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
The FTC is reportedly probing Meta’s VR business for antitrust violations
Following news that the FTC’s antitrust suit against Meta cleared a critical hurdle earlier this week, the agency is apparently also taking a sharp interest in the company’s VR business.
Bloomberg reports that the FTC and multiple state attorneys general are probing Meta’s virtual reality division for “potential anti-competitive practices.” New York reportedly leads the state-level investigation, which has been chatting up outside software developers who make apps for Meta’s VR experience.
The state and federal officials are examining how the company may have engaged in anti-competitive behavior to suppress competition in the VR market. The officials were also interested in how the company subsidizes the price of its Quest 2 VR headset to push it on consumers and box out the competition, according to Bloomberg.
The fact that the FTC is digging around about Meta’s app store, hardware and software practices suggests that the company’s acquisitions aren’t its only angle in what could be a landmark antitrust case that defines the next era of internet businesses.
In December, The Information reported that the FTC was looking into Meta’s proposed acquisition of Supernatural, a VR fitness app, in a deal worth more than $400 million.
Earlier this week, a judge ruled that the FTC’s major antitrust case against Facebook (owned by parent company Meta) could continue, throwing out the company’s effort to block it. In December, Facebook asked the court to dismiss the suit and pushed for FTC Chair Lina Khan, a proponent of breaking up big tech, to recuse herself.
In that suit, the FTC accuses Facebook of abusing its market power to quell rivals in the social media space and goes as far as asking a judge to make parent company Meta divest itself of Instagram and WhatsApp.
“The facts alleged this time around to fortify those theories, however, are far more robust and detailed than before, particularly in regard to the contours of Defendant’s alleged monopoly,” U.S. District Judge James Boasberg wrote.
“… Although the agency may well face a tall task down the road in proving its allegations, the Court believes that it has now cleared the pleading bar and may proceed to discovery.”
German Government Considering Shutting Down Telegram; Report
A report in the German newspaper Die Welt suggests that the government there is considering taking action to shut down messaging app Telegram because people opposed to COVID restrictions and lockdowns are using it to organise protests and share information.
The report contains an interview with German Interior Minister Nancy Faeser who stated “We cannot rule this out,” when asked if the platform will be targeted for censorship.
“A shutdown would be grave and clearly a last resort. All other options must be exhausted first,” Faeser clarified.
The minister also told the newspaper that while it is currently unclear what legal action would be needed to shut down the platform, the German government is in consultation with the European Union regarding potential regulation of it.
The Epoch Times notes that in Germany, which has implemented some of the most severe pandemic restrictions, “Telegram has been used as a hub of communication for the protest movement against the measures established to fight the CCP virus, including lockdowns, intermittent mask mandates, and restrictions for the unvaccinated.”
Telegram has been shut down or blocked in other countries including Iran, China, Pakistan, India, Thailand, and Russia.
The platform saw a huge surge in users last year after Facebook owned Watts App introduced a controversial privacy update which led to concerns that the app would hand over user data to its parent company. It also came at the same time as President Trump’s purge from big tech social media platforms.
Telegram founder Pavel Durov warned that people are “being held hostage by tech monopolies.”
In addition to being independent from big tech, Telegram promises robust end-to-end encryption, ensuring messages remain private.
This has made Telegram a target for authoritarians and big tech monopolists.
In the U.S. lobbyist group The Coalition for a Safer Web even filed a lawsuit against Apple in an effort to get Telegram removed from the app store, claiming that it allows ‘extremists’ to spread ‘hate speech’.
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Gene discovered in Georgia water a possible global threat
The MCR-9 gene, which causes antimicrobial resistance, was recently found in Georgia
A gene that causes bacteria to be resistant to one of the world’s most important antibiotics, colistin, has been detected in sewer water in Georgia. The presence of the MCR-9 gene is a major concern for public health because it causes antimicrobial resistance, a problem that the World Health Organization has declared “one of the top 10 global public health threats facing humanity.”
