Feels like each day we’re headed a little further down the rabbit hole. What started as markets experiencing growth scare related turbulence seems to have now turned into a full on nose-dive as markets now look to be discounting a recession. Manufacturing weakness has been known as are the struggles within industrials, commodities, and materials but this week the other shoe dropped with US Services signaling it may be headed in the same downward direction evidenced by the non-manufacturing ISM falling to a two-year low. In fact, this week was marred with red flags being raised across the globe; European banks earnings have been mostly dismal, growth dependent stocks have drastically lowered outlooks, US construction spending was weak despite the warmest December on record, and Asian PMIs continued to paint a bleak picture, and Chinese consumer income confidence fell to a historically low reading. Furthermore, even the “love my stocks, hate the market” mentality that most investors have clung to through these treacherous markets now seems to slipping as indicated by our PB data which saw this week only the third day in five years that both longs were sold and shorts covered to the magnitude seen on our desk. Amid the broader downturn of commodities, markets, and positioning which have culminated in a type of “Wall Street Recession”, the more pertinent question I believe is whether or not this weakness will manifest itself into a “Main Street Recession”.
The bears have made it clear; there are plenty of signs pointing to recession above and beyond the aforementioned ones. At the micro level for instance, several companies sent unsettling messages; American Electric Power(AEP) & Southern (SO) both reported a significant decline in industrial demand, consumer names Kohl’s (KSS), Decker Outdoors (DECK), Hanesbrands (HBI), & Ralph Lauren (RL) all reported weakness and lowered guidance, and Linkedin (LNKD) and Tableau’s (DATA) lowered guidance’s also drummed up concerns given that weakness in their long-tailed sales contracts may suggest that SMEs are pulling back on spending more broadly. The yield curve has also flattened and given that one of the most consistent and well-followed indicators of oncoming recession happen to be an inverted yield curve, this is another red flag. It last inverted in late 2006 and correctly signaled the oncoming recession in 2008/09. Severalother key market metrics — BBB and high-yield bond spreads, the S&P 500’s Schiller P/E, and equity volatility — are currently at levels typically seen in recessions as well . This week has also seen several unusual dislocations which have caused much consternation. The Wash Rinse Repeat market of Oil, Commodities, Currencies, Credit, and Equities, once again was in a jam as we saw a weaker dollar and lower oil as well as separately seeing markets roll right over despite receiving a dovish message from Fed President Dudley midweek. While the list looks to be mounting, recession is still a debate and by no means a foregone conclusion; our US Economist Ellen Zentner still only gives it a 20% probability. However, in the spirit of reminding investors that any given point in the cycle opportunities still exist, our US Research team has put together a list of stock ideas if a downturn does occur. The list, “Names to Own / Avoid in a Recession”, includes names to own such as Acceleron (XLRN), Amgen (AMGN), Chubb (CB), Danaher (DHR), Kraft Heinz (KHC), McDonalds (MCD), and Verisk (VRSK) as well as names to avoid like American Airlines (AAL), Bloomin’ Brands (BLMN), Coach (COH), GoPro (GPRO), Outfront Media (OUT), Sprint (S), and Time (TIME). Please ask for the report.
Despite all of the doom and gloom being presented, there is potentially a silver lining for markets. For instance, while the headline number came in below expectations at 151k, the NFP report was otherwise quite positive. The unemployment rate fell by a tenth to 4.9%, wage growth expanded by 2.5, and participation was also higher than expected.We also saw signs of easing credit in the mortgage space, auto sales rising 2% in January after pulling back 5% in December, and oil even ended on the right side of the $30 mark , albeit overall being down on the week. Moreover and most importantly, I am firmly focused on earnings as I believe seeing some sort of growth will be key to sustaining and holding up the markets. Admittedly, the bar for earnings is lower so while beats are less impressive, if we can still get to anywhere between $120-125 of EPS implying even a slight level of growth I believe that will help instill confidence for many. One of the brightest signs of growth from earnings this week was surprisingly in the industrials sector. Broadly, 4Q15 EE/MI sales were actually in-line with expectations or better, tonnage growth at industrial-exposed LTLs ArcBest (ARCB) and Old Dominion Freight (ODFL) inflected higher in January, and Hubbell (HUBB), Fastenal (FAST), WW Grainger (GWW), and Emerson (EMR) all pointed to an improvement in January trends. Given that this sector has been one of the most pointed to by bears as evidence of a recession these recent data points should certainly raise the question of whether trends are reversing. Finally, ammunition of Central Banks has been a topic I have frequently debated and with Central Banks sending the message that they are willing to be accommodative and in some cases, “do whatever it takes”, I can’t help but feel that markets are implicitly supported by a policy floor. For those looking for opportunities which are best capable of navigating the challenged environment, a good list to start with is that of companies with high quality franchises including Amazon (AMZN), Apple (AAPL), Gilead Sciences (GILD), Google (GOOGL), Bank of America (BAC), Qualcomm (QCOM), Starbucks (SBUX) and XL Group PLC (XL). Unfortunately, many of these stocks have been beaten lately as investors have been caught off sides with too much risk and been forced to reign in their exposures or book profits. No other area potentially highlights this greater than in tech, where “Nasdaq” exposures comprised over 40% of N. America net exposures. Nevertheless, markets lurched lower and investors cut exposures; by the end of the week our MS New Tech Basket (MSXXNTCH) — which is comprised of 20 different stocks — was down -8% on Friday. Furthering that point was Google (GOOGL) who ended the week down almost 8% despite posting the fastest Google Websites rev growth ex-FX since 4Q11 and at one point becoming the world’s most valuable company. One of the only bright spots to note in tech this week was that I took a dive into the unfamiliar world of Millennials, downloading Venmo and by booking through AirBnB; wish me luck,
Looking at that list, it seems no surprise that many of the perceived highest quality companies are also some of the largest, most well-owned and therefore most recently among the worst punished. Recalling back to 2015, one of the more telling statistics of this group was around the outperformance of the largest names in the S&P500 where the difference between the average return of the top 10 names by weight and the average of all the other 490 names was nearly 20%. So far this year, the mega-cap cohort appears to be continuing to shine as earnings show that the S&P100 has beat earnings by +4.7% and beat by 1.2% on sales while the rest of the S&P 500 beat EPS +2.0% and missed sales by -1.6%. As they say, size matters. Sticking with that concept, 42 companies within the S&P have the same total market capitalization as the next 458 and therefore, regardless of if you believe the S&P will move up or down, either way these 42 names — or 44% of the S&P 500’s market capitalization and 46% of earnings — will have a large part to say in the matter. With that in mind, our US Equity Strategist Adam Parker has done a deep dive into this segment of the market attempting to contextualize what growth rates are in the price, where we think our fundamental analysts appreciably differ from consensus, and offer some quantitative approaches for stock selection. Based on that analysis, Bank of America (BAC), Gilead (GILD), IBM (IBM), JP Morgan (JPM), and Citigroup (C) are likely to generate excess return over Exxon Mobil (XOM), Disney (DIS), Bristol-Myers Squibb (BMY), UnitedHealth (UNH), and Chevron (CVX). Please ask for Adam’s work around the Large Caps.
