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Thanksgiving is one of my favorite times of the year and I can’t believe it’s already around the corner! What a great time to appreciate everything we have and spend time with loved ones in the midst of what are still crazy times. Of course, there are plenty of other Thanksgiving traditions that I look forward to next week spanning from the pumpkin pie to watching my Cowboys, as well as paying homage to my roots with an Italian dish (hopefully lasagna this year) topping off a full menu of hearty Thanksgiving food. While I can almost taste the turkey, there is still plenty to dig into this week before we all sit down at the dinner table.

 

Much of the buzz around supply chains and inflation fears this week were largely overshadowed by the strength of consumer spending seen across many company reports. Tech led the way for two of the three major US indices churning out weekly gains this week (S&P and Nasdaq), whereas the Dow posted its second straight weekly loss. While Powell’s status as Fed Chair a few weeks ago seemed bulletproof, there seems to be some growing traction behind Biden appointing Brainard as the next Chair of the Fed. A combination of ‘lower for longer’ becoming the new motto for treasuries and heightened fears of regulation could play out if Brainard is nominated, yet much of this remains up in the air until Biden announces his decision before Thanksgiving.

 

The Fed isn’t the only central bank delicately approaching tightening policies despite rising inflation levels. ECB President Christine Lagarde reiterated her view on maintaining rates through next year, stating that she does not want to “rush into a premature tightening when faced with passing or supply-driven shocks.” Higher energy costs and supply chain issueshave driven Euro-area prices to rise at the fastest rate since 2008, yet Lagarde’s hesitancy to raise rates could be warranted by a recent resurgence in Covid cases across the continent. Lockdown fears swept across European equities on Friday to bring the SX5E down on the week following a stretch of posting weekly gains in 6 of the past 8 weeks, the 8th time this has happened in the past 20 years. Could Austria’s nationwide lockdown be the first of many lockdown measures we see across the continent?

 

Arguably the most debated topic in this market is the status of the consumer. Bulls won this week as strong revenue prints from retailers this week reflected robust consumer demand going into what many expect to be an elevated holiday spending season. Nevertheless, the focus for many investors continues to be around margins and how businesses are handling the impacts of inflation and supply chain pressures. Is the ‘low price’ value proposition the new Achilles heel for some retailers?

 

Price-competitive retailers struggled to keep margins intact as they absorbed cost pressures to preserve low prices and retain customers. While Walmart (WMT) reported strong earnings and raised EPS for the third consecutive quarter, missing on gross margin (albeit only by 15 bps) ultimately led the stock to slide 3+% this week. Meanwhile, Target (TGT) missed by 190 bps on gross margin on a softer earnings print that led to the stock selling off ~5%. Higher labor and freight costs were again the culprits behind these margin pressures, which has been a consistent theme driving many debates. On the other hand, investors continued to reward pricing power, highlighted by Home Depot (HD) and Lowe’s (LOW) posting prints that showcased their ability to pass through cost increases to consumers. We are beginning to see emerging pockets of the market foster greater pricing power for companies, with home improvement in the spotlight here as a space dominated by the two names mentioned above. Could there be other underappreciated segments where we see this dynamic persist going into year-end? Macy’s (M)* and Kohl’s (KSS) posted resounding beats on earnings and gross margins, again pounding the table on the importance of pricing power. With MS Chief US Economist Ellen Zentner forecasting deferred demand in 2H21 lifting spending on goods in 1H22, could a willing consumer and tight inventory be a ‘dream come true’ for some retailers?

 

So what is in vogue as investor wrap up the year? Quality. The MS Quality Basket (MSZZQLTY) MTD has outperformed SPY, IWM and tech investor favorite MS Unprofitable Tech Basket (MSXXUPT) by 420bps, 650bps and 1100bps. MSZZQLTY tracks the spread of MS US Quality Long Basket (MSQQUQLL) vs. MS US Quality Short Basket (MSQQUQLS). Unsurprisingly, names in the long leg are Microsoft (MSFT)*, Costco (COST)*, Amazon (AMZN)*, UnitedHealth Group (UNH), Alphabet (GOOG)* and Danaher (DHR)….all companies with scale and reliable supply chains. Is this recent flight to quality bullish or bearish? Bulls would argue these companies are the proxy for the broader market signaling continued tech spend and a healthy consumer. Bears would prefer these names for different reasons, mainly focused on these best-of-class businesses being the most resilient in a relative tape.

 

If this market has taught us anything, it’s that a lot can change in a few days and there is no room for complacency in this tape as Q3 results have displayed. Companies that missed EPS and sales underperformed the S&P by -3.2%, 30bps worse than the average going back to 2010. The numbers back up the anecdote, that it felt like this quarter produced more outsized moves, particularly to the downside relative to any quarter in recent memory – Peloton (PTON), Snap Inc (SNAP)*, Chegg (CHGG), Farfetch (FTCH)*, Activision Blizzard (ATVI)*, Alibaba (BABA)*, Upstart (UPST) and Vestas Wind Systems (VWS DC). While there is no common thread linking all the aforementioned names, this earnings season certainly drove home the narrative of this being a stock pickers market.

 

I continue, like many of you, to have a couple observations that crossed my mind this week including…

• Inflation angst continues to shake the markets this week. Will the value of our dollars continue to shrink in value next year? The Savone Family Movie of the Week is Honey, I Shrunk the Kids
• Another dominating win for the Cowboys! The offense was firing on all cylinders this week and the defense was lights out. They head over to Kansas City this Sunday for a big matchup against the Chiefs. I can’t wait to watch the best QB in the league face off against Mahomes!
• Next Tuesday will be a huge test for my #2 ranked Bruins as they face off against #1 ranked Gonzaga in Las Vegas. I’m still devastated from my Hoyas’ loss to Dartmouth this week…yes you read that correctly…It will certainly take some time for them to gain my trust back.
• News on Crypto.com’s 20-year, $700 million naming rights deal with the L.A Lakers has furthered my FOMO with Cryptocurrency, an asset-class that I am still meaningfully (and painfully) under-positioned in. The debate remains whether all things crypto is a sign of a liquidity driven market or whether we are on the cusp of something more meaningful and sustainable. Please reach out to MS Cryptocurrency Analyst Sheenah Shah for her views.
• This week in the World Cup qualifier games, the US Men’s Soccer Team stunned Mexico for the third time this year in a thrilling 2-0 win. Over in Europe, Italy struggled against Northern Ireland and goes back home with another tie in the books. Every legendary team has its rough patches and I still think this team is the real deal! Yet, the pain felt from Italy missing out on the last World Cup still sticks with me as I try to temper my expectations…I’m hoping I don’t see that heartbreaking story play out again.
• While the Italian soccer team ranks 6th, the renowned Italian luxury car producer Ferrari (RACE)* is now racing to take 1st place in the EV space. Their new CEO Benedetto Vigna plans to unveil ‘the full plan’ during the company’s capital markets day on June 16th, 2022. Check in with MS Analyst Adam Jonas to hear why Ferrari is his new favorite EV stock!
• Although it may take a while for the Metaverse to fully develop, luxury brands are already fighting for market share. Big brand names like Dolce & Gabbana have begun to sell NFTs of dresses and other outfits that could become very popular in this new space. What would your wardrobe look like in the metaverse? For more context, check out Edward Stanley, Eduard Aubin, and Elena Mariani’s latest piece on Luxury in the Metaverse. What would your wardrobe look like in the metaverse?
• Fintech giants Visa (V) and Amazon (AMZN) clashed in the UK this week over Visa’s high cost of interchange fees. Is this feud transitory (and a good entry point in Visa) or will Amazon refuse to let consumers pay with their Visa credit cards moving forward? MS Analysts James Faucette and Jonathan Lee give their view on this debate in their recent report. Make sure to ask for a copy.
• With every passing year, I find myself wondering what other aspect of my life will Apple tap into. Although I prefer wearing the original wire-in headphones over Airpods, I am in awe of everything they have created since the first Mac. Reports suggest that their next innovation will be the Apple Car, with a potential launch as soon as 2025. Reach out to MS Analysts Katy Huberty and Adam Jonas for their latest report with more details.  
• For those of you in the US, what is your favorite Thanksgiving dish? Do you have any unique family traditions? I’m always open to trying to something new, especially when we’re talking about Thanksgiving food!  

