FT : Morgan Stanley: Mortgagepocalypse Soon

Morgan Stanley: Mortgagepocalypse Soon
Unsafe as houses

Rishi Sunak is prime minister, after the UK managed to get through an entire BoJo Cycle (opportunism, boosterism, lies, humiliating betrayal of the loyalists) in a matter of mere days — who says the national productivity puzzle can’t be solved?

Given the brief boost given to the pound by Johnson demonstrating he can, in fact, pull out, FT Alphaville is inclined to speculate the former PM simply wanted to make his next holiday a bit more affordable. With stable leadership now in place, it’s now plain sailing for the United Kingdom.

Oh, but the economy.

A lot of discussion over the past year has been about the cost of living crisis in terms of price inflation and energy bills. But the other major element is of course mortgage costs. Another vicious cycle: price are soaring —> your friendly, local central bank hikes rates —> now your mortgage is more expensive too. Thanks.

For anyone feeling relieved that the future of the UK is no longer in the hands of the Conservative party membership (we’re not going to get on our high horse about who has a mandates here), Morgan Stanley has a note out today that’s perfectly-timed to wipe the smile off your face. 🥰

A new PM for the UK is incoming, but we think the fiscal course is already changed. A recession awaits, and we forecast the BoE to hike much less than markets next year as growth slows…

Given short fixed-rate periods, 35-40% of UK mortgages may see higher rates in the next 12 months. Resets are significant for both banks and borrowers; ~6% new rates versus ~2% rates in the back book. With higher utility bills, a 6% mortgage rate could mean that 30-40% of UK households struggle to pay their mortgage.

Read that again. Up to four in ten UK mortgaged households may struggle to stay current on their house over the next year.

On the plus side, Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, argues that “mortgage underwriting was of significantly higher quality than pre-GFC”. Bank investors may be (a little) relieved; households are probably not.

The further slides are . . . grim:

When Johnson’s leadership fell apart in the early summer, there was a sense that the Conservatives were operating in effectively suspended animation: determined to spend the summer playing to the party faithful despite the tough looming winter.

Now, three-and-a-half months later, we‘re down a monarch and a chunk of credibility, and up some kind of energy bill relief (although exactly what form it will take still seems somewhat up in the air). It would be a great thing to have a fully-functioning government right now. We know that’s a lot to ask though.

FT : Picking the next wave of takeover targets in the Rishiconomy

Picking the next wave of takeover targets in the Rishiconomy
Hoist those UK-for-sale signs, we’re doing fantasy M&A again

Here’s a meaningless statistic: Liz Truss’s premiership will probably be the first in modern times in which no UK-listed companies were bought. Several takeover offers arrived during her Downing Street layover — Aveva, RPS, Biffa — but of the 13 takeouts and take-privates completed so far this year, none has been on her watch.

OK, it’s probably not the most surprising datapoint. Truss’s six weeks in office were during a relatively slow year for global M&A, due mostly to the seizing up of LBO financing. But things look a bit different for incoming premier Rishi Sunak.

The market for articles about how UK plc is on sale has remained buoyant, after all. Weak sterling, record institutional underweighting, docile laws, value obsession, Brexit effects — you know the kind of thing, since you’ve probably been reading about it for decades.

And it’s consensus that Britain will be picked apart again once credit markets right themselves. Half of private equity investors see the UK as more attractive than other markets available to them, with another 41 per cent saying it was significantly more attractive, a Numis survey of PE professionals found. Institutional owners are too biased towards value (say 38 per cent) so are expected to be receptive or highly receptive to public-to-private offers (say 83 per cent).