Energy has been one the biggest sources of pain for markets, whether it be directly or indirectly given it’s far reaching impacts on both a sector and geographical basis. This week both ConocoPhillips (COP) and Exxon Mobil(XOM) sounded the alarm as the former was forced to cut its dividend and the latter suspend its buyback program. However, what has been somewhat reassuring is that prices appear to have settled and while many are still assessing the impacts of prolonged lower prices on other assets, investors also seem to be discussing the scenarios necessary for oil to rebound. Ironically perhaps, while ‘Lower for Longer’ used to refer to the Fed’s rate policy on rates, our Energy Commodity Strategist, Adam Longsonnow suggests it more accurately reflects the price of oil on the back of his forecast revisions where he now expects low oil prices to persist for longer than we previously assumed. The expectation is for oil to finish the year around $30 and remain volatile until 2017. China has been slowing, reducing demand, however oil inventories have been rising, creating an unbalanced supply demand, skewing price to the downside. Given this backdrop, we continue to like names that have solid assets, healthy growth rates and (most importantly) strong balance sheets; Total (FP FP), Eni (ENI IM), BP (BP/ LN), Cimarex (XEC), Noble* (NBL) and EQT (EQT) are top picks while also going short Whiting Petroleum (WLL), Murphy Oil (MUR) and Southwest Energy (SWN) is an attractive way to pair off given these volatile markets. Looking across to Financials which have been heavily scrutinized given the loan book exposure to energy, is too likely early to be positive on energy-exposed US mid-caps BOK Financial (BOKF), Cullen/Frost (CFR) and Zions Banc (ZION), whereas the US large-caps look oversold, specifically for names such as Bank of America (BAC), US Bancorp (USB) and BB&T (BBT). In Europe, these forecasts reinforce our caution on Standard Chartered (STAN) as well as DNB (DNB NO) which this week reported moderately higher oil-related provisions.
In Europe, energy exposure has clearly not been the only issue for banks which intra-week were down nearly 12% before recovering to end the week down around 5%. It is really starting to feel like Q3 again given the dispersion in share price performance around result as SEB (SEBA SS) and ING (INGA NA) both up nearly 10%, against Credit Suisse (CSGN SW) down more than 10% after reporting its first full-year loss since 2008 after booking a big impairment charge at its investment banking business which suggests that challenges facing management may be underestimated. Meanwhile UBS* (UBSN SW), another key restructuring play also disappointed with lower than expected operating performance in Wealth Management and Investment Bank but managed to nearly negate those concerns by reporting that its balance sheet currently sits at a healthy 14.5% CET1 ratio as well as by declaring an ordinary and special dividend equivalent to 5% yield. The need for a strong balance sheet certainly seems to be a theme for European banks and given that the better capitalized banks have already de-rated so much, there looks to be little reason to be bullish the lower quality names such as Deutsche Bank (DBK GY), Commerzbank (CBK GY), Unicredit (UCG IM), Barclays (BARC LN). Potentially the more frustrating and demoralizing region as it pertains to earnings growth, what was a potential glimmer of hope this year has already faded. . In the last four weeks alone, consensus 2016 EPS growth for MSCI Europe has fallen from 6.1% to just 3.8% today. The declines have been largest in commodity sectors, but we have also seen a sharp deterioration broadly too. Earnings declines notwithstanding, the banks sector is still showing a significant amount of dispersion in large cap, liquid names and should be on the radar of anybody seeking opportunities internationally. Fortunately, for those interested the European Financials Conference in London is just over one month away and with over 115 (90+ w/ CEOs & CFOs) of Europe's key financial institution present, it is an excellent forum to better assess the opportunity set. Please ask for more details on the conference if you are interested.
Over in Asia, the week felt relatively quiet (HSI -2.0%) as we await China’s FX reserve number for January (out Sunday). Whether the current dollar weakness is a new trend or not is hard to say, but the pressure on CNY will likely ease if it is. With the FX numbers expected to fall by around $188bn to $3.2tn (exceeding the record $106bn decline in December), there may be some upside given a 1) a very bearish expectation with the range of MoM declines from 120bn (the most bullish) to 200bn (the most bearish) and the fact that 2) China has started reinforcing many of the existing outflow rules this month (which they did not do previously in December). Strategist Jonathan Garner updated his EM/APXJ Industry Framework since its inception in Nov 2015. His industry framework ranks the largest 100 country/industry groups in EM/APXJ equities based on 13 qualitative and quantitative measures, incorporating country models and analysts’ bottom up views. The key upgrade includes Korea Semiconductor and China Utilities to OW and key downgrades includes ASEAN consumer services, HK Div Financials to UW, ASEAN Banks to UW, Taiwan Insurance and India Banks to EW. Notable large-cap stocks within OW industries include KEPCO (015760 KS), Sun Hung Kai Properties (16 HK), Ping An Insurance (2318 HK),SK Hynix (000660 KS), TSMC (2330 TT), Guangdong Investment (270 HK) and Infosys (INFO IN) . Bellwether AIA (1299 HK) was down 9% intraday Wednesday post news that Union Pay International is capping debit and credit cards at $5,000. However, concerns on the negative read through for AIA are overblown as overseas purchases have always been subject to a $5,000 cap…now they are just going to enforce this limit. Earnings this week were relatively quiet but I would highlight Amorepacific* (002790 KS) and Lenovo* (922 HK). Amorepacific* (002790 KS), which despite missing consensus 4Q numbers on extrapolated positive read through from LG H&H’s strong growth in duty free, showed strong growth momentum across all geographies/channels (+38% YoY OP growth). Despite a 3Q beat Lenovo was down 10% on concerns that ongoing cost cutting measures will erode competiveness; cost cutting is simply not a durable long-term strategy. Market Internet Analyst Rob Lin remain bullish on Baidu (BIDU US) ahead of the upcoming print and expects in-line 4Q15 results driven by 32% YoY revenue growth. Given the onslaught of negative earnings revisions and falling ROEs, some of the stocks that offer stable return and growth but are trading cheap relative to their historic valuations include: E.Sun Financial (2884 TW), Hollysys (HOLI US), Weibo Corp ( WB US), and AviChina (2357 HK). In a market where it seems that nothing can be said with conviction, the one thing I feel wholeheartedly confident about saying is that the Chinese markets won’t go down next week. Unfortunately, it will be because they are closed for the New Year.