 

A data point I continue to follow closely is the ratio of dispersion between sectors vs dispersion within sectors which currently sits at the 11th %ile of the last 5 years, slightly higher than last week. Looking further into this, dispersion between sectors fell to the 77th %tile (down 4 points) while dispersion within sectors fell to the 88th %tile (down 7 points). Nonetheless, these high dispersion levels reaffirm this environment being suited towards stock pickers. Dispersion within Real Estate is now at the highest %tile for dispersion across all sectors, sitting at the 96th %tile, followed by Healthcare, Industrials, Dictionary and Financials. Another thing worth noting here is single name volatility within Discretionary, which currently sits at the 88th %ile (materially higher than other sectors) and is actually down from last week. While it’s certainly plausible that the conclusion of Q3 earnings could lead to this volatility normalizing a bit going forward, investors should continue to exercise caution with some of the names in this space. Please ask to be connected to the team for more details.

 

On positioning, US Equity L/S gross leverage decreased ~2% WoW to 198% and net leverage of these funds increased ~2% WoW to 62%; it is evident that investors are still adding to their longs in order to keep nets high. On a YTD basis, absolute performance for the US L/S cohort remains strong, up +8.4%, but relative to the S&P 500 up +26.8%, that upside capture rate remains low vs. historical averages. Directionally nonetheless, these hedge funds have been a bit more bullish into year end, than we have seen in previous weeks.Across other regions, gross leverage for EU L/S funds fell ~1% WoW to 177% due to the majority of equity de-grossing done by hedge funds, while net leverage was unchanged WoW at 50%. Asia fundgross leverage fell ~2% WoW to 137%, meanwhile net leverage rose ~1% WoW to 74%.

 

Looking back on what felt like one of the more turbulent earnings seasons in recent memory, I want to highlight some of the takeaways from our 3Q21 final earnings scorecard. The overarching theme across Q3 earnings was the punishment of misses and somewhat tepid reaction to beats. As of 11/16, the average company outperformed the SPX by 0.72% after delivering both an EPS beat and a Sales beat, which is lower than the +1.3% average dating back to 2010 for stocks in this bucket. Conversely, companies that missed on both EPS and Sales underperformed the SPX by a wider magnitude than the historical averages going back to 2010 at -3.2% relative to SPX. According to FactSet's latest Earnings Insight report, companies in the S&P500 are reporting earnings that are 10% above expectations, below the 18% one-year average positive surprise rate, but above the five-year average of 8.4%. With respect to sales, companies are reporting 2.8% above expectations, below the 3.5% one-year positive surprise rate but above the five-year average of 1.4%.

 

While many investors continue to reflect on what was a rollercoaster of an earnings season, MS Chief Equity Strategist Mike Wilson shifts his attention to EPS growth in the next two years (Back to the Future!). The MS view on EPS growth in ’22 and ‘23 is above consensus, while its outlook for valuation is well below it (Mike models earnings growth of 10% and 8%, respectively) based on strong GDP forecasts and the MS Proprietary Leading Earnings Indicator. Mike also highlights that the risk of de-rating has been deferred, not avoided, making his 12-month S&P 500 Bear/Base/Bull targets of 3900/4400/5000 unexciting. Taking into account continued margin pressures and a forecast of demand deceleration after the holiday season, Mike’s ‘Ice’ narrative could play out sooner than expected. Although Mike forecasts a pullback, it is undeniable that market conditions have bred higher dispersion, making stock picking more important than ever. Mike and the team are overweight Healthcare, Real Estate, and Financials; he is underweight [goods–oriented] Consumer Discretionary and Tech hardware; and constructive toward sectors of Consumer/Business Services and reasonably priced Software. Please reach out to be connected with Mike and the team.

 

In a wider lens, Chief US Economist Ellen Zentner highlights that delayed activity should spur growth into next year and raises her forecast for 2022 real GDP growth to 4.6%. However, she caveats this view by stressing that consumer wallet share should continue to shift away from goods in favor of services, with supply chain disruptions setting up a rocky road ahead for mid-2022. Ellen’s demand-side bear case forecasts the stalling of the labor market recovery, inflation steam starting to decelerate, and consequently prices becoming more muted. On the supply-side, Ellen’s bear case predicts a subdued labor market recovery and more extended supply chain disruptions that cause higher inflation and lead to slower growth. Taking a step back, MS Chief UK Economist Jacob Nell forecasts 2022 real GDP growth at 4.6% respectively for both Europe and the UK. However, while he expects growth for the EU to catch up with its pre-Covid trend in late 2023, Jacob thinks that the UK will actually face pressure from its Brexit adjustment, Scottish political risk, and fiscal consolidation, triggering real GDP growth to decelerate in 2023. Looking south to LatAm, Latin America Economist Andre Loes believes that resilient inflation levels and a less credible fiscal anchor should compel the BCB to maintain rates significantly above neutral throughout 2022. He forecasts a policy rate of 9.25% at the end of 2021, 10.00% in March 2022, and 7.00% by the end of 2023, as inflation tensions abate and the convergence to a target level finally materializes. Please ask to be connected to the respective teams.

 

MS European Equity Strategist Graham Secker reflects on another year of positive returns albeit with increased macro volatility. Graham and the team stay bullish on European EPS and the top picks are Autos, Banks, Energy, FTSE100 and Germany. Some of our MS Top Stock Ideas include Adidas (ADS GR), Royal Dutch Shell (RDSA LN), Akzo Nobel (AKZA SW)*, and Unicredit (UCG IM). During the EU TMT Conference this week, the most noteworthy takeaways were Nokia (NOK) reinforcing their view that 5G development is still at least 2 years from its peakand Swisscom (SCMN SW) CEO Urs Schaeppi’s saying that the market will receive an update on the COMCO fibre investigation when the company reports FY results. The most requested corporate meetings were from the conference were: Adyen (ADYEN NA), ASML (NA)*, JustEat Takeaway (JET LN), Infineon (IFX GR)*, Delivery Hero (DHER GR), Amadeus (AMS IT)*, HelloFresh (HDG GR)*, Logitech (LOGN SW), SAP (SAP GR)*, STMicroelectronics (STM FP)*, Zalando (ZAL GR), Ubisoft (UBI FP)*, ASM International (ASMI LI), Wordline (WLN FP), Cellnex (CLNX SM), Deutsche Telekom (DTE GR)*, Flutter (FLTR LN)*, Deliveroo (ROO LN), Ocado (OCDO LN) and Allegro (ALE PW). Notably, our MS Analysts are overweight on 15 of the names listed above. Please ask to be connected with Graham and the team or for a recap of the EU TMT Conference.

 

Looking to Japan, MS Asia Equity Strategist Jonathan Garner expects Japan to outperform EM again in 2022 with stronger EPS growth, reopening and stimulus-driven domestic recovery, and late-cycle factor support. Another noteworthy update comes from MS Analyst Mia Nagasaka who upgraded Japan’s Banks sector, with 8 major banks trading at ~0.47x P/B, below the 0.63x average P/B between 2016 and 2019. Mia expects earnings recovery and renewed enhancement of shareholder returns to be catalysts for rising share prices. In other news, Japan’s 55.7 trillion yen ( ~$490 billion) government package is the largest government stimulus ever, and the Cabinet office estimates it represents 5.6% of Japan’s GDP. Keep in mind that ~$175 billion will be attributed as cash handouts that go directly into the pockets of consumers. This headline comes at a time where seasonality plays to Japan’s favor, and adds on to the accelerating narrative for inflation globally. One of our best baskets to play this inflationary theme is the JD Pricing Power Basket (MSAPPOWR), which consists of Japanese companies with pricing power such as Recruit Holdings (6098 JT) and Hoya Corp (7741 JT). Please ask to be connected with the teams.

 

On China, MS China Equity Strategist Laura Wang sees lingering risks into MSCI with earnings headwinds, extended tight liquidity, US/China non-trade tensions (i.e. ADR delisting and geopolitical risk) and near-term property market volatility. Laura and the team prefer A shares to offshore China and like select exposure to Consumer Durables & Apparel, IT, Materials, and Industrials given their better positioning in the context of reflation and a regulatory reset. MS prime brokerage data on institutional gross exposure to China relative to the rest of the world has shown stabilization recently (just above 8% or 40th percentile over the past 12 months), where gross exposure to A shares has surpassed ADRs. As the wave of macro changes settle, fundamentals of individual companies such as that of JD.com (JD), NetEase (NTES)*, and ZTO Express (ZTO) start to outweigh the macro influence. Please ask to be connected with the teams.

 

Another important conference this week was the Virtual Asia Pacific Summit, which addressed many global themes: optimism and uncertainty on reopening and its bottlenecks, positive growth outlooks for India and ASEAN, and decarbonization. Something I really miss from pre-Covid times was traveling to many of our fantastic conferences around the world; it’s hard to replicate the buzz in Singapore and the beaches in Barcelona! While it’s hard to say I miss the 19-hour flight to Singapore, I hope to see more of our conferences return to being in-person as we emerge from this Covid world.

