we ring in the new year and reflect upon 2021, I want to express how deeply grateful I am for my loved ones, colleagues at MS and of course, everyone reading this. 2020 was undoubtedly a year to forget for many (including myself), marked by the ‘shock’ brought on by the initial onset of the pandemic. Compared to last year, 2021 brought us far more positives and reasons for hope that we will soon defeat this virus. It’s remarkable how quickly countries around the world were able to scale up testing operations and vaccine distribution systems in less than a year. Let’s not forget how ‘close’ we were to normalcy before Omicron took center stage. While wearing masks indoors again serves as a painful reminder of the past, here’s to taking another step forward in 2022 and a final push to eradicate Covid.
While this was not the full-blown ‘Santa Claus rally’ that some had wished for, the Dow Jones and S&P 500 closing at all-time highs on Wednesday punctuated a positive recovery from the broader market sell-offs a few weeks ago brought on by Omicron and hawkish central bank stances. Now that investors have had a few weeks to digest news around this new strain and assess the implications of tighter financial conditions, it feels as though many are cautiously more bullish going into the new year. According to our PB Strategic Content Team, US Equity L/S gross leverage currently stands at 190% (3rd %tile over LTM, 78th %tile since 2010) and net leverage currently at 61% (35th %tile over LTM, 94th %tile since 2010).
We now enter 2022 in a precarious spot for global markets, as the US and larger cap companies with scale lead performance. Bulls will argue we are on the cusp of entering the final phases of Covid becoming an endemic, where the world will be more positioned to fully reopen. Even further, consumer balance sheets remain strong and earnings growth / margins are well supported by corporate pricing power leading to ~10% consensus EPS growth for major indices globally. On the other hand, bears will argue markets are overextended, with above trend valuations highlighted by the S&P trading at ~22x NTM P/E. What’s more, those bracing for a correction would argue current levels of consumer demand are unsustainable and likely to come down, just as the Fed pivot is upon us where inflation will contract margins and be a headwind to growth for corporates. The ebbs and flows of conviction around valuations, positioning and fundamentals have continued to come back to the driving forces of Covid and inflation. This framework may stay with us for some time as we navigate the beginning of 2022.
2021 served as a year where investors struggled to keep up with index level returns given the negative alpha between longs and shorts with crowded shorts outperforming longs by ~11.4% as we close the year.We saw a maximum negative spread of over 25% at the end of January, given the early pain caused by ‘meme shorts’ just as sectors like Energy and Banks led the long side (two areas most active investors were under-exposed throughout the last several years). We saw dispersion driven by sector rather than stock selection for most of 2021, while China regulatory concerns weighed on sentiment in a segment of the market that historically provided meaningful single stock alpha. According to Chris Metli and the QDS Team, dispersion levels both within and between sectors have each fallen to the 20th %tile over last 5 years, while the ratio of dispersion between and within sectors crept up again this week to the 63rd %tile over the last 5 years. This is a far cry from the beginning of November, when this ratio of dispersion dipped to the 0 %tile over the last 5 years, the lowest point since late 2017. Could 2022 be the return of ‘stock picker Nirvana’ or will it be another challenging year to keep up with rotations beneath the surface as indexes grind higher, or worse yet, will we finally see a meaningful broader index correction?
I think it’s fair to say that the broader index moves this year have felt utterly divorced from the carnage taking place beneath the surface as many segments of the market saw 30 to 50 to 70% corrections from highs. While the S&P 500 and MSCI World returned north of 27% and 20% respectively over the past year, this hardly captures all of the pain felt in many single names. Digging deeper within the S&P and Nasdaq paints a dreary picture as 92% of S&P 500 members and 89% of Nasdaq members saw at least -10% corrections from their YTD highs,while the average member drawdown from YTD highs was -18% for the S&P and -40% for the Nasdaq. It has certainly been an exhausting and challenging year to say the least as we collectively battle Covid while navigating an unusual market against utterly unfathomable times.
Aside from Omicron, inflation remains the greatest area of uncertainty going into the new year. Powell admitted we are no longer seeing transitory levels of price increases but remains steadfast in his belief that inflation will peak in early 2022. Only time will tell whether this scenario will play out, as investors focus on incremental economic data prints to assess inflation levels and predict how the Fed will respond. That said, the accommodative actions of the Fed and central banks around the world helped contribute to an extraordinary year for markets reaching all-time highs. Now that inflation has become a priority for central banks, will higher rates and an accelerated tapering schedule lead markets lower? It’s still unclear when Powell will move to raise rates, yet another positive beat on US jobless claims this week and more encouraging data on Omicron being less severe than prior variants could suggest rate hikes coming soon. Powell will be hard pressed to again ‘thread the needle’ in addressing inflation before it’s too late without endangering an economic recovery that’s still in its early stages.