Japan is often called the Land of the Rising Sun, but given the Nikkei is now back below 17,000 and the Yen is resisting any depreciation, the impact of negative rates in the absence of growth will likely be negligible as Japan increasingly is looking anything but Sunny or Rising. This week (Topix -4.4%) marked JPY’s largest weekly advance against USD since 2009. FX Strategist Hans Redeker notes that the negative rate is unlikely to drive much more diversification out of Japan given the current risk backdrop and the advanced stage of diversification from Japan’s pension funds. It is starting to feel like QE3 should have a different meaning - Quickly Eroding 3: Market Sentiment, Yen Weakness, and Investor Confidence in Central Banks. Given a continued thirst for yield, our derivatives team introduced a new liquidity-weighted, 80-member basket (MSJNJPYD Index) targeting high dividend, high ROE names. I’d highlight meaningful Real Estate & JREIT exposure here makes it a more liquid alternative to the TSE REIT index (also less liquid). Also, the basket excludes banks but does include Dai-ichi Life (8750 JP). Real Estate Analyst Omuro-san also did a deep dive into JREITs and reiterated his Attractive sector view on account of stocks looking undervalued as yield products, shareholder returns are high, and the limited impact of negative rates on the sector. JREITs now rank ahead of developers and housing stocks. His top picks are: Japan Excellent (8987 JP), Japan Hotel REIT (8985 JP), and Japan Real Estate (8952 JP). This quarter will likely mark the 13th straight quarter of earnings beats in Japan, but comes on the back of downwardly revised consensus estimates (vs. prior quarters of beats on upwardly revised consensus estimates). Unlike in the US, on an absolute basis earnings in Japan are still showing YoY growth. At a third of the way through Topix earnings (by market cap), operating income (ex-fins) have beaten consensus by 2.7%. The biggest beats have come from Real Estate, Textiles & Apparels, Shippers, Services & Chemicals, whereas Metals, Airlines and Electric Appliances have missed. Notably, Sharp (6753 JP) was up (17%) after announcing it is considering a deal with either of INCJ or Hon Hai* (2317 TT). Some major beats on earnings this week include: Terumo (4543 JP), Nikon (7731 JP) and Yamada Denki (9831 JP). The negatives include: Mitsumi Electric (6767 JP) and Net One Systems (7518 JP). A few more name to highlight that look cheap and show stable return and growth: Bridgestone (5108 JP), Mazda Motor (7261 JP), and Mitsubishi Heavy (7011 JP).
In what has become one of our strongest idea-rich reports, our Alpha Team updated their Call Categories report this week, which classifies each stock by the nature of its investment story in an attempt to position key forward looking stock calls by Morgan Stanley Research over the last month. For January, the team highlights several names within Self-Help: Estee Lauder (EL), General Electric (GE) and Children’s Place Inc (PLCE) where the company's systems implementations, store fleet optimization, and expansion into wholesale and international franchising are all providing support to operating income while the children's apparel environment remains highly promotional. On the secular growth front, O’Reilly Auto (ORLY) will benefit from a number of secular drivers – a growing and aging auto fleet, healthy underlying parts demand, market share gains, expanding gross margins, and minimal e-commerce pressure. On the short side, the team sees several stocks as likely to de-rate in the near term, including Telesites SAB (SITESL MM) which LatAm TMT’s Michel Morin sees as overextended given that it currently trades at a 2016e EV/EBITDA of ~20x, above global tower peers at 13-18x and at a material premium to Mexican infrastructure stocks at 11-13x. The report goes on to also highlight HCA Holdings (HCA), Symantec (SYMC), Ameriprise Financial (AMP), Newell Rubbermaid (NWL), Teva Pharmaceuticals (TEVA) and Microsoft (MSFT) on the positive side and Whiting Petroleum (WLL), Nordstrom (JWN) and VF Corp (VFC) on the negative side. Please ask for the full report.
Focus on single names was also on display in our bi-weekly “Global Sales Idea” meeting which included ServiceMaster Global Holdings (SERV US), Estee Lauder Companies (EL US) and Recruit Holdings (6098 JP) pitched as longs and EuropCar Group (EUCAR FP) pitched as a short. ServiceMaster Global Holdings (SERV US), a leading provider of essential residential services, has, in its seven years as a private company, made significant improvements to its operations. Denny Galindo, therefore, likes the cash-flow prospects and sees upside to his $48 12-month price target. Estee Lauder Companies (EL US) is likely to see topline growth acceleration driven by its non-heritage brands, while heritage brands are going through a turnaround period. Favorable channel- and brand mix, as well as greater pricing power make Dara Mohsenian believe that EL should continue to grow faster than its CPG peers, with in-line valuations to the group. Last up on the long side, Recruit Holdings’ (6098 JP) momentum remains positive in existing businesses and mgmt has a healthy appetite towards business investment. The key themes for Recruit are the pursuit of investments and profit growth over the next year. This stock has already proven resilient in a tricky market environment, and Testuro Tsusaka-san opines that the outperformance is likely to continue. Lastly, from a short angle EuropCar Group (EUCAR FP) is very attractive given that OEM funding costs are on the rise and used car prices are rolling over. Anne Grube sees that both factors represent earnings risk for Europcar, which could follow the path already laid out by CAR and HTZ here in the US, as they have significantly de-rated.
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,
Nick
*Included in my 2016 Global Ideas Deck. Please ask for the presentation.
TRENDS & INFLECTION POINTS
Positive
ìUS – Housing – James Egan, US Housing Strategist, is assessing the health of the housing market. Amid concern related to the US economy, housing has been an area of stability. Even though elements of one recent survey suggest that the rate of household formations is slowing, he thinks it is mostly a blip in the data. He continues to remain constructive that the rate of household formations remains above long-term average levels, particularly given demographic factors and improving signs around lending reflected in the Fed’s Senior Loan Officer Opinion Survey. Housing prices are also improving, partly driven by tight supply – which is driving housing starts. Total housing starts finished the year at 1,111k – the highest level we’ve seen since 2007 and multifamily starts now at their highest levels since 1987.
ì Europe – Economics & Strategy – With weaker oil prices, the EU referendum and a more dovish governor, MS Chief UK Economist Jacob Nell and team expect a wait-and-see stance from the MPC. They expected an unchanged 8-1 vote to stay on hold and a shift to a more dovish near-term stance, driven by three recent developments. First, the sharp fall in oil prices weighs on near-term inflation, which they believe will not rise above 1% until September. Second, they now expect the EU referendum in the summer rather than the autumn, bringing forward the related uncertainty, which they expect will slow growth and keep the MPC on hold. And finally, there has been a clear dovish turn in the governor’s stance: he said unequivocally, "now is not yet the time to raise interest rates”. They expect GBP to have a volatile Thursday, given the market's aggressive pricing for low rates for longer. Their focus will be on the MPC's assessment of risks from the global economy and higher market volatility. They remain sellers of GBP/USD on rebounds as they expect reduced flows into UK assets this year. Front-end GBP rates currently price in around a 30% probability of a rate cut from the MPC over the next 12 months. This is difficult to justify, given MPC communication to date. They suspect that the current pricing is driven more by broader expectations that DM central banks will have to ease more, so the pricing for the MPC may remain rich for some time, regardless of domestic fundamentals. The EU referendum also poses a downside risk which could justify the current premium, although they do not believe it is the reason the market has rallied.