Researchers from the University of Georgia’s Center for Food Safety (CFS) collected sewage water from an urban setting in Georgia to test for the MCR gene in naturally present bacteria. Led by College of Agricultural and Environmental Sciences assistant professor Issmat Kassem, whose research focuses on MCR’s presence around the world, the team was surprised at how quickly they detected MCR — they found evidence of the gene in the first sample they took.
Kassem said that demonstrates that the gene is becoming established in the U.S.
The bacteria where the gene was found, Morganella morganii, added further concern for Kassem. This marked the first time that MCR was found in M. morganii, which is problematic because it is a bacteria not often tested by researchers. This means that the problem could be considerably more widespread than initially thought.
It was previously believed that agriculture was a driving factor in the spread of MCR. Nations such as China and India use the colistin antibiotic in livestock. Colistin is considered a “last resort” antibiotic because it can kill infections that other antibiotics cannot. Its frequent use means that some bacteria are becoming resistant to it. This means that if people or animals contract a strain of colistin-resistant bacteria, there are potentially no medications that can treat their infection. They face extreme, invasive health measures and possible death.
Colistin is banned in the U.S. for use in food animals and it was previously thought that this measure would help slow the spread of antimicrobial resistance to colistin in the country. However, MCR can be spread through global travel and the import of foods from other countries. Results of the CFS study prove that the U.S. is no less susceptible to the threat than other nations around the world.
Further complicating the issue is the way that the gene is spread. It transmits in plasmids, which are strands of DNA found inside cells that can replicate on their own, independent of the cell. A plasmid with antimicrobial resistance found in one type of bacteria can transmit to other types of bacteria. This means that bacteria like E. coli and Salmonella that commonly cause outbreaks in humans can potentially carry MCR, turning them from treatable illnesses to potentially deadly infections.
How worried should we be about the MCR-9 gene?
Kassem said that taken all together, the global threat of antimicrobial resistance, the presence of MCR in Georgia, that it was found inside a bacterium that is often overlooked, and that it occurred even without the use of colistin in U.S. agriculture is a serious problem that requires immediate action on the part of many industries including research, healthcare and government to work together toward a solution.
“If we don’t tackle it right now, we are jeopardizing human and animal medicine as we know it and that can have huge repercussions on health and the economy,” Kassem said. “It’s a dangerous problem that requires attention from multiple sectors for us to be able to tackle it properly.”
Because of this urgency, findings from the research were printed in short format manuscript out now in the Journal of Global Antimicrobial Resistance. It was funded through a CFS grant and other researchers involved were Jouman Hassan, David Mann, Shaoting Li and Xiangyu Deng.
To learn more about colistin-resistant bacteria and Kassem’s work, see “UGA scientist is tracking ‘hitchhiker’ genes” in UGA Today.
Tsunami Warning Ordered for Tonga Following Undersea Volcano Eruption
No immediate reports of injuries; tsunami advisory issued for Hawaii, Alaska and the U.S. Pacific coast
Underwater Volcano Erupts Near Tonga
WELLINGTON, New Zealand—An undersea volcano erupted in spectacular fashion near the Pacific nation of Tonga on Saturday, sending large tsunami waves crashing across the shore and people rushing to higher ground. A tsunami advisory was in effect for Hawaii, Alaska and the U.S. Pacific coast.
There were no immediate reports of injuries or the extent of the damage as communications with the small island nation remained cut off hours after the eruption.
In Hawaii, the Pacific Tsunami Warning Center reported waves slamming ashore from a foot in Nawiliwili, Kauai, to 2.7 feet in Hanalei. “We are relieved that there is no reported damage and only minor flooding throughout the islands,” the center said, describing the situation in Hawaii.
On Tonga, video posted to social media showed large waves washing ashore in coastal areas, swirling around homes and buildings.
New Zealand’s military said it was monitoring the situation and remained on standby, ready to assist if asked.
Satellite images showed a huge eruption, a plume of ash, steam and gas rising like a mushroom above the blue Pacific waters.
The Tonga Meteorological Services said a tsunami warning was declared for all of the archipelago, and data from the Pacific tsunami center showed waves of 2.7 feet had been detected.
In Hawaii, Alaska and along the U.S. Pacific coast, residents were asked to move away from the coastline to higher ground and pay attention to specific instructions from their local emergency management officials, said Dave Snider, tsunami-warning coordinator for the National Tsunami Warning Center in Palmer, Alaska.