While this will be a shortened New Year’s weekend with markets open on Monday, this time of the year is one where I like to reflect on the past and think about the future. The same goes for thinking about markets, especially given all of the recent turbulence around Omicron and new Fed policies. I continue to remain constructive on the outlook for 2022 and believe these next few weeks will be critical in setting the tone for the rest of the year with respect to monetary policy and the battle against Covid around the world. While I have certainly enjoyed the relative quietness over the holidays, I am now looking forward to what should be another exciting year for markets. Forza!
I continue, like many of you, to have several observations that crossed my mind this week including…
- With 5.5mm deaths from this pandemic I want to send my thoughts and prayers to all the families that have been impacted.
- Furthermore with 287+mm cases globally a HUGE thank you to all the first responders and essential workers.
- As we cap off this challenging year, I want to highlight a movie that captures the importance of learning from failure and embracing setbacks. The Savone Family Movie of the Week is King Richard.
- Will 2022 finally be the year that international markets outperform the US? Are we officially the boy that cried wolf? It feels like we have been saying this for a few years now…
- The Nasdaq Golden Dragon China Index jumped 9.4% on Thursday—the biggest one-day surge since 2008. While some say it’s just a mean reversion trade, could there be more to come?
- For all of us Gen X’ers, after nearly two years I feel like I can finally work my way around zoom like the tech savvy Millennials…Although I am excited to forget my new skills as the world reopens!
- I always wondered how the younger generations managed to meet new people during the pandemic. With the increased popularity of new dating apps like Match, it seems that technology has managed to influence yet another aspect of life. Make sure to reach out to Lauren Shenk for more color on why Match Group (MTCH) is her top pick!
- It’s always great to watch all of the CFB bowl games this time of year. Forza Blue! –I think Georgia takes the title this time around, but my Michigan friends tell me differently…. I’m a big fan of legendary football coach Paul Bryant’s ‘defense wins championships’… who do you have taking it all?
- My Cowboys are looking fantastic both offensively and defensively at this point in the season. They host a very dynamic Arizona Cardinals team this Sunday in Dallas. Should be a great game to watch!
- With so much speculation around the Metaverse and its implications, I wonder which companies will innovate the most next year. Which names do you follow in this space?
- Looking to my boys in Italy, A.S. Roma should be rested and ready to go for their tough matchup against A.C Milan. I have a feeling that 2022 will finally be a successful year. Forza Roma!
- Do you find yourself leaning more bullish or bearish looking into next year? Although I tend to stay more positive as the year starts, there is a lot more to consider this time around…
Positioning has been fairly consistent over the last 18 months with several unique nuances below the surfaces as we finish the year. As of 12/30, US Equity L/S gross leverage fell ~0.4% WoW to 190% (~7.6% lower than levels at the start of 2021) and net leverage decreased ~1% WoW to 61%. According to our Prime Brokerage Strategic Content Desk, these gross leverage levels follow a period of fund de-leveraging during the back half of this year. Keep in mind that we typically see a relatively consistent re-grossing in the first quarter, which in 2021 was far more extreme due to performance pain around the ‘meme stock’ short squeeze. Regarding net leverage, it still remains more elevated vs history (94th %-tile since 2010; 35th %-tile over last 12M), especially compared to more moderate gross leverage levels. Noah Bramlage on the PB Content team notes that forecasting the path forward for nets is difficult given the general uncertainty around market directionality, considering: (1) Re-opening has yet to fully play out and (2) Retail brought more dips throughout this year, but have been more quiet over these last few months. Across other regions, gross leverage for EU L/S funds rose ~3% WoW to 179% and net leverage increased ~2% WoW to 48%. Asia fund gross leverage remains leveled at 132% and net leverage increased ~1% WoW to 71%.
More on hedge funds’ absolute performance, December was in line with what we have seen throughout the year. Our PB Content team notes that US L/S funds are up +1% MTD as we head into 2022, still only capturing a fraction of overall S&P index gains (+4.8% MTD) in a frustrating end to a challenging year. For context, between 2010 – 2020 in years when the S&P 500 was positive, the average fund in the cohort captured ~64% of the index’s upside. Also noteworthy, Noah highlights that the top 50 US crowded longs finished up only ~11.4% YTD vs the crowded shorts up ~22.8% YTD for a -11.4% YTD spread. In the average year (from 2010 – 2020), the return spread between the crowded longs and shorts is generally +7.8%. Please ask to be connected with the PB Strategic Content Desk.