ì China – Macau – With a shift in sentiment, Gaming Research analyst Praveen Choudhary has turned more positive in his 2016 outlook, and upgraded his view on Macau from cautious to inline. His top picks are Galaxy (27 HK) and Melco Crown (MPEL US). They upgraded the industry based on; 1) After several negative GGR revisions, GGR growth expectations have largely remained stable since July 2015. EBITDA margin has largely remained stable since 1Q15 despite weaker GGR; 2) Mass revenue decline has narrowed to single digit in December; 3) Valuation has become much more reasonable.
ì US – Airlines – Rajeev Lalwani, US Airlines Analyst, is looking at how airlines would perform in a recession and thinks the risk reward of his group has improved considerably post the YTD sell-off. In his recession scenario, he found that the group would hold its own as potential earnings declines would be about one-half the 100%+ reductions seen in 2009. Among the carriers, based on his scenario analysis, earnings would likely be down least for ultra-low-cost carriers, then low cost / leisure airlines, followed by the legacies. Within the groups, Allegiant (ALGT), Alaska (ALK), and Delta (DAL) rank well and American (AAL), Hawaiian (HA), and United (UAL) less so
ìEurope – Autos & Auto Parts – îAuto supplier organic growth is seen as a structural story, but MS EU Auto Parts analyst Victoria Greer and team find that industry mix improvements, driven by cheap credit, have been a major cyclical support. Supplier organic growth has been well ahead of auto volume growth for the past six years, supported by structural trends (reducing emissions, move to autonomous driving). Over the same period, they estimate that the falling cost of debt has been a c.300bps annual tailwind to price/mix in the US auto market, and almost 600bps for the European OEMs' global businesses (excluding China local production). This has been a major cyclical support to auto suppliers: it implies underlying market growth well ahead of production; and supplier content is typically much higher on premium cars. Any deterioration in the cost of credit, credit availability or used car prices could reverse this benefit – the YoY cost of credit for European OEMs is now rising. Credit is the key risk to their FY16outlook, with suppliers' PE premium vs. the OEMs and US peers at all-time highs. Move Valeo to UW.
ì Japan – J-REIT – Tomoyoshi Omuro-san, Japan Real Estate Analyst notes that Amid an uncertain external environment, he expects J-REITs to be re-rated. Stocks look undervalued as yield products, shareholder returns are high (payout ratio approaching 100%), property market are improving, and BoJ purchasing is supportive. He believes the impact from BoJ's introduction of negative rates will be limited. He reiterates his attractive industry view and sets his industry preference as J-REIT, real estate, and housing (formerly real estate, J-REITs and housing). Although real estate stocks have a higher valuation upside, with the external environment remaining unsettled, he believes J-REITs are a more obvious option as a yield product due to the high beta of real estate stocks. (2) He has revised price targets in keeping with changes in his earnings forecasts.
ìUS – Banks – Ken Zerbe and Betsy Graseck, US Mid-Cap and Large-Cap Banks Analysts respectively, have compiled a summary of individual bank exposure to energy lending. They look at the size of energy exposure, the amount of reserves, and percentage of tangible book among others. In the midcap space, Ken tends to favor banks that have no energy exposure and that can grow loans faster than peers given niche business models while maintaining better-than-peer credit quality — specifically BKU, FRC, SBNY, and SIVB, all rated Overweight. In large caps, Betsy likes BAC and RF.
ì Europe – UK Food Retail – According to figures published by real estate consultancy firm Barbour ABI over the weekend, Lidl has stepped up its UK expansion plan by issuing almost three times as many planning applications as Aldi for new supermarkets in 4Q15. Lidl filed 48 applications, worth ~£150m in construction costs alone, during the three months to the end of 2015. Aldi filed 17, by comparison, during the same period. For the whole of 2015, Lidl filed a total of 104 applications. Aldi filed 101. As a result, Lidl has posted a material acceleration in its total sales and sales density growth in recent quarters: in 4Q15, Lidl sales increased by +20% y-o-y (vs. +16% for Aldi and -0.3% for the industry in total) as per Kantar data. In1Q15, Lidl sales had been up 'only' +12% y-o-y as a comparison (vs. +20% for Aldi and +1.0% for the industry in total). MS EU Food Retailer Analyst Edouard Aubin and team estimate that in 4Q15, Lidl posted a LFL sales increase of approx. +10% in the UK, adjusting the Kantar data for the company's store expansion program. This compares to ~0% for Tesco, 0.4% for Sainsbury (15 weeks to 9 January, as reported in its Q3 IMS) and+0.2% for Morrisons (9 weeks to 3rd January). With total European sales reaching ~€80bn in 2015, Lidl is now the largest grocer in Europe, ahead of Carrefour, Tesco and Aldi, by a wide margin.
ì Australia – Engineering & Construction – Nicholas Robison, Australia Engineering, Chemicals, and Packaging Analyst thinks macro E&C conditions remain weak, however the steps required to form a bottom are converging. After three years of almost solely negative signposts the first evidence of incremental market rebalancing is emerging with: 1) administrations and M&A removing capacity; 2) proactive balance sheet repair (reducing incentives to act irrationally); and 3) a broader range of work coming to the market (other than mining / oil & gas construction). With differentiation now appropriate he makes his first upgrades in ~3 years – DOW to OW, UGL to EW. AMC and ORA have scope to use capital to supplement growth in more challenged markets. Both stocks are expected to highlight this lever at 1H16 – ORA through bolt-on M&A and AMC by way of an additional buy back. He continues to see the upside that could emanate from this capital allocation as greater for ORA with consensus still unrealistically, in his view, expecting ORA to deleverage. With his FY16-18e EPS estimates 2-10% ahead of the Street – ORA is his top pick.
Negative
î US – Media – Ben Swinburne, US Cable & Satellite Analyst, believes the escalation of sports rights will continue and is emerging as a major long-term risk to networks. Looking forward, given the risk of (1) accelerating cord-shaving and (2) secular (shift to digital) and cyclical (waiting for next recession) pressures to TV ad spending, fixed sports obligations inside of major media companies create greater downside earnings risk than exposure to non-sports programming. For example, in 2016/17 both Disney and Time Warner will see the NBA rights fee step-ups negatively impact their margins. He would view CBS losing its contract for Thursday Night Football as a positive but reiterates his Overweight rating given CBS’ advertising outlook. Meanwhile, he is below consensus on the cable segment at Disney and think upcoming F1Q results will likely pressure the premium multiple. The negative skew toward sports rights, reinforces his Cautious industry view.