 

From EVs to Animal Health, MS research teams continue to initiate coverage on some of the most influential trends around the world. MS Analysts Adam Jonas, Shawn Kim, and the rest of the team published a Bluepaper on the future of EVs and the various ways in which investors can gain exposure to this exciting space. The team has worked across 10 sectors to analyze the >$500 billion battery TAM, creating a Global Battery Portfolio of 71 names and mapping the value chain from the mine to the highway line. Looking over to the specialty pharmaceuticals space, MS Analyst Erin Wright initiated coverage on the Animal Health industry, highlighting a $65 billion core global market growing at 5-7% annually. Emerging from the pandemic, Erin believes the structural tailwinds across Companion and Production (livestock) segments should remain strong, while innovation should boost long-term growth. The main names that will benefit from this outsized growth are Zoetis (ZTS), IDEXX Laboratories (IDXX), and Elanco Animal Health (ELAN). Make sure to grab a copy of both reports!

 

In the coming weeks, MS will be hosting a wide variety of conferences including the Virtual Global Consumer & Retail Conference (Nov 30 – Dec 2), the Energy & Clean Tech Symposium taking place in person and virtually (Dec 1), and the 4th Annual Space Summit, taking place in person (Dec 7). The Virtual Global Consumer & Retail Conference will again feature well-established retail companies and emerging high growth companies, including Best Buy (BBY), MGM Resorts International (MGM), and Macy’s Inc. (M). These conferences are always in high demand, so be sure to reach out to your sales coverage for more information. Thank you again to the MS Global Corporate Access team for such great work around the world! Please see below for all upcoming MS Conferences & Events.

 

Nevertheless, please find below a selection of this week's data points, charts and research from each region (Europe, US, LatAm, Asia, Japan, EEMEA) that I believe points to an inflection or material change for individual sectors, companies and/or the macro environment this week. I have tried to avoid the obvious beats and misses and instead highlight what I thought to be the more significant trends and inflection points.

 

Have a great weekend. Drink lots of fluids, take Vitamin C, and make sure to wash your hands!

 

#FORZA

 

Nick

 

*Included in my 2021 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

 

UPCOMING CONFERENCES –

Please reach out to your sales representative if you are interested in attending any of these conferences.

Nov 22 (New York) I Virtual Insurance Corporate Access Day: Life and P&C

Nov 30-Dec 2 (New York) I Virtual Global Consumer & Retail Conference

Nov 30-Dec 3 (London) I Virtual Nasdaq Conference

Dec 1-3 (Tokyo) I Inaugural Virtual Japan ESG Conference

Dec 7 (New York) I 4th Annual Space Summit

Dec 7 (London) I Business Services, Leisure & Transport Corporate Access Day

Dec 7-9 (China) I Virtual China Wind & Solar Symposium

Dec 9-10 (Global) I Virtual Global Metaverse Symposium

Jan 5-7 (China) I Virtual China New Economy Summit

Jan 11-12 (China) I Virtual HK/China 2021 Top Picks Outlook Seminar

Jan 12-14 (New York) I Virtual 14^th Annual Latin America Executive Conference

Jan 13-14 (China) I Virtual China Cyclicals Corporate Day 2022

Jan 18 (Asia) I Virtual Asia ESG Symposium

Mar 7-10 (San Francisco) I TMT Conference

Mar 15-17 (London) I European Financials Conference

Mar 22-24 (Hong Kong) I Virtual Hong Kong Summit

May 24-26 (China) I 8^th China 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

 

 

MS BROAD TRENDS & INFLECTION POINTS

 

Positive

 

ìîUS – Equities – 3Q21 Earnings Results

 

ìî Global – Strategy – Asia/EM Equity StrategyBase-Case Index Targets For December 2022 – We See Modest Returns For Next Year, With A Preference For Topix > Em, And A-Shares Versus Offshore China

Source: MSCI, IBES, RIMES, Morgan Stanley Research. Data as of November 10, 2021. Our top-down fiscal year TOPIX EPS for F3/22, F3/23 and F3/24 are ¥134 (+43%), ¥142 (+6%) and ¥153 (+8%), Bottom-up Consensus EPS for F3/22, F3/23 and F3/24 are ¥133 (+45%), ¥143 (+8%) and ¥155 (+8%).

The good news for 2022 is that growth should be solid and mid-cycle markets are generally supportive. The bad news is that policy is tightening and many risk premiums are compressed versus comparable periods. Mid-to-late cycle environments are generally supportive for equities outright, and relative to other assets. We want valuations that are reasonable enough and fundamentals that are sustainable enough to not buck that trend. To put in market preference, we are overweight Europe and Japan, underweight the US and equalweight on EM (and China).

Asia/EM Strategy - Jonathan Garner expects more of the same in 2022 – Japan to outperform EM again in 2022, as China manages a difficult growth model shift while Japan exhibits stronger EPS growth on global capex cycle + JPY weakness + stimulus driven domestic recovery. They see the opportunity in EM at the individual market and sub-regional level as well as in stock selection and are most constructive Energy, Financials and (Higher Quality) Value – which support OW EEMEA and ASEAN vs North Asia. Accordingly, the team makes several changes to Focus Lists today, adding SK Innovation and GoerTek to our APxJ and GEM Lists, Santos (to APxJ) and Saudi National Bank (to GEM). Finally, 2022 is shaping up as another catalyst-filled year – general elections in Korea (March 9), Australia (by May 21) and Brazil (Oct 2 and 30) will be particularly notable for regional investors. Download the Complete Report / Download the Complete Report / Download the Complete Report

 

ìîAsia – Strategy – Asia’s Nominal GDP To Post The Strongest Gains As Compared To Europe And Americas

Source: Haver Analytics, Morgan Stanley Research Note: Americans include US, Canada and LatAm, Pan- Europe includes Euro Area, UK, Norway, Sweden, and CEEMEA economies within MS coverage

2022 Global Macro Outlook - Global inflation is strong but should recede to varying degrees next year against slower, but still above-potential, global GDP growth. Demand coming out of the Covid recession, boosted by stimulative policy, has confronted sclerotic supply chain. Rising commodity prices have boosted inflation, but in MS economists’ baseline these prices peak then retreat, easing inflationary pressures. MSe Fed’s first rate hike in 1Q23, global GDP growth for 2021 at 6.1%Y and stepping down to 4.7%Y in 2022; growth remains faster than potential through the end of the forecast.

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·        Asia: We see Asia’s recovery gaining strength and building breadth as more economies join the upswing. Underpinning this recovery are the best productivity dynamics since 2007, with the strong rebound in private capex making a compelling case for a self-sustaining recovery. Download the Complete Report

·        China: After an unparalleled tightening in 2021, we expect an above-consensus economic recovery to 5.5%Y in 2022 amid policy easing, led by public capex and a gradual consumption revival. Download the Complete Report

·        HK: We expect Hong Kong's GDP growth to reach 3% in 2022, with a broadening economic recovery amid gradual border reopening with mainland China in 2022. Fiscal support could gradually fade out, but the lower interest rate environment could be sustained amid ample interbank liquidity. Download the Complete Report

·        Japan: We expect economic recovery and gradual price increases to continue in 2022. Download the Complete Report

·        ASEAN, Korea and Taiwan: We go from Goldilocks to steady-state expansion. Growth broadens out. Inflation rises but does not get out of hand. Policy normalizes but does not get disruptive. Download the Complete Report

·        India: We expect a full-fledged growth recovery with all drivers firing and macro stability indicators remaining in the comfort range. Download the Complete Report

 

ìîEurope – Strategy – Real Yields Are Very Likely To Rise Going Forward As Monetary Policy Starts To Tighten

Source: MSCI, Bloomberg, Morgan Stanley Research

Another year of positive returns but with increased volatility given macro crosscurrents. MS Equity Strategist Graham Secker stays bullish on European EPS. Higher real yields could finally unlock some rotation and favour Europe over the US. Top picks include: Autos, Banks, Energy, FTSE100 and Germany. Download the Complete Report

 

ìGlobal – Autos & Shared Mobility – Ten Sector Analysis Of $500Bn TAM; Global Battery Portfolio