A satellite image shows the undersea volcano eruption near Tonga on Saturday.
PHOTO: JAPAN METEOROLOGY AGENCY/ASSOCIATED PRESS
“We don’t issue an advisory for this length of coastline as we’ve done—I’m not sure when the last time was—but it really isn’t an everyday experience,” he said. “I hope that elevates the importance and severity for our citizens.”
He said the waves already slamming ashore in Hawaii were just under the criteria for a more serious tsunami warning, with measurements at 2.7 feet in Hanalei and Maui. Waves of about 3 feet or above would trigger a warning. Snider said they are currently expecting waves of 1 foot to 2 feet along the Pacific coast.
Snider said residents in these areas should expect waves and strong and unusual currents for many hours and there could be some low areas that are inundated, such as marinas and harbors.
“The important thing here is the first wave may not be the largest. We could see this play out for several hours,” he added. “It looks like everything will stay below the warning level but it’s difficult to predict because this is a volcanic eruption and we’re set up to measure earthquake or seismic-driven sea waves.”
Residents of American Samoa were alerted of the tsunami warning by local broadcasters as well as church bells that rang territory-wide. An outdoor siren warning system was out of service. Those living along the shoreline quickly moved to higher ground.
As night fell, there were no reports of any damage and the Hawaii-based tsunami center canceled the alert.
Authorities in the nearby island nations of Fiji and Samoa also issued warnings, telling people to avoid the shoreline due to strong currents and dangerous waves. The Japan Meteorological Agency said there might be a slight swelling of the water along the Japanese coasts, but it wasn’t expected to cause any damage.
The Islands Business news site reported that a convoy of police and military troops evacuated Tonga’s King Tupou VI from his palace near the shore. He was among the many residents who headed for higher ground.
The explosion of the Hunga Tonga Hunga Ha’apai volcano was the latest in a series of spectacular eruptions.
A Twitter user identified as Dr. Faka’iloatonga Taumoefolau posted video showing waves crashing ashore.
“Can literally hear the volcano eruption, sounds pretty violent,” he wrote, adding in a later post: “Raining ash and tiny pebbles, darkness blanketing the sky.”
Earlier, the Matangi Tonga news site reported that scientists observed massive explosions, thunder and lightning near the volcano after it started erupting early Friday. Satellite images showed a 3-mile-wide plume rising into the air to about 12 miles.
More than 1,400 miles away in New Zealand, officials were warning of storm surges from the eruption.
The National Emergency Management Agency said some parts of New Zealand could expect “strong and unusual currents and unpredictable surges at the shore following a large volcanic eruption.”
The volcano is located about 40 miles north of the capital, Nuku’alofa. Back in late 2014 and early 2015, a series of eruptions in the area created a small new island and disrupted international air travel to the Pacific archipelago for several days.
Tonga is home to about 105,000 people.
Unilever Makes Approach for Glaxo’s Consumer-Healthcare Business
Company says toothpaste-to-painkiller unit would be strong strategic fit
LONDON— Unilever UL 1.14% PLC said it had approached GlaxoSmithKline GSK 0.91% PLC and Pfizer Inc. PFE -1.06% about a potential acquisition of their consumer-healthcare joint venture, a deal that would reshape the consumer-products giant’s portfolio at a time when it is under pressure to accelerate growth.
Unilever said in a statement Saturday that the business, known as GSK Consumer Healthcare, was “a leader in the attractive consumer health space” and would be a “strong strategic fit,” though cautioned there was no certainty that any agreement would be reached.
Glaxo has set out plans to spin off the unit as a stand-alone company, which analysts say could be worth £45 billion, equivalent to more than $61 billion, while also saying it would potentially be open to a sale. The unit, 68% owned by Glaxo and 32% by Pfizer, sells everything from Aquafresh toothpaste to Advil painkillers.
Unilever approached Glaxo and Pfizer about a potential deal last year but was rebuffed, according to people familiar with the matter. The approach was earlier reported by London’s Sunday Times.