î Europe – Oil & Gas – In 2015, oil companies took Final Investment Decisions for just six projects. This year, the number is likely to be even lower. This included Johan Svedrup (Statoil, Norway), Maria (Wintershall, Norway), West Nile Delta (BP, Egypt), Appomattox (Shell, Gulf of Mexico), Culzean (Maersk, UK) and Go FLNG (Perenco, Cameroon). Combined, these six projects present a capex commitment of ~$58bn, a fraction of what the industry typically did in previous years. As a result of delays over the last two years, there is now a sizeable 'inventory' of upstream projects that could be undertaken if and when market conditions make them sufficiently attractive. Outside US shale, they count 232 projects in pre-FID stage. If all were undertaken, the total investment required would be ~$1.0tn. Funding those investments provides a further constraint that they cannot screen for at the project level. That will need to be resolved at the corporate level, and partly depends on which projects companies want deprioritize. However, with oil prices in line with the forward curve – $32-37/bbl in 2016 – and some spending commitments for maintenance and FIDs from prior years, capex budgets are under even greater pressure than in 2015. Also, with industry cost coming down rapidly now, operators have an incentive to wait, which has the added side-effect that it leads to even greater supply chain weakness and further cost deflation. Therefore, it is likely that not all nine will go ahead.
î China – Energy & Chemicals – Andy Meng, China Energy & Materials Analyst believes the profit warnings from PetroChina and COSL imply more downside risk to upstream earnings in 2016. Andy Meng believes that the poor 4Q15 results highlight the earnings risk in 2016 and that upstream earnings will continue to miss consensus materially. PetroChina profit warning expects 2015 net profit to decline 60-70% YoY from Rmb107bn in 2014, this implies 2015 net profit of Rmb32-43bn and 4Q15 net profit of Rmb1-12bn. Andy believes the wide range of 4Q15 results mainly reflects the uncertainty of book value revaluation gain. Assuming the high-end earnings are reported in 4Q15, the 2015 full-year results would be 7% below his estimate and 12% below consensus. In 2016, Andy’s earnings estimates are 87% below consensus. COSL also reported profit warning with 2015 net profit expects to decline 85% YoY from Rmb7.5bn in 2014 and implies 2015 net profit of Rmb1.1bn and 4Q15 net loss of Rmb125mn. If so, COSL 2015 full-year results would be 26% below Andy’s estimate and 51% below consensus. For 2016, Andy’s earnings estimates are 77% below consensus.
î EEMEA – SA Retailers – Competition is rising, the SA economy is deteriorating – what does this likely mean for apparel growth? Michelle Olivier’s (our SA retail analyst) proprietary analysis suggests ~9% 2015-18 CAGR – hardly enticing. Yet could different return requirements allow new entrants to take market share? Even though she lowered her earnings estimates for Mr Price, it still has the largest earnings downside risks followed by Truworths (7%-9%), should real disposable income growth slow to +0.7%, combined with a 100bps rate increase and low consumer confidence levels (-8) in 2016. Foschini (OW) and Woolworths (OW) top picks.
î LatAm – Brazil Banks – Jorge Kuri (our LatAm banks analyst) took a detailed look at how the banks' new guidance compares with consensus estimates. He thinks Itaú's new guidance better reflects the ongoing challenges on revenues and provisions than is the case at Bradesco. Itaú's net income using the mid-point of the guidance range is around R$19.6bn (13% below current consensus of R$22.7bn); while Bradesco's net income at the mid-point of the guidance range is R$18.9bn, 11% above current consensus of R$16.9bn. He reiterates his bearish view on Brazilian banks and believes another leg of underperformance is ahead.
î US – Oil – Adam Longson, US Energy Commodity Strategist, is lowering his oil price forecasts and Andrew Sheets, Chief Cross Asset Strategist, is looking at the implications of a lower for longer oil environment across asset classes. On Oil, Adam’s revised forecast is below. He expects 4 factors to delay rebalancing and keep prices subdued for longer than previously forecast: 1) Weaker than expected demand; 2) Higher than expected supply; 3) Rising inventories; and 4) Increased hedging incentives. Over the longer term (2018+), Adam writes that materially higher prices will be needed to keep the market in balance. See below for his updated Brent price forecasts
î Europe – Leisure & Hotels – MS EU Leisure & Hotels Analyst Jamie Rollo and team’s monthly travel agents survey shows the "wave" season made a solid start, but that this faded after the stock market weakness, Istanbul attacks, and Zika. Their webscraping survey suggests cruise pricing has weakened as well. China remains a fundamental concern for us. They trim their RCL PT to $99. Agents cited particularly strong demand for the Caribbean and Alaska, boosted by the strong economy, USD, new ships, new advertising campaigns, and refreshed product. Promotions are high, but continue to be amenity- rather than price-led, with RCL recently tightening its price integrity policy. However, demand seems to have slowed in recent weeks after the Istanbul terrorist attacks, weak stock market, Presidential election distraction, and Zika virus. Cruise lines are not panicking but some agents indicate perks are rising and rates falling slightly. Agents say Royal Caribbean's product continues to resonate more than Carnival's with consumers. Quantitative webscraping of cruise prices shows prices weakening recently. YoY average 2016 price increases have weakened for most lines since their last webscraping one month ago, including Carnival (+10% to +5%),Royal Caribbean (+15% to +13%), Celebrity (0% to -4%), Princess (2% to -2%),Costa (+6% to -1%) and P&O (+3% to -6%). The bigger hit at the premium lines and European lines reflects their larger exposure to more exotic deployments and destinations that are perceived to be riskier. Contemporary lines are still enjoying price increases taken in Q4, but some of these seem to be reversing too. They caution about reading too much into webscraping given calendar / channel shifts, but this data is concerning.
î India – Economics – Chetan Ahya, Chief Asia Economist report that the RBI kept key rates unchanged, in line with expectations. With the RBI on pause, the repo rate remains at 6.75%.The reverse repo rate and marginal standing facility rate remain at 5.75% and 7.75%, respectively. The cash reserve ratio (CRR) remains unchanged at 4%. In its policy statement, the RBI highlighted that it expects inflation to decelerate to 5% by end-F2017 and will be closely tracking actual inflation data to assess moderation in inflation trajectory. In particular the statement highlights: "The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Chetan expects another 25-50bps of rate cuts and holds to his view that inflation will be sustainably lower at 4.75% YoY in QE Mar-17, with risks to the downside. Drivers of inflation remain benign (rural/urban wages, fiscal deficit, global commodity prices) and supportive of a deceleration in inflation outlook.