From a US Strategy perspective, MS US Chief Equity Strategist Mike Wilson believes that valuations for equity markets are likely to come down in the next 3-6 months. Mike points to the high likelihood of his base case, which revolves around stickier inflation, a more aggressive Fed, and a reversion of multiples down to ~18x. On the year as a whole, Mike’s view on EPS growth is above consensus (he models earnings growth of 10%), but his outlook for valuation is well below consensus. Mike makes his 12-month S&P 500 Bear/Base/Bull targets 3900/4400/5000. While Mike’s base case still appears the most likely (60% chance), shifts in supply and Fed policy could cause a change in course.
Furthermore, Mike notes that the quality trade has taken on a more defensive posture. Both of these shifts are very much in line with his 2022 outlook--be wary of high valuations and focus on earnings stability/achievability—i.e., favor large cap defensive quality. With the market and the Fed now fully understanding that inflation is not going to be transient, the Fire part of his narrative is in full gear. With the de-rating process hitting expensive/low quality stocks the hardest over the past few months, Mike thinks that investors must now contend with the Ice scenario. Mike favors defensives over cyclicals and staples over discretionary as defensive leadership is the primary trend into 2022, in his view. He also notes that leading indicators point to PMI deceleration in coming months, a headwind for cyclicals relative performance. Lastly, I want to give a noteworthy congratulations to Mike and the team for the performance of their Fresh Money Buy List. The names in his list has an all time performance of ~33%. Some of the biggest performers this year were Simon Property Group (SPG), SBA Communications (SBAC), and Synchrony Financial (SYF). Mike also just recently added AT&T (T) to the list due to three factors: 1) solid financial and operating outlook, 2) attractive absolute and relative valuations, and 3) important near term catalysts.
Looking to next year’s composite Capex Plans Index, MS Chief Economist Ellen Zentner points out that little changed on net in December as the index declined 1.5 points to 30.6. Ellen notes that given the consecutive declines in the m/m reading, it is possible that this loss in momentum might linger into early 2022, but will most likely rebound as the year progresses. The Energy Capex Plans Index, which is a subindex comprised of just the energy-heavy regions of Kansas City and Texas, fell 3.8 points, its largest month-over-month decline since May 2020, but it remains well above its historical average. Ellen highlights that based on these surveys, she finalizes her forecast for the ISM Manufacturing PMI December at 59.3, down 1.8pts from 61.1 in November. Overall, she sees private capex growing 7.9% 4Q/4Q in 2021 (7.7%Y), 5.9% in 2022 (5.9%Y), and 5.3% in 2023 (5.6%Y), contributing 1.0pp, 0.8pp, and 0.7pp to 4Q/4Q real GDP growth in those years, respectively.
Looking across the pond to Europe, it is clear that there have been lots of ‘cross-currents’ for equity investors to navigate over the past year. MS Chief EU Equity Strategist Graham Secker believes that there are a few key themes worth watching more closely: (1) Recovery sensitive stocks, (2) The potential for rising real yields, (3) The style rotation away from Unprofitable Tech in the US and (4) Cheap versus expensive stocks. He and his team screened single-name ideas to play each respective theme. Keep in mind that these stock ideas are separate from the ‘11 reopening beneficiaries’ discussed in previous weeks. With investor sentiment low, equity valuations reasonable and tactical indicators in ‘buy territory’, Graham believes investors should view any near-term volatility as an opportunity to add exposure. His top picks from different sectors, include Adyen (ADYEN NA) in Technology, Vodafone (VOD LN) in Telecom, Prudential (PRU LN) for Insurance, and Stellantis (STLA IM) in Autos for 2022. Please ask for the full list of top picks or to be connected with the teams.
Looking to Asia, while the repeated Covid outbreaks could drag down 4Q GDP by 50-100bps, MS China Economist Robin Xing highlights that the government bodies followed up with more easing since the CEWC. The unleashing of the government's fiscal firepower for public capex appears to be most concrete, and housing measures remain modest. MS China Financials Analyst Katherine Liu expects more IPOs in HK since the CSRC establishes and enhances the framework to regulate domestic firms' offshore listings. This may benefit brokers with strong offshore investment banking franchises like CICC (601995 CH) and CITIC (600030 CH), which usually enjoy a larger wallet share in HK deals. Please ask to be connected with the teams.