Unilever, best known for selling Ben & Jerry’s ice cream and Dove soap, does already sell some healthcare products like toothpaste and supplements but a deal would give the company a presence in over-the-counter medicines.
The company has come under pressure of late to revive growth, with its share price falling over the past year and analysts saying it has underperformed rivals during the pandemic in areas such as hygiene and packaged food.
To boost its performance, Unilever has sought to shed slow-growing brands and acquire businesses in more on-trend categories. For instance, in November it struck a roughly $5 billion deal to sell the bulk of its tea business to buyout firm CVC Capital Partners. Meanwhile, it has bought plant-based foods brand Vegetarian Butcher, healthy snacks maker Graze, and a string of upscale skin care and vitamins brands.
Still, Unilever’s efforts to rejig its portfolio haven’t been without challenges. The Wall Street Journal reported last year that it had to abandon plans to sell a string of struggling beauty and personal-care brands after failing to drum up enough interest.
For Glaxo, the planned spinoff of its consumer-healthcare business comes as the pharmaceuticals giant looks to focus more on drug and vaccine development.
Some investors including activist hedge fund Elliott Management Corp. have urged Glaxo to consider an outright sale of the consumer business, rather than a spinoff, arguing that the proceeds from any sale could be used to boost funding for R&D, to pay down debt and buy back shares.
Elliott built a multibillion-pound stake in Glaxo last year, according to people familiar with the matter, and set out a series of recommendations in a letter to Glaxo’s chairman in the summer. Those included urging the company to consider a sale of the consumer unit.
Glaxo hasn’t ruled out a sale if it deemed such a transaction in the best interest of shareholders, though it is currently planning to spin off its majority stake in the business to existing investors and list shares of the new company in London. It recently appointed a chairman and chief executive for the new stand-alone company.
Glaxo has said that the move would be tax efficient. By retaining a stake, it would also get the chance to benefit from any gains in the stock price as it seeks to sell off the rest of the position over time. The consumer-healthcare company would also take on a disproportionate share of the group’s debt, giving the remaining prescription drug and vaccines business more freedom to invest.
GSK rejects Unilever’s £50bn offer for consumer unit
The division jointly owned by Pfizer is due to be spun off in London listing later this year
GlaxoSmithKline has rejected a £50bn bid from Unilever to acquire its consumer health joint venture with Pfizer, in what could become one of the London market’s largest deals.
Unilever has made multiple attempts to engage with GSK over the past few months, making a number of approaches in that period, according to people with direct knowledge of the matter. The latest offer of about £50bn including debt was rejected, the people said.
GSK, which is working with Goldman Sachs, declined to comment.
Unilever said on Saturday that it had “approached GSK and Pfizer about a potential acquisition of the business”.
“GSK Consumer Healthcare is a leader in the attractive consumer health space and would be a strong strategic fit as Unilever continues to reshape its portfolio. There can be no certainty that any agreement will be reached,” Unilever added.
The bid was first reported by the Sunday Times.
The prospect of a deal being reached depends on what the market and GSK believe is the value of the consumer business. Analyst estimates range from £37bn to £48bn for the unit, which had £2.45bn of net profit for the full year 2021, according to one person familiar with the matter.
Unilever declined to comment on whether it would return with a higher bid.
GSK has been preparing to spin off the division, a joint venture with Pfizer that makes Panadol painkillers, Theraflu cold and flu medicine, and Otrivin decongestant. The new company would be led by GSK insider Brian McNamara and its board is due to be chaired by Dave Lewis, the former Tesco chief executive.
Activist investors including US hedge fund Elliott Management have put pressure on Emma Walmsley, GSK’s chief executive, to explore other options — including a sale — if it can generate greater returns for shareholders. Walmsley plans to use proceeds from the spin-off to bolster the pharma and drugs business’ lacklustre pipeline.
Pfizer owns 32 per cent of the division, which GSK has said it will list in London this year, although private equity groups have also looked at a potential purchase.
A Unilever buyout would be one of the largest ever on the London market, bringing together the FTSE’s third-largest company with a division that, if independent, would be in its top 20. It would be rivalled only by Vodafone’s acquisition of Germany’s Mannesmann in 1999 and AB InBev’s purchase of SABMiller in 2016.