Over at Goldman Sachs they have put some data behind the theory in a note advising clients to go long UK mid-caps. Foreign investors eat about 5 per cent of London’s market cap a year after the pound falls 10 per cent, from 2 per cent in a normally, it says:


Goldman’s not particularly bearish on the UK economy, setting its base case to trough GDP halfway through 2023 after four consecutive negative quarters. Yet the FTSE 250 is heading towards its worst year on record so looks cheap on current earnings forecasts, it says:
Plus, oddly, the UK mid-caps outperform in periods of economic flux:
Goldman Sachs’s UK target list has few surprises. It’s full of lapsed targets (Entain), active targets (Micro Focus), corporate clients (Pearson) perma-speculation names (ITV, Burberry, Sage), bond proxies (United Utilities, SSE, Pennon) and geographical aberrations (Experian, Network International).
The most politically charged names above are defence contractor Babcock and aerospace/engineering roll-up Melrose. Any offers in that direction would give the new PM a chance to try out the veto powers provided by the UK National Security and Investment Act, whose introduction last year was championed by former chancellor Rishi Sunak.

FT : EY denies negligence over audits of collapsed NMC Health

EY denies negligence over audits of collapsed NMC Health
Big Four firm defends $2.7bn claim as role of auditors in detecting fraud comes under scrutiny

EY’s UK business has denied it was negligent in its audits of NMC Health, the collapsed former FTSE 100 hospital operator, in a $2.7bn court battle that will renew focus on the scope of auditors’ duty to detect fraud.

Abu Dhabi-based NMC entered administration in April 2020 after it was targeted by short sellers in 2019 and the subsequent discovery of $4bn of debt that had been hidden from its balance sheet. The case is one of the biggest frauds ever alleged at a FTSE 100 company.

The legal claim, filed in London’s High Court by NMC’s administrators in May, alleged a string of shortcomings by EY, including a failure to spot that its client’s accounts were fraudulently misstated and that NMC did not keep proper accounting records.

The claim also alleged that the Big Four auditor failed to verify NMC’s bank and debt balances, similar to claims against EY in its role as auditor of collapsed German company Wirecard.

Administrators Alvarez & Marsal, tasked with securing funds to repay NMC’s creditors, claimed that more than $1.5bn was transferred from the group to its founder BR Shetty and two of his associates.

Shetty, himself the subject of a criminal complaint in the UAE, has claimed he was a victim of the fraud.

The case, which is not expected to reach a full trial until 2024, is the latest flashpoint in the debate over an auditors’ duty to spot fraud after UK regulators toughened requirements last year.

Auditors have long complained of an “expectation gap” between the public perception of their role and their actual duties.

In its defence filed this month, EY said audits were designed to give “reasonable assurance” the accounts were not materially misstated but they do not guarantee this and do not absolve company directors of “primary responsibility for the accuracy of those financial statements”.

The firm said the alleged fraud “involved the falsification and concealment of accounting records and other documents”. 

It added it was “not aware that there were a large number of payments to and from Dr Shetty’s personal bank accounts” and denied it should have taken steps that would have revealed manipulated entries.

EY argued the amount of damages it was ordered to pay to the administrators should be reduced to reflect NMC’s negligence. It said “many of those charged with governance within NMC, including at the most senior levels, were themselves guilty of perpetrating the fraud (including by making deliberately false representations to EY)”. 

The firm’s defence also rests on its outsourcing of much of the NMC audit to its Middle East business. EY UK, which signed off NMC’s group accounts and is the defendant in the legal case, argued it should not be liable for any failings in so-called component audits of overseas operations. EY did not admit any failings by its Middle East business.

EY UK said it carried out its duties as group auditor by giving “proper instructions” to overseas auditors, primarily EY Middle East, and satisfying itself that it could rely on their work. The firm said it had “no reason to think” EY Middle East was not carrying out its work properly.

EY is a network of separately owned national and regional practices that share a brand globally, in a similar way to its rivals, a structure that has helped firms to limit legal liabilities in one country from hitting their finances elsewhere.

EY, which charged almost £14mn for its work since NMC floated in 2012, said most of the administrators’ claims were invalid because of contractual and statutory limitation periods.