Source: Morgan Stanley Research; Note: excludes ESS

MS Research Analysts Adam Jonas, Shawn Kim, and the Autos & Shared Mobility global research team highlight that the birth of the battery economy is reshaping century-old supply chains and creating a new industrial order. The global team has worked across 10 sectors to analyze the >$500bn battery TAM, creating a Global Battery Portfolio of 71 names and mapping the value chain from the mine to the highway line. The team notes that the battery industry is highly complex with dozens of mini self-reinforcing (and some self-correcting) supply/demand curves to take into consideration. The team thinks that the chances one will find agreement within the battery community on how everything plays out over the next 10 or 20 years is remote. The team thinks that while battery costs are still grinding lower, the big change is the quantum of capital and climate-oriented stimulus policies, especially outside of China. So today, the battery story is a global story and the team notes that amount of capital involved is 10 to 20x higher than it was pre-COVID. To that end, the global team has built a proprietary battery total addressable market (TAM) model and a global battery stock portfolio. The team arrives at a 2040 electric vehicle (EV) Battery TAM of ~$525bn and overlays the MS global utilities teams' energy storage system (ESS) Battery TAM assumptions to arrive at a 2040 total battery TAM of ~$535bn (ESS Battery TAM is approximately 3% of the total market). Download the Complete Report

 

ìUS – Specialty Pharmaceuticals – Initiating Coverage Of Animal Health With In-Line View

Source: Refinitiv, Morgan Stanley Research

MS Research Analyst Erin Wright highlights that core animal health is an estimated $65 billion market globally, growing +5-7% annually. Emerging from the pandemic, she thinks that structural tailwinds across Companion and Production (livestock) segments should continue, while innovation should boost long-term growth. She notes that Animal Health enjoys healthcare's defensive characteristics without many of the risks associated with reimbursement, third-party payers, generic threats, and research & development inefficiencies. She also notes that the emergence of larger, standalone animal health companies with deeper pockets has accelerated innovation through stepped-up internal and external investments. She sees innovation contributing 200-300 bps to industry growth, focusing on (1) monoclonal antibodies, vaccines, and other injectables; (2) more advanced diagnostics; (3) alternatives to antibiotics; and (4) technologies/devices. According to her proprietary survey of 75 companion animal veterinarians, practice trends should remain strong over the next 12 months, with respondents expecting +5.3% and +6.5% clinic visits and practice revenue growth, respectively, despite challenging year-over-year comparisons following significant growth in 2H20/1H21 (est. +6% and +14%, respectively). She thinks that outlooks are likely to reflect more modest underlying Companion Animal market growth as the industry laps COVID-induced tailwinds, with innovation driving outsized growth for certain players, such as ZTS (OW, $264 PT), IDXX (OW, $732 PT), and ELAN (OW, $40 PT). Download the Complete Report

 

ìEurope – Strategy – UK Consumers Tilted Their Spending Sharply Towards Goods As The Pandemic Hit, And The Adjustment Back Has Been Fairly Gradual

Source: ONS, Morgan Stanley Research

After the rebound, growth shifts down with headwinds from fiscal, Brexit and Scottish political risk. Inflation declines to target slowly as energy and goods turn from drivers to drags. After a fast lift-off triggers QT from February 2022, the BoE shifts to a slower pace of tightening. Download the Complete Report 

 

ìîNorth America – Consumer Discretionary–  MS Research Analyst Jamie Rollo was broadly encouraged by his meetings with CCL, RCL and NCLH. 2H22 pricing appears strong, onboard spend is “off the charts”, and action on cost/mix should drive higher margins. RCL could also announce some ambitious LT targets soon. Against this, there are signs of near-term discounting, Q4/Q1 will remain tough, and fuel cost/ESG pressures are mounting. Download the Complete Report

 

ìEurope – Consumer Discretionary –Earnings Transcript Mentions By Theme Over Time

Source: AlphaSense, Morgan Stanley Research

Metaverse gaming and NFTs could constitute 10% of the Luxury Goods addressable market by 2030, MS Equity Strategist Edward Stanley estimates, a €50bn revenue opportunity and a c25% uplift to the industry's profit pool. Download the Complete Report

 

ìEurope – Consumer Discretionary– MS Research Analyst Edouard Aubin believes that demand for Swiss watches in the coming months/years could be materially boosted by wealth generated by crypto currencies. Should such additional demand materialise, he would see Richemont shares as a good vehicle to play this theme and anticipate further share price upside. Download the Complete Report

 

ì Greater China – Technology – Auto Semi Revenue vs. Light vehicle production

Source: IHS Markit, company data, Morgan Stanley Research. Note: Auto semi revenue is consolidated from Infineon, NXP, Renesas, Texas Instrument, STMicro, ON Semi, Rohm, and Analog Devices.

Charlie Chan believes that chip shortage is over, as all fabs in Malaysia are already back to 100% manpower in October, based on check with his equipment contacts. Overall, he expects pent-up demand for cloud data center server shipments to be released, raising his shipment forecasts to +2% in 4Q (vs. -2% previously). He believes this will provide some upside to DRAM shipments for server and server BMC vendor Aspeed will also see order upside. On auto semis, he believes that demand will stay strong in coming quarters, as carmakers change their inventory policy from “just in time” to “just in case”.  The continuation in strength will depend on semi content growth in EV and autonomous driving technology. He has applied 10% CAGR to car semis to capture the content growth since 2017 and believes that there is a gap of c.15% between car production and auto semi revenue. Volkswagen CEO Herbert Diess has also remarked that the company currently has better chip supply and that hopefully the company can increase after months. Toyota has also progressively narrowed its production cuts.

·        Cloud Semis – Daniel Yen has raised PT for Montage by 29%, to Rmb80 and Aspeed by 33% to NT$3,400 respectively, as he expects the catch-up component supply to boost cloud semis growth from 4Q21. Reiterate OW on Aspeed, with its significant TAM expansion on BMC, but he remains EW on Montage, given elevated market expectations for DDR5. Download the Complete Report / Download the Complete Report

 

ìUS – Internet – Metaverse Likely Next Gen Social/Digital Platform; $8tn US TAM

Source: Company data, PWC, Bureau of Economic Analysis, Census Bureau, National Center for Education Statistics, Morgan Stanley Research. Note: Concerts/Live Events and Casino estimates are normalized

MS Research Analyst Brian Nowak highlights that investor interest around “what the metaverse could be” is rising following FB's (OW, $365 PT) recent reveal/name change. The debate/creation/evolution around the metaverse will likely take years, but at a high level, he thinks that the metaverse is most likely to be a next generation social media, streaming and gaming platform. And like current digital platforms, Brian expects the metaverse to initially and primarily operate as an advertising and e-commerce platform for offline products/purchases. He notes that this means that the addressable US consumer expenditure to monetize is large at ~$8trln. And while he expects digital collectables and non-fungible tokens (NFTs) to grow with a next generation metaverse, he believes that it will be much longer before markets substantially replace physical items (i.e., digital jewelry, digital sports cars or digital appliances fully replacing physical versions). Brian notes details on investing in the metaverse optionality in the space across FB, RBLX (OW, $88 PT), GOOGL (OW, $3200 PT), and SNAP (OW, $85 PT). Download the Complete Report

 

ìî Asia – Strategy – Unlike In Other Global Markets, Singapore Valuations Have Yet To Re-Rate Past Pre-Covid Levels

Source: Refinitiv, Morgan Stanley Research. As of 10 Nov 2021.

Korea Strategy – remains equal-weight within EM, and risk-reward dynamics point to more downside than upside in 1H22. Elections are a swing factor, with bigger swings expected for affected sectors. Patience is needed while the market hunkers down. Reflecting our macro team’s expectation of four more BoK rate hikes through 3Q22 (to bring the policy rate to 1.75%), Joon Seoklowers Kospi target to 3,000 (as of end-2022) applying 10.5x target P/E on -5% EPS growth. Swing factors for next year include presidential elections in March. Download the Complete Report

Singapore Strategy – one of the overweight countries within Asia/EM. In 2022, Wilson Ng sees Singapore equities surpassing pre-Covid levels and catching up with the rest of the world, given a favourable macro backdrop and tailwinds from corporate restructuring and index rebalancing. Prefer financials and energy/utilities sectors, sees selective opportunities in the property and tech sectors; and thinks much optimism has already been priced into travel-related stocks despite their beta to the reopening theme. Download the Complete Report

Australia Strategy – downgraded to equal-weight within our Asia/EM framework.The macro outlook links to rebounding consumption and expansionary fiscal settings. Equities face fading earnings in aggregate and muted Index returns. Positioning takes weight from Banks and adds more focus to Industrials. Three key themes: (1) Policy Paths; (2) Reopening 3.0; (3) Inflation Risk Management. Download the Complete Report

 

ìUS – Machinery & Construction – Bipartisan Infrastructure Bill Could Provide Mid-Teens Lift To Aggregate EBITDA