The approach came as Unilever, already one of the world’s largest consumer goods groups, seeks to renew momentum after a period of tepid sales growth.
Its share price has languished since chief executive Alan Jope took over in 2019, and top-10 investor Terry Smith this week attacked the company as “labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”.
Other investors disputed that, but most agree the company must address its underperformance. It agreed last year to sell off its tea division, which has been a drag on growth, for €4.5bn to private equity group CVC, but has yet to make a major acquisition under Jope.
Unilever in 2018 agreed a deal to buy GSK’s health food drinks business, including the Horlicks brand, in India and other Asian markets for €3.3bn. It has also acquired a series of small consumer health brands, including Smarty Pants, Olly and Onnit supplements and Liquid IV drinks mixes.
Google, Amazon, Meta and Microsoft Weave a Fiber-Optic Web of Power
The four tech giants increasingly dominate the internet’s critical cable infrastructure
To say that Big Tech controls the internet might seem like an exaggeration. Increasingly, in at least one sense, it’s literally true.
The internet can seem intangible, a post-physical environment where things like viral posts, virtual goods and metaverse concerts just sort of happen. But creating that illusion requires a truly gargantuan—and quickly-growing—web of physical connections.
Fiber-optic cable, which carries 95% of the world’s international internet traffic, links up pretty much all of the world’s data centers, those vast server warehouses where the computing happens that transforms all those 1s and 0s into our experience of the internet.
Where those fiber-optic connections link up countries across the oceans, they consist almost entirely of cables running underwater—some 1.3 million kilometers (or more than 800,000 miles) of bundled glass threads that make up the actual, physical international internet. And until recently, the overwhelming majority of the undersea fiber-optic cable being installed was controlled and used by telecommunications companies and governments. Today, that’s no longer the case.
In less than a decade, four tech giants— Microsoft, Google parent Alphabet, Meta (formerly Facebook ) and Amazon —have become by far the dominant users of undersea-cable capacity. Before 2012, the share of the world’s undersea fiber-optic capacity being used by those companies was less than 10%. Today, that figure is about 66%.
And these four are just getting started, say analysts, submarine cable engineers and the companies themselves. In the next three years, they are on track to become primary financiers and owners of the web of undersea internet cables connecting the richest and most bandwidth-hungry countries on the shores of both the Atlantic and the Pacific, according to subsea cable analysis firm TeleGeography.
By 2024, the four are projected to collectively have an ownership stake in more than 30 long-distance undersea cables, each up to thousands of miles long, connecting every continent on the globe save Antarctica. In 2010, these companies had an ownership stake in only one such cable—the Unity cable partly owned by Google, connecting Japan and the U.S.
Traditional telecom companies have responded with suspicion and even hostility to tech companies’ increasingly rapacious demand for the world’s bandwidth. Industry analysts have raised concerns about whether we want the world’s most powerful providers of internet services and marketplaces to also own the infrastructure on which they are all delivered. This concern is understandable. Imagine if Amazon owned the roads on which it delivers packages.
But the involvement of these companies in the cable-laying industry also has driven down the cost of transmitting data across oceans for everyone, even their competitors, and helped the world increase capacity to transmit data internationally by 41% in 2020 alone, according to TeleGeography’s annual report on submarine cable infrastructure.
Undersea cables can cost hundreds of millions of dollars each. Installing and maintaining them requires a small fleet of ships, from surveying vessels to specialized cable-laying ships that deploy all manner of rugged undersea technology to bury cables beneath the seabed. At times they must lay the relatively fragile cable—at some points as thin as a garden hose—at depths of up to 4 miles.
All of this must be done while maintaining the right amount of tension in the cables, and avoiding hazards as varied as undersea mountains, oil-and-gas pipelines, high-voltage transmission lines for offshore wind farms, and even shipwrecks and unexploded bombs, says Howard Kidorf, a managing partner at Pioneer Consulting, which helps companies engineer and build undersea fiber optic cable systems.