>>> US Research Calls

Research Calls

  • Upgrades:
    • ANSYS (ANSS) upgraded to Buy from Neutral at Rosenblatt; tgt lowered to $270
    • AT&T (T) upgraded to Strong Buy from Outperform at Raymond James; tgt $24
    • Avis Budget (CAR) upgraded to Overweight from Neutral at JP Morgan; tgt raised to $231
    • HEICO (HEI) upgraded to Outperform from Sector Perform at RBC Capital Mkts; tgt raised to $175
    • ServiceNow (NOW) upgraded to Buy from Neutral at Guggenheim
    • Stoke Therapeutics (STOK) upgraded to Outperform from Mkt Perform at SVB Leerink; tgt $30
    • Suzano S.A. (SUZ) upgraded to Overweight from Neutral at JP Morgan
    • Teladoc (TDOC) upgraded to Neutral from Sell at Guggenheim
    • Texas Instruments (TXN) upgraded to Equal Weight from Underweight at Barclays; tgt $150
    • Visteon (VC) upgraded to Neutral from Underweight at JP Morgan; tgt raised to $129
    • Wolfspeed (WOLF) upgraded to Overweight from Neutral at JP Morgan; tgt raised to $160
  • Downgrades:
    • Adidas AG (ADDYY) downgraded to Hold from Buy at Stifel
    • Analog Devices (ADI) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $140
    • Baidu (BIDU) downgraded to Neutral from Outperform at KGI Securities; tgt $90
    • CapStar Financial (CSTR) downgraded to Mkt Perform from Outperform at Keefe Bruyette; tgt lowered to $20
    • CapStar Financial (CSTR) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $19
    • Chevron (CVX) downgraded to Hold from Buy at HSBC Securities; tgt $177
    • CNH Industrial (CNHI) downgraded to Neutral from Buy at Goldman; tgt lowered to $12.14
    • Continental Resources (CLR) downgraded to Mkt Perform from Outperform at Raymond James
    • Danaher (DHR) downgraded to Hold from Buy at The Benchmark Company; tgt $325
    • Ericsson (ERIC) downgraded to Neutral from Conviction Buy at Goldman; tgt lowered to $6.10
    • FedEx (FDX) downgraded to Equal Weight from Overweight at Wells Fargo; tgt lowered to $160
    • Green Plains (GPRE) downgraded to Market Perform from Outperform at BMO Capital Markets; tgt lowered to $31
    • Huntington Banc (HBAN) downgraded to Equal-Weight from Overweight at Stephens; tgt raised to $16
    • MDU Resources (MDU) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $26
    • Meta Platforms (META) downgraded to Neutral from Buy at BofA Securities
    • MorphoSys (MOR) downgraded to Sell from Hold at Deutsche Bank; tgt lowered to $150
    • NovoCure (NVCR) downgraded to Neutral from Overweight at Piper Sandler; tgt lowered to $70
    • NXP Semi (NXPI) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $140
    • Qorvo (QRVO) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $90
    • Silicon Labs (SLAB) downgraded to Underweight from Equal Weight at Barclays; tgt lowered to $95
    • Southern (SO) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $59
    • Tattooed Chef (TTCF) downgraded to Market Perform from Outperform at Cowen; tgt lowered to $4.50
    • The Aaron's Company (AAN) downgraded to Underperform from Neutral at BofA Securities; tgt $6.50
    • Tremor (TRMR) downgraded to Mkt Perform from Outperform at Raymond James
    • Williams-Sonoma (WSM) downgraded to Underperform from Hold at Jefferies; tgt lowered to $100
  • Others:
    • Advanced Micro (AMD) initiated with a Hold at HSBC Securities; tgt $60
    • Doximity (DOCS) initiated with an In-line at Evercore ISI; tgt $28
    • Flywire (FLYW) initiated with a Buy at Loop Capital; tgt $25
    • Futu Holdings (FUTU) initiated with a Buy at DBS Bank; tgt $55
    • Harley-Davidson (HOG) initiated with a Neutral at Citigroup; tgt $40
    • Intel (INTC) initiated with a Reduce at HSBC Securities; tgt $23
    • LiveWire Group (LVWR) initiated with a Neutral at Citigroup; tgt $8.70
    • Ollie's Bargain Outlet (OLLI) initiated with a Buy at Gordon Haskett; tgt $60
    • Qualcomm (QCOM) initiated with a Buy at HSBC Securities; tgt $180
    • R1 RCM (RCM) initiated with an Outperform at Evercore ISI; tgt $25
    • UP Fintech (TIGR) initiated with a Buy at DBS Bank; tgt $5
    • WeWork (WE) initiated with an Overweight at Cantor Fitzgerald; tgt $8