Source: Company data, Morgan Stanley Research

MS Research Analyst Courtney Yakavonis highlights that the Bipartisan Infrastructure Bill (or BIF) will authorize over $900B of spending over 5 years, including $550B in new spending not in the baseline. She notes that roughly 20% of the incremental spend will be allocated towards traditional roads & bridges infrastructure with another 20% allocated towards non-roads and bridges surface transportation spending including transit and passenger rail programs. In total, she sees ~$550B authorized for traditional surface transportation over 5 years - a $45B/year (~70% p.a.) increase to baseline levels of federal surface transportation spending. Courtney notes that the remaining 60% of incremental spending associated with the bill is earmarked for air, water, clean energy, broadband and EV infrastructure. She estimates that the impact of the BIF to be a 5-9% FY23e Sales and ~13-17% FY23e EBITDA lift to Aggregates and a ~2-8% FY23e Sales and 2-12% FY23e EPS impact to Construction Equipment. She sees the most upward pressure on MLM (OW, $469 PT), VMC (EW, $205 PT), and URI (UW, $297 PT) sales and EBITDA estimates in 2023 as the revenue uplift implied by her analysis is in-line or higher than consensus sale estimates. She notes that consensus is pricing in more growth than her analysis suggests for OSK (OW, $134 PT), TEX (EW, $50 PT), VMC, WAB (OW, $102 PT), and DE (OW, $442 PT), but the stocks screen most attractive vs. historical multiples. Download the Complete Report

 

ì S.Korea – Internet - Korean Game Publishers' Announced Plans For Nft-/Blockchain-Based Games

Source: Company earnings call transcripts, Morgan Stanley Research

Seyon Park makes several changes to his recommendations in the Korea internet space amidst the market hype/excitement around Metaverse, P2E and NFT – upgrading NCSoft to OW (Top Pick), and downgrading DoubleU Games to UW.  While there are distinct differences between P2E and NFT, and how this converges with the metaverse are clearly difficult questions to answer in a nascent stage, there’s no doubt these business models have potential for larger TAM and to disrupt the video gaming landscape. He looks into each company’s exposure to the theme and explains the difference in the note. Seyon believes differentiation ultimately comes down to content quality and gamer experience, hence favoring those with strong content and ability to execute. In our coverage, we find NCSOFT and Pearl Abyss best positioned. Download the Complete Report

·        Related Deep-dive reports on Metaverse:

o   Brian Nowak notes that the Metaverse is likely to be a next generation social media, streaming and gaming platform (FB, RBLX, GOOGL, SNAP being his key picks). Download the Complete Report

o   Edouard Aubin analyzed how the Metaverse may expand the TAM for the luxury sector (10% of the Luxury Goods addressable market by 2030, a €50bn revenue opportunity and a c25% uplift to the industry's profit pool). Download the Complete Report

 

ì Japan – Strategy – TOPIX Consensus EPS Trend With Ms Forecasts On Japanese Fiscal Year Basis - We Are In Line With Consensus Forecasts

Source: IBES Consensus, Datastream, Morgan Stanley Research. Data as of November 4, 2021.
Daniel Blake reiterates his constructive call on TOPIX, with 12% upside to December 2022 target of 2,250. MS EPS growth of 13% in 2022 and 8 % in 2023, is above consensus driven by 1) reopening and stimulus-boosted recovery for GDP growth in 2022; 2) a strong global capex outlook, 3) an earnings profile boosted by a weaker JPY@118 over 2Q22 and US 10-year yields moving up to 2.1% by year-end; and 4) typical late-cycle outperformance, with factor support if value/cyclicals outperform as we expect. Our 2,250 target for TOPIX is set on a 15x 12m forward target multiple (vs. spot 14.3x). Catalysts to watch: Fiscal package headlines out today- bigger than expected Y55.7tln vs MSe Y30tln headline implies nearly 10% of GDP, scope of cash handout looks broader than expected as well, restart of GoTo travel incentives further investment in infrastructure and eco security and advanced technology. In addition MSe the BoJ to adjust its yield curve control target to the 5yr maturity (from 10yr), allowing some curve steepening, which would be an additional positive for Financials beyond near-term capital management potential. We continue to recommend positioning for self-help, reopening and productivity/digital leaders. Download the Complete Report

 

ì Asia – Strategy - Annual performance of MSCI Europe, MSCI EM, and EM Portfolio Of Stocks With High European Revenue Exposure Since 2017 - The Revenue-Based Portfolio Delivered More Similar Performance To MSCI Europe than to MSCI EM

Source: Datastream, Morgan Stanley Research. Monthly data as of Oct. 31, 2021. * 'EM stocks with high European revenue exposure' refer to portfolio of top 30 EM stocks with highest European revenue exposure, equal-weighted. 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.

Following our global strategy team’s preference of Europe and Japan > EM > US for equities in 2022, Ronald Ho provided a quant strategy guidebook on trading 2022 EM Equities. EM investors can gain exposure to our preferred geographies through stocks with high revenue exposures to these selected regions. Ronald’s backtest suggests that compared to overall EM, a portfolio of EM stocks with high revenue exposure to a certain geography generates a return profile closer to that of the revenue-source market. Ronald provides two stock lists with the highest revenue exposure to Europe and Japan, although noting that for EM stocks, revenue exposure to Japan is generally lower than that to Europe.Download the Complete Report

 

ìî China –  Consumer Discretionary – Chinese Suppliers To See Auto Smart Cockpit Localization Opportunities

Source: Morgan Stanley Research

Shelley Wang identifies threes industry trends for China auto smart cockpits that have long investment runways – localizing the supply chain, centralizing domain architecture, and evolving user interaction. Supply chain localization: Smart cockpits are less safety-critical and have higher demand for local content than smart driving. This should mean more opportunities for Chinese local tier-1 suppliers that can provide faster customer support at lower cost. E/E (electrical/electronic) architecture centralization: OEMs have strong incentive to transform E/E architecture from distributed to centralized domains. DCUs (domain control units) are one of the few features that can improve vehicle performance while simplifying hardware structure. Desay has first-mover advantage from mass-producing autonomous DCUs for Xpeng P7, while others like Joyson and Foryou are catching up. The third in-car display: HUD (head-up display) can extract key messages from multiple screens, and its penetration is growing rapidly in China as larger scale is driving down costs. Although the HUD supply chain is still dominated by global players, especially in the upstream, she sees Chinese players aggressively gaining market share, especially Foryou, with its AR-HUD mass produced in 4Q21. Shelley upgrades Desay SV to OW on the back of this, raising PT to Rmb140. Download the Complete Report

 

ìîBrazil – Utilities – MS LatAm Research Analyst Miguel Rodrigues had six results from his coverage, for which highlights are summarized in this report. Cemig and Energisa beats his estimates on solid distribution results (e.g. higher volumes and losses reduction), while Sanepar's results were above his estimates mainly due to lower opex and better-than-expected volumes. On the other hand, CPFL, Light and Sabesp reported mostly in line results. While CPFL reported solid results across the board, Light reported weak volumes, which was partially offset by manageable expenses reduction. Download the Complete Report

 

Negative

 

îìUS – Equity Strategy – The Year Of The Stock Picker; 12-Month Risk/Reward Unattractive For Broad Indices, Not Stock Level

Source: Bloomberg, Morgan Stanley Research

MS Chief US Equity Strategist Mike Wilson highlights that the economic and political environment has been permanently altered from its pre-COVID days, although the changes are not necessarily due to the pandemic itself. What this really means from an investment standpoint is higher nominal GDP led by higher inflation, which is the only solution to the US’ over-indebtedness, in his view. Ultimately, he thinks that should lead to greater investment and higher productivity but thinks it will likely take years. In the meantime, markets will have to deal with the excesses and uncertainty created by the extreme nature of this recession and recovery. He believes that breeds higher dispersion, making stock picking more important than ever. For 2022 and 2023, he models solid earnings growth of 10% and 8%, respectively, based on MS economists' strong GDP forecasts and MS’ proprietary Leading Earnings Indicator. He thinks that the risk of de-rating has been deferred, not avoided, and makes his 12-month S&P 500 Bear/Base/Bull targets of 3900/4400/5000 unexciting. For 2022, he is OW Healthcare, Real Estate, and Financials, and more constructive within sectors on Consumer/Business Services and reasonably priced Software. With his view for payback in demand from this year's overconsumption, he is UW Consumer Discretionary (particularly Goods-oriented, which is the majority of the sector) and Tech Hardware. Download the Complete Report

 