In the past, trans-oceanic cable-laying often required the resources of governments and their national telecom companies. That’s all but pocket change to today’s tech titans. Combined, Microsoft, Alphabet, Meta and Amazon poured more than $90 billion into capital expenditures in 2020 alone.
The four say they’re laying all this cable in order to increase bandwidth across the most developed parts of the world and to bring better connectivity to under-served regions like Africa and Southeast Asia.
That’s not the whole story. Their entry into the undersea fiber-laying business was inspired by the growing cost of buying capacity on cables owned by others, but is now driven by their own insatiable demand for ever more terabytes of bandwidth, says Timothy Stronge, vice president of research at TeleGeography. This has made profits razor-thin for traditional players in the cable-laying industry, like NEC, ASN and SubCom, he adds. (It has done the same to profits of wholesalers of capacity on submarine cables, such as Tata and Lumen.)
By building their own cables, the tech giants are saving themselves money over time that they would have to pay other cable operators. That means the tech companies don’t need to operate their cables at a profit for the investment to make financial sense.
Indeed, most of these Big Tech-funded cables are collaborations among rivals. The Marea cable, for example, which stretches approximately 4,100 miles between Virginia Beach in the U.S. and Bilbao, Spain, was completed in 2017 and is partly owned by Microsoft, Meta and Telxius, a subsidiary of Telefónica, the Spanish telecom. In 2019, Telxius announced that Amazon had signed an agreement with the company to use one of the eight pairs of fiber optic strands in that cable. In theory, that represents one eighth of its 200 terabits-per-second capacity—enough to stream millions of HD movies simultaneously.
Meta works with global and local partners on all of its submarine cables, as well as with other big tech companies such as Microsoft, says Kevin Salvadori, vice president of network infrastructure at the company.
Sharing bandwidth among competitors helps ensure that each company has capacity on more cables, redundancy that is essential for keeping the world’s internet humming when a cable is severed or damaged. That happens around 200 times a year, according to the International Cable Protection Committee, a nonprofit group. (Repairing damaged cables can be a huge effort requiring the same ships that laid the cable, and can take weeks.)
Sharing cables with ostensible competitors—as Microsoft does with its Marea cable—is key to making sure its cloud services are available almost all of the time, something Microsoft and other cloud providers explicitly promise in their agreements with customers, says Frank Rey, senior director of Azure network infrastructure at Microsoft.
But the structure of these deals also serves another purpose. Reserving some capacity for telecom carriers like Telxius is also a way to keep regulators from getting the idea that these American tech companies are themselves telecoms, says Mr. Stronge. Tech companies have spent decades arguing in the press and in court that they are not “common carriers” like telcos—if they were, it would expose them to thousands of pages of regulations particular to that status.
“We’re not a carrier—we don’t sell any of our bandwidth to make money,” says Mr. Salvadori. “We are and continue to be a major buyer of submarine capacity where it’s available, but in places it’s not available and we need it, we are pretty pragmatic, and if we have to invest to make it happen we’ll go do that,” he adds.
There is an exception to big tech companies collaborating with rivals on the underwater infrastructure of the internet. Google, alone among big tech companies, is already the sole owner of three different undersea cables, and that total is projected by TeleGeography to reach six by 2023.
Google declined to disclose whether or not it has or will share capacity on any of those cables with any other company.
Google has built and is building these solely owned-and-operated cables for two reasons, says Vijay Vusirikala, a senior director at Google responsible for all of the company’s submarine and terrestrial fiber infrastructure. The first is that the company needs them in order to make its own services, such as Google search and YouTube streaming, fast and responsive. The second is to gain an edge in the battle for customers for its cloud services.
All of these ownership changes to the infrastructure of the internet are a reflection of what we already know about the dominance of internet platforms by big tech, says Joshua Meltzer, a senior fellow at the Brookings Institution who specializes in digital trade and data flows.
The ability of these companies to vertically integrate all the way down to the level of the physical infrastructure of the internet itself reduces their cost for delivering everything from Google Search and Facebook’s social networking services to Amazon and Microsoft’s cloud services. It also widens the moat between themselves and any potential competitors.
“You have to imagine this investment will ultimately make them more dominant in their industries, because they can provide services at ever-lower costs,” says Mr. Meltzer.