>>> US Gapping down

Gapping down
In reaction to earnings/guidance:

  • DORM -4.4%, PHG -3.3%, PKX -2.5%

Other news:

  • TCDA -93.4% (announces VALOR-CKD trial did not meet primary endpoint)
  • YUMC -10.4% (announces primary listing on the Hong Kong Stock Exchange and inclusion in the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect)
  • AXDX -8.8% (discloses that the FDA clarified that company must obtain 510(k) clearance to continue marketing and distribute Accelerate Arc Products in U.S.)
  • PINE -2.9% (entered into separate equity distribution agreements having an aggregate gross sales price of up to $150,000,000)
  • HA -2.9% (discloses select financial statements should no longer be relied upon)
  • VRDN -2.8% (Presents Clinical Data from Ongoing VRDN-001 Phase 1/2 Trial)
  • TSLA -2.3% (discloses that YTD it recorded $170 million of impairment losses resulting from changes to the carrying value of its bitcoin and gains of $64 million on certain conversions of bitcoin into fiat currency)
  • HZNP -1.9% (reports New Real-World Analysis of TEPEZZA)
  • NVCR -1.3% (Announces 11 Presentations on Tumor Treating Fields in Multiple Solid Tumor Types at the American Society for Radiation Oncology 2022 Annual Meeting)

Analyst comments:

  • AAN -3.4% (downgraded to Underperform from Neutral at BofA Securities)
  • ADI -1.6% (downgraded to Equal Weight from Overweight at Barclays)
  • META -0.7% (downgraded to Neutral from Buy at BofA Securities)

>>> US Gapping up

Gapping up
In reaction to earnings/guidance:

  • PSO +8.4%, BOH +5%, KEX +2.4%

Other news:

  • PCVX +40.9% (Reports Positive Topline Data from Phase 1/2 Proof-of-Concept Study of its 24-Valent Pneumococcal Conjugate Vaccine Candidate)
  • SCHL +11.5% (authorizes repurchase of up to $75 mln in common stock)
  • MYOV +8.2% (to be acquired by Sumitovant Biopharma for $27.00 per share in cash)
  • MWA +4.3% (increases its quarterly dividend)
  • ZNTL +3% (plans to initiate the first study of its collaboration with Pfizer (PFE) on Zentalis' product candidate ZN-c3, a selective Wee1 inhibitor designed to induce synthetic lethality in cancer cells)
  • VRAY +2.3% (Announces Primary Endpoint Outcome from First Prospective, Multi-Institutional Study to Deliver Ablative Doses of Radiation to Pancreatic Cancer Patients)
  • MDT +1.6% (announces intention to separate its combined patient monitoring and respiratory interventions businesses)
  • SRRK +1.5% (reports New Phase 2 TOPAZ Trial Data Indicate Positive Trends in Quality-of-Life Measures Over 24 Months with Apitegromab for Nonambulatory Patients with Types 2 and 3 SMA)
  • MCRB +1.4% (Presents SER-109 ECOSPOR IV Study Data)

Analyst comments:

  • CAR +3.5% (upgraded to Overweight from Neutral at JP Morgan)
  • NOW +3% (upgraded to Buy from Neutral at Guggenheim)

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • PSO +8.6%, MYOV +7.6%, MWA +4.3%, NVCR +3.3%, MCRB +2.5%, SRRK +1.5%
  • Gapping down:
    • YUMC -9.4%, AXDX -8.8%, PHAT -4.8%, PHG -4%, PINE -2.9%, VRDN -2.8%, HA -1.9%, HZNP -1.7%, PKX -1.6%, ASTI -0.7%