î US – OTAs – Brian Nowak, US Internet Analyst, is reiterating his caution on the OTAs in 2016 due to slowing room night growth and continued deteriorating room night economics. Meanwhile, PCLN's cost of bookings is rising at record levels – PCLN's ratio of bookings growth to ad spend growth is set to fall 16% in 2015. Given these trends, he is lowering his expected forward margins. He is also modestly reducing his forward room night growth and take rates (due to macro uncertainty in Europe and increased competitive pressure). Both EXPE and PCLN have sold-off recently but Brian stays on the sidelines until he sees a source of upward revisions
î Europe – Retailing – EU Retail Analyst Geoff Ruddell and team think trading conditions in 2016 will be less benign than in either2014 or 2015. Although they do not anticipate the operating environment being especially challenging, they think consensus forecasts are significantly too high. Despite recent weakness, they retain their 'Cautious' stance. Whilst the retailers have struggled to capitalize on it, they think the operating environment has been unusually supportive over the last couple of years. In the coming year, however, they expect weaker demand growth, more opex inflation and greater FX pressures on sourcing costs. They don’t expect 2016 to be especially difficult, but they do think it will be more challenging than 2014 or 2015. Although the sector has fallen 10%since the beginning of November (twice as much as the wider UK market) they believe that many of the retailers are still significantly over-valued. They continue to see 20%+ downside in ASOS, Halfords, Pets at Home, Dunelm and Dixons Carphone, all of which they continue to rate at Underweight.
î China – Consumer Discretionary – Robby Gu, China Discretionary Analyst sees limited improvement in 2016 as he expects air conditioning channel destocking will last for two summers instead of consensus expectation of only one. He continues to rate Midea as his top pick. He does not expect demand to recovery strongly this year, due to flat new property sales growth and low probability of replacement demand surprising on the upside. Therefore, his revenue forecasts for Midea and Gree are 6-13% below consensus in 2016-17. But inventory risk is still manageable. Despite slower industry growth, he believes strong players will benefit from supplier consolidation, product mix upgrade, efficiency improvement and favorable raw material cost trend. He believes Midea to widen its lead over peers in the next three years, driven by its leading e-commerce strategy (online sales accounts for 12% of revenue), efficiency gains from expansion of Annto logistic network, and exposure to small appliance segment. Its collaborative innovation with tech giants bodes well for its future in the smart home business, and recent ventures with Yaskawa and investment in Kuka also lay the foundation for its development in robotics. The stock is attractively valued at 8.3x 2016 P/E or 5.2x ex-cash, vs. 13% recurring EPS CAGR in 2014-17.
î EEMEA – Russian Retailers – Falling oil, a weaker RUB and incremental additional trade restrictions (Turkey) will inevitably lead to higher inflation at a time when the consumer surely cannot bear it, and retailers are struggling to pass it through. Nick Ashworth (our EEMEA consumer analyst) has seen top line slowdowns in 2H for most, but he believes this will likely continue in 1H16 given the very tough comp base, following a strong start to 2015 before consumer behaviour changed. This should mean EBITDA margin contraction for most. The current macro woes could lead to consolidation in the market over the next 1-2 years.
CHARTS
US Equity L/S Gross & Net Leverage Exposure
As of yesterday, Gross exposure is currently at 150%. We haven’t seen de-grossing recently because funds have sold longs, however, they have also added shorts and hedges. If market continues to have big swings on the downside, it’s more likely that funds will begin to degross. On the flipside, 1-day nets have come down to 45% as of yesterday which is near multi-year lows.
The Correlation of Returns within the Mega Capitalization Cohort is High versus History
Chief US Equity Strategist Adam Parker highlights that the correlation within mega-cap stocks has risen from markedly lower levels in July 2014 and is high today relative to history. This increased correlation is due in part to macro forces, such as slowing growth in China, continuing weakness in crude oil, constant questions about the Fed path, dollar strength, and other factors.
P&C Pricing Pressures
P&C Insurance Analyst Kai Pain is out with his detailed 2016 Property & Casualty Insurance Primer. Inside, he gives a) an industry overview, b) key investment considerations, c) company specific details and theses, d) emerging trends, and e) insight to performance around catastrophes
Domestic Loan Demand & Standards
US Large Cap Banks analyst Betsy Graseck notes in her Fed Sr. Loan Offer Survey note that many (30% of large bank respondents) expect to tighten standards this year in the corporate book as uncertainty in the energy sector and possible knock-on impacts to industrial economy weigh on credit officers. 25% of respondents expect to raise interest rates charged on C&I loans. Banks also expect an increase in delinquencies and charge-offs for all categories of commercial loans in 2016, which is in-line with MSe, given historically low levels and expected credit deterioration in the energy portfolios. Partial offset is from mortgage, where banks expect to ease standards for GSE-eligible and nonconforming jumbo mortgage loans, and interest rates to rise (alongside spreads). She expects average y/y loan growth to increase from 4.9% in 2015 to 5.5% in 2016.
US Economics – Potential GDP
Our Chief US Economist Ellen Zentner pegs US potential GDP growth at 1.5%Y. This estimate takes into account her sobering view of the economy's supply side dynamics that assumes only a gradual climb in productivity to around 1%Y and very slow growth in the labor force of around 0.5%Y.
The Only Way Is Down (with Apologies to Lovers of 1980s Music Hits)
For those too young to know or too old to remember, The Only Way Is Up was not just an 80s pop music hit
by Yazz and the Plastic Population, but also a big in central bank policy making circles. Relive it on Youtube or here!
Source: Morgan Stanley Research
A dreadful January of deteriorating markets and rising recession fears went out with a bang for central bank watchers when the BoJ unexpectedly announced that it was lowering its deposit rate into negative territory for most of the new excess reserves created in the banking system in future. With this step, the BoJ aims to lower money market rates (and through them also bond yields) while limiting the burden on the banking system and depositors more broadly. For some observers, this unexpectedly bold action marks a regime shift: Others see it as less of a change than the previous bold step in late 2014 and if anything are concerned about hints that the BoJ is starting to run out of assets to buy. In his speech today, Governor Kuroda stressed that further rate reductions are possible and that “there are no limits” to the BoJ’s easing campaign. But after four European central banks, including the ECB, have taken similar steps over the previous two years, central bank watchers seem to have become a bit blasé about the fact that you would now need to pay for the privilege of depositing your excess cash somewhere. That said, there is a key difference between the two policy tools central banks employ at the current juncture, i.e., asset purchases and negative rates. In the view of Elga Bartsch and Chetan Ahya, MS Global Co-Heads of Economics, negative interest rates tend to have stronger ramifications on the exchange rate. While this is very much a local issue for small, open economies, it could potentially become a global issue for larger economies. Download the Complete Report (1) Download the Complete Report (2) Download the Complete Report (3)
So where will 2015 EPS end up? (EM has been downgraded 40% + over last 12 mths) – 2015FY Consensus EPS by Region
This is likely Japan's 13th straight quarter of earnings beat but on back of downwardly revised consensus estimates - Full year F3/16 company guidance for earnings are down as well. F3/16 full year consensus earnings are down by 4% since the end of last earnings season (mid November, 2015). In addition, F3/16 full-year guidance by companies has been revised down as well for net income by 2.0% since end of last earnings season. Guidance for operating income and revenues (both ex financials) have been revised slightly down, by 0.2%. Download the Complete Report
Japan and US Best Estimates Whilst EM and APxJ Missed Thus Far for Oct-Dec Quarter 2015
Globally, Japan and S&P 500 have thus far beat consensus earnings this quarter while APxJ and EM have missed. S&P 500 earnings in aggregate have beat consensus estimates by 4.4%, with 56% mcap reported. In contrast, APxJ and EM, with only 19% and 23% mcap reported thus far, have missed consensus earnings by 5.8% and 6.2%, respectively. Download the Complete Report
European Momentum Continues to Roll Over
Source: MS Baskets Team and Alpha Team
After a 4% move in the Long/Short momentum basket yesterday, it is down another 1% today. The maximum duration of a momentum sell off since 1988 is 7 months, with an average of 1.9 months (3.6 for the worst 10).