î Asia – Strategy – SGX's Share Price vs. HKEx A50 Contract Market Share

Source: SGX, HKEx, Bloomberg, Refinitiv, Morgan Stanley Research

The China MSCI China A50 Connect Index Futures (BBG Ticker: MCYA INDEX, CFTC certified) has been launched on Oct 18 with a trading fee waiver until 30th June 2022. Now that the new contract has been trading for more than 3 weeks, our Asia cross product team notes that it is showing more traction in liquidity profile and accumulation of volumes, as market share vs. the SGX-FTSE A50 contracts continued to grow. Nick Lord has an interesting chart showing that SGX's share price has been negatively related to HKEx's share of the offshore A share index futures market. Initially when HKEx gained share, this fell during the contract expiry, but has now rebounded. HKEx had 22% share on 12 Nov. Please see the attached note from cross product team on the updates of MSCI A50 Index. We support List Futures + OTC swaps + Options: please reach out for details. Download the Complete Report

 

îEurope – Economics – Market Expectations Of The CEEMEA Monetary Policy Cycle…

Source: Bloomberg, Morgan Stanley Research

Inflation arrived early in CEEMEA, prompting a wave of policy tightening. MS Economist Alina Slyusarchuk does not think the cycle is over just yet, and sees more tightening in places like Russia, Ukraine and CE3 while South Africa is just about to get started. And so despite a supportive external backdrop, inflation, monetary tightening and Covid keeps her cautious. Download the Complete Report

 

îìUS – Cable/Satellite – MS Research Analyst Ben Swinburne believes that the 2H21 slowdown in cable growth reflects the unwind of pandemic related trends to a more normalized level of activity and market share. In his view, it may take until lapping easier compares in 2H22 to see YoY net adds stabilize or re-accelerate. However, he thinks it is encouraging that industry net additions in 3Q21 were still up 25% from 3Q19, highlighting the continued consumer demand for broadband and rising penetration levels. For US cable stocks, Ben sees three somewhat unique investment outlooks: 1) CMCSA ($72 PT) in his view benefits from a relatively low valuation vs. peers, the market, and history and he reiterates his OW rating as his Top Pick in Cable/Satellite with 35% potential upside to his PT, 2) for OW CHTR ($810 PT), as a pure play and levered cable equity trading at an EV/EBITDA multiple in-line with the five year average, he thinks that there is both more upside and probably more risk relative to CMCSA, and 3) for EW ATUS ($20 PT), he believes its competitive footprint is most intense and it struggled to grow its customer base pre-COVID. Ben notes additional views on LSXMK (OW, $57 PT), SIRI (EW, $7 PT), LBRDK (EW, $220 PT), and DISH (EW, $50 PT). Download the Complete Report

 

î US – Autos & Shared Mobility – Increased Caution On Franchise Auto Dealers; Downgrade PAG And SAG To Underweight

Source: Morgan Stanley Research estimates

MS Research Analyst Adam Jonas highlights that while franchise dealers overall beat consensus expectations in 3Q21, driven by elevated new GPUs and SG&A/Gross % cost savings, the market reaction was fairly muted. He downgrades 2 of his franchise dealers to UW - PAG ($90 PT) and SAH ($40 PT) - as a reflection of secular industry headwinds despite peak earnings. In particular, he does a deeper dive into US SAAR by breaking it up into ICE and EV SAARs as well as subcategories that comprise the EV SAAR. He reflects his refined SAAR views in his new vehicle unit forecasts. Out of his franchise dealer coverage, he now skews to the downside - UW 3 names and EW 3 names with no OWs. Adam sees the inability of legacy OEMs to control the consumer experience in a direct-to-consumer model as one of the biggest threats to legacy OEMs over time – even bigger than the threat of electrification itself. Also, based on his discussions with a wide range of EV OEMs (including covered and non-covered names), Adam does not expect to see any use the franchise dealer model. Download the Complete Report

 

îì Europe – Financials – Given sluggish SA loan growth, acquisitions have supported relative credit dynamics for CPI and FSR (to a lesser extent), while FSR's superior risk adjusted pricing trends and ABG's more recent trend improvements support ABG and FSR as MS Research Analyst James Starke’s preferred sector picks. Download the Complete Report

 

MS SINGLE NAMES CONTENT

 

Positive

 

ìUS – Ferrari NV – MS Research  Analyst Adam Jonas highlights that 3Q21 results were not merely significant for beating expectations and raising guidance, but for introducing the market to Ferrari’s (OW) new CEO Benedetto Vigna, who provided some valuable insights into the future of Ferrari as it begins to architect the BEV strategy. Regarding the electrification strategy, he notes that Ferrari’s CEO says the company will unveil ‘the full plan’ during the company’s capital markets day on June 16th, 2022. Adam layers in the Q3 beat of €0.10 and updated guidance for €4.30 Adj EPS in 2021 and he now forecasts €4.34 in 2021 moving to €4.87 (from €4.73) in 2022 and €5.43 (from €5.30) in 2023. Longer term, he sees the scope for Ferrari to offer a range of EV products at potentially higher prices than the average selling price of today’s Ferrari, while leveraging economies of scale on higher volumes. Adam forecasts EV revenues to surpass ICE revenues at Ferrari by 2034, reaching 75% of total company revenues by 2040 and believes that Ferrari may be one of the only surviving manufacturers of ICE engine vehicles long term. At his revised $350 PT, derived from his 2040 DCF, RACE trades at 26x 2024 EBITDA, a premium to the luxury goods players but at a discount to luxury goods leader, Hermès which trades at ~28x 2024 EBITDA. Download the Complete Report

 

ìUS – Roblox Corporation – MS Research Analyst Brian Nowak notes that RBLX's (OW, $150 PT) 3Q results and analyst day highlighted its early leadership in the metaverse and continued innovation to capitalize on materially higher long-term monetization opportunity. From 3Q results, he was particularly encouraged by the October trends (bookings/DAUs/hours 7%/17%/10% above his, ex-outage) as he thinks that they speak to RBLX’s better than appreciated growth runway/ability to continue growing its user base, engagement and monetization even through reopening. Additionally, he came away from this week's analyst day bullish on the company's investments to penetrate specific new verticals (e.g. education and music) as well as its efforts around improved developer tools and platform optimizations. That said, Brian was most encouraged by management's statement that "in the next 3-5 years, all brands will have a Roblox Strategy", as he believes that this speaks to the company's focus on driving higher branded monetization. Download the Complete Report

 

ìSouth Africa – Absa Group Ltd – Upgrade to Overweight as the stock's c8% decline since 30 September now leaves 24% total return to MS Research Analyst James Starke revised R163 PT. This reflects his above consensus earnings outlook of 43% CAGR to FY23e (consensus: 39% CAGR), and he thinks offers the best value in his SA banks coverage at 5.9x fwd PE. Download the Complete Report

 

ìSwitzerland –Richemont SA – Overall, this was a solid set of results from Richemont and management's comments on the call were encouraging. Download the Complete Report

 

ìUnited Arab Emirates – Network International Holdings PLC  –MS Research Analyst Alastair Nolan expects a continued rebound into FY22, supported by structural tailwinds around cash-to-card/e-Commerce growth. Capex set to peak in FY21. He models a c. 19% organic top-line CAGR in 2021-24. Trading on 18x FY23 P/E or a PEG of 0.6x, a clear discount to peers - resume coverage at Overweight with a 460p PT, c. 45% upside. Download the Complete Report

 

ìRussia – Headhunter Group PLC–3Q Revenue of RUB 4.7 bn (+103% yoy; +20% QoQ) came in 24% ahead of consensus and 11% ahead of MSe driven by strong demand for candidates which has led to an increase in both paying customers and average consumption (job postings +110% yoy). Adjusted EBITDA of RUB 2.8bn (60% margin) was 26%/20% ahead of Consensus and MSe. Download the Complete Report

 

ìUS – P10, Inc – Private Markets Growth At Compelling Valuation; Initiate At Overweight

Source: Net IRRs as disclosed and quartile rankings sourced from Cobalt; Morgan Stanley Research, Company data

MS Research Analyst Mike Cyprys initiates coverage of PX with an OW rating and $18 PT, implying 34% potential upside. He highlights that P10, Inc. provides asset owners (e.g., pension funds, family offices/HNW individuals) access to private market investments (a ~$8tr AUM industry today that's expected to grow to $13tr by 2025), with a focus on the middle and lower-middle market. He notes that shares began trading on Oct 21. P10's offerings include co-mingled funds and customized separate account solutions across its four verticals: 1) private equity, 2) venture capital, 3) private credit, and 4) impact investing. A majority of AUM is in primaries funds of funds (that invest in the funds of 3rd party managers) with a strong performance track record, however, Mike sees stronger growth from secondaries funds and direct/co-investment funds as those strategies scale. Mike thinks that the market is underestimating P10's organic growth potential and quality of revenues, with shares trading at 20x 2023e P/E, implying mid-single-digit organic growth (based on a regression of organic growth vs. current P/E) compared to his mid-teens forecast. Download the Complete Report