In case you missed it last week and I appreciate everyone who already followed up with thoughts on the 2021 global ideas deck,I share my list of 42 global stocks for 2022, 22 longs and 20 shorts (fitting for 2022 and we could always use short ideas right?). Some ideas to look out for on the long side include Whitbread PLC (WTB LN), RWE AG (RWE GR), Activision Blizzard (ATVI), Melco Resorts & Entertainment (MLCO), and Nippon Steel Corp (5401 JP). On the short side, just a reminder that our stock-picking strategy focuses on structurally challenged sectors, or companies with lofty valuations that do not match the outlook for earnings/growth. Some of these stocks to watch out for include Geberit AG (GEBN), Hapag-Lloyd AG (HLAG GY), Rocket Cos (RKT), Extra Space Storage (FSLR), and Bunzl PLC (BNZL LN) just to name a few. Without wanting to give too much away—each stock in the ’22 ideas deck 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 could see global market inflections especially outside of the US. See the below table for the full list of 2022 ideas and ask for the full deck!
As we wrap up the year, our MS conferences will continue into 2022 including the 8th Annual Auto 2.0 Conference, which is now taking place virtually (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 Aurora Innovation (AUR), Stellantis (STLA) 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
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.
UPCOMING CONFERENCES –
Please reach out to your sales representative if you are interested in attending any of these conferences.
Jan 5 (Las Vegas) I 8thAnnual 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) I Virtual 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 21th 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
Global – Positioning – 2021 In Review
SELECT COVID VIRUS AND TREND FOR RE-OPENING DATA POINTS
Global – Biotechnology – COVID-19 Outbreak Dynamics
MS Research Analyst Matthew Harrison offers an update on the Omicron variant, noting that Omicron continues to drive a wave of new cases globally given its immune evasion properties and innate transmissibility. Boosters appear to be the best way to increase protection against symptomatic infection, but given the speed of the Omicron wave and limited penetration of boosters, Matthew does not expect a significant portion of the population to be protected (less than 20% in the US). Multiple datasets have demonstrated that 2 doses have limited efficacy against infection (~30%) but do have efficacy against hospitalization (~70%). Three doses or two doses and prior natural infection provide decent protection against infection (~75%). He expects the Omicron wave to feature a high absolute number of cases, but because of its significant transmissibility to also reach peak rapidly. Data from SA, the UK and Denmark suggest that Omicron is leading to a lower percentage of patients being hospitalized versus Delta, likely due to prior natural infection and vaccination. It remains unclear given the much greater proportion of the population that is susceptible to Omicron if the peak will plateau or resolve quickly because infection saturation occurs rapidly. In the UK, Omicron became the dominant variant on 12/14. Matthew believes that peak absolute cases from an Omicron wave could occur in ~4-8 weeks at 2-3x the number of daily cases versus the prior Delta wave. Over this coming week he expects significant daily variability in the case count data due to the recent and upcoming Holidays. Download the Complete Report
US – Retail – Total Discretionary Retail Traffic
Source: Prodco, Morgan Stanley Research
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìAsia – Strategy – Dedicated EM Equity Weekly Fund Flows (Ex-China A-Share Funds)*
Source: EPFR Global, Equity Fund Flows Database (see last page for details), Morgan Stanley Research. Data as of December 22, 2021.
* Dedicated EM Equity Fund Flows include GEMs, LatAm, EMEA and EM Asia (ex-China A) regional funds.