Positioning in Japan – Impact on Banks
Japan positioning seems unlikely to hurt the banks given their ‘risk-on’ status going forward given that the long/short ratio is currently 1.26 which is extremely risk-off versus a high at 1.7x last July. It has only been lower in September 2011 through Nov 2012. Anecdotally, Long only accounts think sell-off is fundamentally overdone, and L/S accounts currently do not have appetite to buy banks given macro concerns regarding East Asia/China growth.
JREITS are coming into the spotlight for the first time since 2007
Real Estate Analyst, Omuro-san notes that amid an uncertain external environment, he expects J-REITs to be re-rated. Stocks look undervalued as yield products, shareholder returns are high (payout ratio approaching 100%), property market are improving, and BoJ purchasing is supportive. He believes the impact from BoJ's introduction of negative rates will be limited. (1) He reiterates his Attractive industry view and set his industry preference as J-REIT, real estate, and housing (formerly real estate, J-REITs and housing). Although real estate stocks have a higher valuation upside, with the external environment remaining unsettled, he believes J-REITs are a more obvious option as a yield product due to the high beta of real estate stocks. (2) He has revised price targets in keeping with changes in his earnings forecasts. Download the Complete Report
EM Flows (14 Straight Weeks): US$0.67bn In Outflows This Week
Dedicated EM equity funds (GEMs + EM Asia + EMEA and LatAm regional funds) reported outflows of US$0.67 bn for the week ended February 3, 2016. Excluding China A share equity fund flows, this week's outflows from EM funds amounted to US$1.1 bn. This marked the 14th consecutive week of outflows for dedicated EM equity funds. EM Asia regional funds reported largest outflows of US$0.52 bn, followed by GEM regional funds with outflows of US$0.16 bn. Outflows in LATAM funds were negligible. Meanwhile, EMEA regional funds reported inflows of US$0.01 bn this week. Dedicated EM ETF funds reported outflows of US$0.25 bn, while non-ETF/active funds reported outflows of US$0.42 bn in the current week. Dedicated EM non-ETF/active funds have continued to report outflows since May 2015. Download the Compete Report
Colombia’s Current Account Vulnerability – 7% GDP
Something’s got to give to rebalance Colombia’s economy and Luis Arcentales & Arthur Carvalho (our LatAm economics team) suspect that economic growth is the weakest link. As Colombia’s economy adjusts to lower oil prices, three major challenges have emerged: a widening current account deficit, a rising and persistent inflation, and a deterioration of the fiscal accounts. Luis & Arthur think the policy response to the three challenges should be twofold: further interest rates hikes should help curb inflation and improve the current account, while cutting government spending may be the only possible way to reach the authorities’ fiscal objectives. Download the Complete Report
RESEARCH
Positive
ì US – Ally Financial – Cheryl Pate, US Consumer & Specialty Finance Analyst, sees ALLY as the best execution story in her coverage, delivering 1) healthy credit performance, 2) prudent loan growth, while growing share and 3) capital return. She is reducing her price target marginally from $28 to $27, yet still sees >60% upside. Increased volumes in growth channels have come with only modest mix shift, and importantly, a corresponding increase in yields. In fact, consumer auto risk adjusted margins (NIM - NCO) improved 18bps in 2015, even with a 8bp increase in auto NCOs. Despite the positive fundamentals, Cheryl believes the stock is currently pricing in a recession, with significant credit deterioration and used car pricing pressures. Upcoming catalysts for ALLY are: 1) next week's investor day and 2) the institution of buybacks and a dividend through 2016 CCAR. Download the Complete Report
ì Europe – Amundi – MS EU Diversified Financials analyst Anil Sharma and team believe the share price will rise relative to the industry over the next 30days.This is because the stock has traded off recently, making short term valuation much more compelling. Adjusting earnings for surplus capital, Amundi trades on sub 11x calendar 2016 P/E (crediting ~1/2 the €1.3bn surplus only), which is the lowest in the EU traditional AM sector (avg. ~13-14x). Into results on 12Feb, they view the discount vs. peers as too wide and see scope to narrow given:(i) potential for flow beat vs. consensus with recent Q415 data suggesting Amundi inflows ahead of Q3; (ii) no Brexit risk; (iii) limited exposure to the UK's FCA competition review and; (iv) mark to market impact likely less severe vs. Peers given large fixed income skew (~70% of AUM) where YTD moves have been less severe than equities. They estimate that there is about a 70% to 80% (or "very likely") probability forth scenario. Estimated probabilities are illustrative and assigned subjectively based on their assessment of the likelihood of the scenario. Download the Complete Report
ì India – Hindustan Unilever – Nillai Shah, India Consumer Analyst upgrade Hindustan from EQ to OW. Contrary to popular perception, he expects stable volume trends for most categories for 2016 with broadly similar growth trends in both urban and rural areas. HUL is emerging as a clear winner based on the results of this survey. The strategy of multiple brands at multiple price points is working well across categories. There is a marked shift in the consumer perception of HUL brands in this survey vs. his earlier survey results (published on February 2, 2014). This includes brands like Wheel (vs. his previous survey, which favored Ghari), Lifebuoy (vs. his previous survey, which favored Dettol), and Surf. Over the next 12 months, his survey results suggest a marked improvement in performance for HUL’s brands across categories and especially some mass-market brands in rural areas. Download the Complete Report
ì EEMEA –Turkish Airlines – Rising security issues and competition risk have driven Turkish Airlines down ~20%, vs a market down only ~10%. Muneeba Kayani (EEMEA Industrial analyst) views these concerns as overdone regarding the impact of lower tourist arrivals on traffic. It was transfer traffic that drove Turkish Airlines' passenger growth in 2014-15, when direct travel remained flat, so Muneeba expects traffic to grow despite security concerns in Turkey. In addition, Muneeba’s fare checks reveal Turkish Airlines' fares are competitive, and higher margins can be maintained because fuel is a larger component of its total costs than for peers, it has competitive ex-fuel unit costs, competition (in particular from Gulf carriers) is not new, and she expects lower currency headwinds. At 6.4x FY16e EV/EBITDA, Turkish Airlines trades at a premium to network peers at 4.7x but this is supported by its higher growth (15% 2015-17e EBITDA growth vs 8% for peers). Her 2016-17e EPS increases by 28% due to 7% higher EBITDA and lower fleet capex estimates. Download the Compete Report