 

ìî China – Netease Inc – Solid Q3 earnings beat, Alex remains bullish for longer term however, closes RTI trades today given stock +45% rally over last 2 months. However outlook is solid into next year, Harry Potter international launch is set for 1H22, and Alex believes it could be as big as China. Diablo Immortal is on track for 1H22, according to Activision. He projects 2022 revenue growth to accelerate to 21% from 14% in 2021, vs consensus at +18%. The stock trades on 23x FY22 P/E, and the core game business is trading at 21x. Recommended Option trade*attached expect limited upside into year-end given outperformance last 2M & lack of near-term catalysts. Prefer short vega at the moment and also given inverted skew in HK (Chart #1), consider Sell Calls or put on some hedging by Collar (Buy Put / Sell Call @ zero-cost). Download the Complete Report / Download the Complete Report

 

ìî ASEAN – Sea Ltd – The Market Is Not Giving Any Value To Sea's Fintech Opportunity – And E-Commerce Alone Should Drive A 46% Return Over Three Years, We Estimate

Source: Morgan Stanley Research (e) estimates. *2023e and 2024e is applying our 1.6x EV/GMV multiple to 2023e and 2024e GMV estimates

Mark Goodridge continues to reiterate Sea Ltd is on track to become an ASEAN super app that’s leveraged to the structural e-commerce play in EM. Most recent Sep-Oct 2021 AlphaWise survey confirms Shopee’s dominance in Indonesia with increasing popularity in most categories compared to our 2020’s findings. CV19 has indeed catalyzed e-Commerce penetration which could increase adoption for Shopee’s core products in Personal, Beauty and Cosmetics, and Apparel verticals, translating in a 2021/22 GMV growth forecast of 80%/51% respectively. To top it off in driving the super app thesis, ShopeePay has now jumped 2 spots (vs last year) to claim top spot among e-wallets popularity. 3Q Results summary: 1) e-commerce losses widened with new markets expansion, but improving unit economics for mature markets gives it room to fund new region growth. 2) While Free Fire (FF) growth seems to taper, FF MAX (high spec version) could double FF TAM and drive user engagement. Valuation remains attractive since market is entirely discounting fintech optionality, while e-commerce alone should propel a 46% return over three years. Remain Overweight with an unchanged PT of HK$388.Download the Complete Report

 

ìUS – Oatly Group AB – MS Research Analyst Dara Mohsenian upgrades OTLY’s ($14 PT) stock to Overweight despite his much lower estimates after a large Q3 revenue/gross margin disappointment, and an even bigger Q4 revenue guide down. To be clear, his upgrade is more tied to the stock's near 70% pullback from highs, which is overdone in his mind, with valuation not reflecting still strong, albeit a lower modeled revenue growth opportunity. Dara notes that the good news is that even using this lower revenue base and assuming LT EBITDA margins are now lower at only 15% (well below OTLY's approaching 20% LT goal), his DCF points to $14-17 NTM value per share, well above the current $9 stock price. His PT is in-line with the lower-end of his DCF and based on a 5x 2023e EV/sales multiple, in the lower-half of high growth disruptive CPG peers, despite much higher revenue growth at Oatly, but conservative reflecting lower Oatly visibility. In regards to details from Q3, Dara points out that Oatly significantly missed consensus, with a -8% Q3 topline miss and Q4 guide-down vs prior consensus by an implied ~20%. He notes that Oatly blamed three key issues for the Q3 miss, including production headwinds in the new US Ogden plant worth $3M, COVID-19 hiccups (UK truckers) worth $1M, as well as temporary food service closures in Asia worth $3M. Download the Complete Report

 

ì Brazil – Materials –MS LatAm Research Analyst Carlos De Alba remains OW on the stock, with a new YE22 PT target of R$65/sh (from YE22 R$63/sh previously). Download the Complete Report

 

ìUS – Sonos Inc – MS Research Analyst Katy Huberty continues to view Sonos (OW, $53 PT) as one of the most underappreciated long-term secular growth stories within her IT Hardware coverage. She notes that with low single digit penetration of Apple households - the best measure of the addressable market, in her view - and continued expansion within existing households through new products and services, she expects double-digit topline growth for many years to come. Her PT increases to $53 (from $51) based on a 3.3x EV/Sales multiple (down from 3.8x previously) - based on a blended average of LOGI (UW, $77 PT) and GRMN (EW, $141 PT), both covered by MS Research Analyst Erik Woodring, and skewed to LOGI - on her 2% higher FY22 revenue of $1.96B, representing 14% Y/Y growth. Katy points out that Sonos guided to $1.925-2B of revenue in FY22, up 12-16% Y/Y, ahead of consensus and MSe of $1.856B and $1.924B, respectively, driven by continued strong demand, a growing product backlog, and low channel inventory. She thinks that component supply remains a headwind to growth near-term, but low cancellation rates give her confidence that demand is unlikely to be perishable. Download the Complete Report

 

ìFrance – EDF– MS Research Analyst Arthur Sitbon expects EDF shares to perform well in the next 3 months as the outlook for strong 2021-22 earnings firms up with the upcoming ARENH auction and rising visibility on power prices/nuclear output in December. While consensus for 2022 earnings has already gone up materially, he still sees some upside. Download the Complete Report

 

ìUnited Kingdom – BHP Group PLC– The proposed DLC collapse, potential petroleum demerger and thermal coal exit should improve BHP's ESG credentials and simplify its structure. MS Research Analyst Alain Gabriel explores the pro-forma balance sheet, cash requirements and commodity exposures for RemainCo. Download the Complete Report

 

ìUnited Kingdom – Vodafone Group – Strategic outlook for Vantage Towers + scope for industrial mergers. Vodafone has identified three core objectives: i. realise organic growth / increase towers utilisation by adding new tenants; ii. complete bolt-on acquisitions (e.g., in-market mergers, extending footprint in new countries); and iii. consider industrial merger possibilities – this would deliver synergies, widen the footprint (more opportunities) and possibly de-consolidate VT from Vodafone's balance sheet (Voda's balance sheet would no longer constrain Vantage Towers – whereas today, Vodafone consolidates Vantage indebtedness). Download the Complete Report

 

ì Brazil – Consumer Staples – Following ABEV's strong 3Q & MS LatAm Research Analyst Ricardo Alves’ round of meetings with investors, he updates his numbers and share feedback on Brazil Beer volume strength, Petropolis, LAS, positioning & more. Ricardo raises 2022e EPS by 10% (still 10% below consensus). At 24x 2022e EPS, ABEV looks priced for perfection and he stays UW. Download the Complete Report

 

ìNetherlands – Yandex NV–Following Ozon's Q3 results, MS Research Analyst Luke Holbrook compares the key ecommerce KPIs for Yandex and Ozon. He has been supportive of Yandex's decision to hike ecommerce investment to $650m this year to support market share gains. For now, Ozon has a comfortable lead over Yandex on most metrics. Download the Complete Report

 

ìUS – Corteva Inc – MS Research Analyst Vincent Andrews reiterates his OW rating on Corteva following meetings with new Corteva CEO Chuck Magro and (recently hired) CFO hire Dave Anderson at the annual MS Global Ag & Chems Conference. Vincent increases his PT from $55 to $60 (as he rolls forward to 2023) and increases his Bull Case from $65 to $81 as he contemplates improved volume, pricing and cost dynamics versus his prior Bull Case. Put simply, he sees the arrival of the confluence of Mr. Magro and Mr. Anderson increasing both the size and the probability of the bull case playing out. Net, Vincent sees Corteva attractively positioned at four way intersection of: i) meaningful self-help opportunities on all three financial statements; ii) positive cycle dynamics; iii) “slope of descent” COGS benefits over time; and iv) meaningful return of capital to shareholders. His most important variant perception versus consensus is that the opportunity exists to restore both the historical growing annuity stream of seed price/mix and the seed industry’s historical EBITDA multiple (which in today’s market versus 2014 - i.e., pre-consolidation and ag down cycle - would likely be mid-teens plus). While it is still very early in Mr. Magro's tenure at Corteva (literally days), and he is still in “listening mode”, it appeared to Vincent that some important high-level opportunities are apparent to Mr. Magro already. Vincent additionally marks Corteva as his top pick. Download the Complete Report

 