MS Chief Asia Equity Strategist Jonathan Garner highlights that for the week ended December 22, 2021, dedicated EM equity funds (ex-China A) reported outflows of US$1.3bn, led by outflows from non-ETF funds partially offset by inflows to ETF funds. He notes that the third consecutive week of outflows took YTD net inflows to US$108.7bn. He also points out that Japan reported outflows of US$0.1bn. Download the Complete Report
ìîUS – Aerospace & Defense – 2021 Wrap-Up And 2022 Thoughts On 2022
Source: FactSet, Morgan Stanley Research
MS Research Analyst Kristine Liwag takes a look back at the top and bottom performers across her coverage universe in 2021. The group’s top performer in 2021 was Textron (TXT), up ~61% YTD. Virgin Galactic (SPCE) represented the group’s bottom performer, down ~45% YTD. The S&P 500 has increased ~29% YTD. Note, Kristine is focused on companies covered throughout the entirety of 2021, which excludes the nine Smid-cap A&D names she initiated coverage on in December (CAE, CR, CW, HEI, HWM, HXL, MOGA, ROLL and TDY) as well as Joby Aviation (JOBY), which she initiated on in September. For 2022, OW-TDG is Kristine’s Aerospace Top Pick and OW-NOC is her preferred Defense prime. Download the Complete Report
ìAsia – Materials– According to MEE, rumors about large-scale production suspensions during the Winter Olympics period are not true. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – CNH Industrial NV – Pure Play In Ag Equipment Post-January 1 Iveco Spin-Off; Resume at Overweight
Source: Company Data, Morgan Stanley Research
MS Research Analyst Courtney Yakavonis resumes coverage of CNHI at OW with a $24 PT. She highlights that following the spin-off of Iveco on Jan. 1, CNHI will become a pure-play Ag Equip company with strong industry tailwinds, underappreciated sales drivers (i.e., RAVN), idiosyncratic margin levers, an attractive relative valuation, and an upcoming catalyst at its CMD on Feb. 22. Download the Complete Report
ìUS – TuSimple Holdings Inc – MS Research Analyst Ravi Shanker highlights that TSP ($75 PT) announced the successful completion of its Driver Out test, thus clearing a critical catalyst for the stock. He continues to see a 4:1 risk-reward skew to the upside, which he believes now has a much greater likelihood of being unlocked with the "binary outcome" event having been cleared. Ravi reiterates his OW rating. Download the Complete Report
ìChina – Innovent Biologics Inc–NDA for Tyvyt was submitted for 2L EGFR+ ns-NSCLC (+bevacizumab/chemo), the eighth indication of Tyvyt. Sean Wu thinks the weakening market sentiment has created a good buying opportunity in Innovent shares, as its fundamentals remain solid and overhang of Tyvyt’s US approval looks mostly priced in. Download the Complete Report
ìJapan – Mitsubishi Estate– After the Dec 28 market close, the Nikkei reported that Mitsubishi Estate would expand the number of its properties where it is planning to introduce the use of renewable energy-derived electricity; there has been no official announcement from the company yet. Mitsubishi Estate had been planning to switch to renewable energy-derived electricity in about 30 of the properties it owns by F3/23, but the Nikkei article says this number will be increased to about 50. If the article is accurate, the company's costs may increase somewhat, but it would mean further reductions in the potential environmental-related burden of the properties in the future, leaving a moderately positive impression. Download the Complete Report
ìChina – WuXi Biologics Cayman Inc– With the Omicron situation unfolding and WuXi's CMO contracts with Vir and Brii Bio, Sean Wu sees potential upside to WuXi's COVID-related business from its previously guided Rmb2bn in 2022. Download the Complete Report
ìChina – Xiaomi Corp – In Nov, Xiaomi's China smartphone shipments were up 5% YoY, outperforming the industry average (3% YoY volume decline). Overall market share improved from 12% in Oct to 14% in Nov, mainly thanks to the strong share gains in the low-end and stable market share in the mid/high-end markets. Download the Complete Report
Negative
îUS – SoFi Technologies, Inc. – MS Research Analyst Betsy Graseck highlights that the student loan moratorium extended 3 months to May 1, pushes out the expected rebound in SOFI's student loan refi originations. Betsy takes her total revenues down 2-3% and PT down $2 to $22. Betsy maintains her OW rating on the build-out of Financial Services, the Galileo expansion, and the inflection in student lending when the moratorium lifts. Download the Complete Report
îUS – Torrid Holdings Inc. – MS Research Analyst Kimberly Greenberger lowers her CURV price target to $12 on a more cautious 2022 & medium-term expense forecast. She raises her expense assumption in 2022 and medium-term to reflect broader inflationary cost pressures across retail, including higher wages and freight expenses. All in, her 2022 SG&A rate increases to 23.0% from 21.0% prior, and her M-T rate increases from 21-21.6% to 23-23.6%. As a result, her 2022 EBITDA declines -13%, while our 2023-2025e EBITDAs decline -15% on average. She continues to apply a 7x multiple to her base case EBITDA, which sits at a midpoint of the omnichannel specialty retailer average of 4x (AEO, GPS, VSCO, and URBN) and 13x for off-price retailers (BURL, ROST, TJX). Kimberly also leaves her Bull/Bear case multiples unchanged at 10x / 4x. All in, the changes to her model result in a $12 base/PT, $22 bull, and $5 bear case, from $14, $25, and $5 prior. Download the Complete Report