ì Brazil – Consumer Discretionary –The call was focused on profitability trajectory ahead, with constructive remarks from the management team, in addition to details and next steps on energy transition initiatives. MS LatAm Research Analyst Bruno Montanari remains Overweight as he believes Vibra is poised to keep delivering superior results vs. peers. Download the Complete Report

 

Negative

 

îUS – CrowdStrike Holdings Inc – Signs Of Increased Competitive And Pricing Pressures Share Gains; Initiate at Underweight

Source: Morgan Stanley Research, July 2021 Survey of Chief Security Officers, n=60

MS Research Analyst Hamza Fodderwala initiates coverage of CRWD with an Underweight rating and $247 PT. He notes that CrowdStrike has quickly risen to market leadership with a SaaS-based Endpoint Detection & Response (EDR) platform offering ease of deployment, strong managed services and an AI-driven approach that better adapts to an evolving threat landscape compared to legacy incumbents. However, his checks indicate CrowdStrike's early leadership position is now increasingly challenged by more competitive next-gen EDR alternatives that are narrowing the functionality gap and offering price points typically at least 15-20%+ less expensive. He thinks that this competitive dynamic will make sustaining the current pace of share gains more difficult and drive uncertainty on the pace of topline deceleration through 2022, particularly as WFH-driven tailwinds since last year begin to normalize. Hamza believes that this sets up an unfavorable risk-reward in CRWD trading at ~26X EV/CY23 Sales or 0.73X EV/Sales/Growth, a slight premium to average of high-growth SaaS/security peers that he thinks will see more pressure on rising competitive concerns and relatively lower estimate beats going forward. Download the Complete Report

 

îìUnited Kingdom – Centrica–The global energy crisis has profoundly impacted UK energy markets, forcing 21 suppliers into administration YTD. Incumbent suppliers face mounting near-term losses to cover hedge losses, yet structural reforms look set to level the competitive playing field and restore margins. Remain Overweight. Download the Complete Report

 

îUS – MGE Energy, Inc – MS Research Analyst Stephen Byrd highlights that MGEE has outperformed the utility group by ~5% YTD and on his latest EPS estimates now trades at a 28% premium to peers, among the highest in the industry. Stephen sees a 15% premium for the utility (or blended 13% including quasi-regulated business) as more reflective of the underlying business characteristics. He notes that the rate base and EPS are growing only modestly above peers (and more slowly going forward, after a pop in 2021), and management does not provide the same guidance and business clarity as its peers — factors that are counterbalanced by a top tier balance sheet, above-average regulatory construct, and single jurisdiction that offer elements deserving of a premium. With a slowing growth profile and higher earnings risks than in the past, Stephen downgrades the stock to UW. After refreshing his rate base forecasts following MGEE's latest disclosures and guidance, he is bringing his 2023 EPS estimate down by 2% to $3.46 (from $3.52). With lower utility EPS and a slightly lower peer multiple, Stephen’s PT declines by 3% to $69/share. Download the Complete Report

 

 

 

Nick Savone, Managing Director
Morgan Stanley | Institutional Equity Division
1585 Broadway, 5th Floor | New York, NY 10036
Phone: +1 212 761-0198
Nick.Savone@morganstanley.com

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Weekend Papers Summary 

NEW YORK TIMES

-The Kyle Rittenhouse case has served to highlight the United States’ divisions over guns. As groups debate the effect of Kyle Rittenhouse’s not-guilty verdict, the legislative stalemate over gun control shows no signs of changing. The acquittal of Kyle Rittenhouse points to the wide berth given to defendants who say they acted out of fear.

-Gun purchases in the US are at record levels, and a spike in the firearm-related homicide rate during the pandemic has overwhelmed local police departments. 

-Mark Richards, Kyle Rittenhouse’s lead attorney, left, and Ben Antaramian, a Kenosha Police Department detective, examine the weapon that Kyle Rittenhouse used on the night of Aug. 25, 2020.

-A power struggle over cobalt: The quest for Democratic Republic of Congo’s cobalt, which is vital for electric vehicles, is stuck in a cycle of greed and gamesmanship between the US and China.

-Hunter Biden’s investment firm helped secure one of the world’s richest cobalt deposits in the DR Congo for a Chinese conglomerate.

-Nancy Pelosi’s pivotal role in the social policy bill reached beyond the House and into the Senate, as she cajoled key holdouts, Joe Manchin and Kyrsten Sinema.

Former President Trump is tightening his grip on the Republican party as a haphazard kingmaker, threatening Republican incumbents while endorsing questionable candidates.

-The White House, F.D.A. and C.D.C. made announcements this week that signaled an expansive effort to control the pandemic. 

-While a rise in fentanyl overdose deaths shows the devastating consequences of the opioid’s spread, less is understood about how the drug has proliferated.

-An Indiana city has the most roundabouts in the country. They’ve saved lives and reduced injuries from crashes — and lowered carbon emissions.

-Generations have dreamed of removing the Claiborne Expressway. President Biden’s $1.2 trillion infrastructure bill could eventually make that possible.

-India’s farmers have received foreign and domestic financial support, kept their camps organized and looked for ways to be seen while trying to avoid violence.

Defense Secretary Lloyd Austin faced tough questions about how countries were supposed to deal with a U.S. national security policy that constantly upends itself.

FINANCIAL TIMES

-Joe Biden’s battle to pass a $1.75tn package to enhance the social safety net and combat climate change moves to the thorny terrain of the US Senate, after clearing the House of Representatives.

-With inflation at multi-decade highs in the US, Germany and other advanced economies, the subject has shot to the top of the economic agenda so rapidly that what was a niche concern at the start of 2021 is now at the heart of politics. “For the first time in 30 years,” says Randy Kroszner, deputy dean of the Chicago Booth School of Business and a former Federal Reserve governor, “inflation has become the salient political issue.”

-Morgan Stanley veteran Colm Kelleher will replace Axel Weber and will work alongside CEO Ralph Hamers, who has pledged to speed up digitization.

-Visa hits back at Amazon over claims its fees are too high. The online retailer says it will stop accepting UK-issued Visa credit cards from next year.

-The European Commission presses Poland and Hungary on rule of law

Letters to Warsaw and Budapest are informal step towards a decision on whether to hold back EU funds. 

-European cities protest against fresh restrictions to stem the coronavirus pandemic. Dutch officials defend police opening fire against demonstrators in Rotterdam while tens of thousands gather in Vienna. 

-The big question for the future of AstraZeneca’s vaccine is: who will be buying it? The US has not yet approved it and the EU has a huge order with Pfizer stretching into 2023. Even its home country, the UK, has turned away from the AstraZeneca shot: while it has administered about 50m in total, safety reporting data estimates that in the three months to early November a maximum of 400,000 AstraZeneca shots were given.

-MiamiCoin: There is a long history of city-states producing their own money. But in the past that production came with monetary sovereignty — the ability to control quality and volume. Miami is launching a novel experiment: it is lending its name to a money it doesn’t control. Miami is looking into allowing city employees to take their salaries in bitcoin and Suarez has said he would like it to be able to collect taxes in bitcoin as well. This is all still an economic development plan — trying to encourage the use of crypto.-Carmakers are both struggling to match Tesla on electric vehicle technology and production. For years it had been assumed that the main carmakers that build millions of combustion engine cars a year could rapidly scale up their EV production — as soon as they nailed battery technology and enough consumers showed an interest. But forecasts for six big car groups out to 2024 indicate that Volkswagen is the only legacy carmaker on track to overtake Tesla for EV production. -Carlos Torres Vila, the head of Spanish bank BBVA, explains why his company has made a bet in Turkey agreeing to take full ownership of Turkish bank Garanti.-Big polluting nations have cast doubt on whether they would upgrade their emissions targets next year, after agreeing at the COP26 climate summit in Glasgow to “revisit and strengthen” them in line with the Paris accord. 

NEW YORK POST

-Two lawyers who briefly worked on Rittenhouse’s case — and helped raise $2 million to help get him released from jail as he awaited criminal charges — want their cash back, but the now acquitted teen’s family is fighting the move.

- US Defense Secretary Lloyd Austin vowed Saturday to both block Iran from securing nuclear weapons and counter its “dangerous use” of suicide drones throughout the Mideast.

“The United States remains committed to preventing Iran from gaining a nuclear weapon, and we remain committed to a diplomatic outcome of the nuclear issue,” said Austin during the annual Manama Dialogue in Bahrain.

-In a court case now unfolding in West Palm Beach, Fla., Ira Kleiman, the brother of the late computer-security specialist David Kleiman, maintains that his brother and computer scientist Craig Wright developed the original digital currency, bitcoin, credited to the Nakamoto pseudonym.