ì US – H&R Block – Thomas Allen, US Gaming and Leisure Analyst, is reiterating his Overweight rating on H&R Block. He likes HRB’s defensive characteristics, sizeable capital return opportunity and ACA tailwinds in the event of a recession. Following its bank sale, the company has guided to $3.5B of buybacks over the next 3.5 years and Thomas sees upside to $4B. ACA should be a growing driver in F16 as higher penalties (expected to increase from $200 on avg to $400-500 in the '16 tax season and $800 in '17) and stricter IRS enforcement should result in a greater number of filers seeking exemptions and going on exchanges, both pricing opportunities for HRB. Download the Complete Report
ì Europe – Vivendi – News flow around a possible deal with BeIn Sports is accelerating. MS EU Media & Internet analyst Adrien de Saint Hilaire and team think the market would welcome a deal. Under the right terms, this would underpin their positive view on a Bolloré-driven turnaround of Canal+. Stay OW. Discussions are said to have resumed early January and an agreement or failure to get a deal done could be announced by end of February or early March. These articles follow similar reports in Les Echos (14 January 2016) and BFM (23 December 2015). They also come a few weeks after Vincent Bolloré heralded a "€2bn investment plan" for Canal+ (BFM, 13 November 2015).Neither Vivendi nor BeIn Sports has commented on these press reports. They believe striking a deal could make sense for both parties. i) The French pay-tv profit pool is shrinking with Canal+ suffering from subscriber drain, while BeIn Sports is largely loss-making and its growth rate appears to be slowing. ii) Both will have to fight new kids on the block in the content market (e.g. Altice, Netflix). iii) A sale to Canal+ plus would give BeIn Sports' Qatar-backed owners an opportunity to exit a loss-making business in this low-oil price environment. iv) Vivendi has plenty of cash and treasury shares available to finance a deal. v) In Spain, BeIn Sports operates under a JV with Mediapro. vi) Canal+ previously responded to domestic competition by acquiring TPS and a stake in Orange Cinema Series (OCS). Download the Complete Report
ì Korea – Amorepacific – Kelly Kim, S. Korea Consumer Analyst reiterates an OW on Amorepacific post 4Q15 results. Excluding year-end employee incentives, 4Q15 results (+38% YoY OP growth) showed strong growth momentum across all geographies/channels – domestic cosmetics OP +61% YoY led by duty free sales +63% YoY and China sales +55% YoY. Mgmt’s 2016 guidance looked conservative (again) with China +30% YoY (vs MSe +40% YoY combined with margin expansion on robust growth of new brands) and duty free +low-20% YoY (vs MSe +44%), but Amore has a track record of consistently beating guidance – 2015 actual OP was 19% above original guidance. Investors have become increasingly concerned about anything China-related and potential impact on Korea cosmetics names. It doesn’t help that MOTIE’s Jan exports data showed cosmetics exports materially slowing to +2% YoY in 3WJan vs +53% YoY in 2015. Kelly is not concerned about Amore’s topline growth in China and expects strong export momentum to continue in 1Q16 with +40% YoY. For long-term investors, this shouldn’t be a cause for concern as long as end sales stay strong. Download the Complete Report
ì LatAm – Wal-Mart De Mexico – Walmex's sales in January surprised positively (again) at SSS +9.7%, showing acceleration in growth exactly when the comparison base started to get tougher. Franco Abelardo (LatAm retail analyst) believes Walmex's good top line performance has been driven both by a positive momentum in Mexico's consumer space (that is lasting longer than Franco initially expected) and by Walmex's internal initiatives, including aggressive pricing versus competition. While the latter is positive from a market share perspective, it may also result in further margin pressure – for instance, Franco estimates that EBITDA margin for Walmex in Mexico contracted 110 bps Y/Y in 4Q15. Download the Complete Report
ì US – Avago – Craig Hettenbach, US Semiconductors Analyst, is raising his price target on Avago from $170 to $180 post the Broadcom acquisition announcement as he sees the synergy opportunity ultimately exceeding $1bn or 2-3X that of the transformative and successful LSI deal. This provides Avago a key lever to drive margin expansion, compensating for an otherwise slow growth environment. The acquisition of Broadcom catapults Avago to the third largest semiconductor supplier. Meanwhile, the pro forma market cap of $58bn is now above Texas Instruments, providing generalist investors another stock to choose from in this market cap range and at a 25% valuation discount. Craig is putting the spotlight on what he views as an unparalleled semiconductor franchise in networking, which should become an increasingly important part of the story (40% of sales, often overlooked). Finally, even after lowering estimates in wireless for Avago and Broadcom, Craig stresses that the next move in consensus estimates should be up, a rarity in the group. Download the Complete Report
ì Europe – Danone – Waters has become Danone's biggest growth driver in recent years. Whilst MS EU Food Producers Analyst Eileen Khoo and team think a 2016 slowdown could reignite market debate on the division's growth outlook, their 'deep-dive' suggests 7-12% LFL, resilient margins and ROIC upside medium term. They are now more bullish on Waters' LT prospects. Danone's stellar turnaround of its Waters business, from a trough of -4% LFL in 1Q09 to +11% average LFL and 7% EBIT CAGR over the last five years has confounded sceptics who viewed the business as commoditized and Aquadrinks as a short-term 'gimmick'. Whilst the division contributed only 6%of group growth in 2009, this has grown to >45% in 2014, helped by leading innovation, Aquadrinks growth (>25% growth in 2010-14) and a revival in Western Europe. In 2016, however, Waters is likely to be impacted by destocking of Danone's Mizone brand in China (c.30% of its total Waters sales) - this could reignite debate on the risk of growth slowdown, margin pressure and competitive risk for Waters, in their view. Danone's share price historically has reacted negatively to concerns on growth slowing. But their proprietary analysis gives us comfort on the favourable structural dynamics enjoyed by the Waters business, and they would be buyers on any short-term concern on growth for this division. They adjust their estimates to reflect a short-term slow down, but higher longer-term growth in Waters. Download the Complete Report
ì China – Baidu – Rob Lin, China Internet Analyst reiterates OW on BIDU going into results next week with PT: US$229, implying 32x non-GAAP ‘16e P/E and 50% upside. Rob expects an in-line quarter with +32% rev growth (mid-point of the guidance) and increasing mobile contribution. Mobile ad load increase should boost the overall search rev while mobile click through rate may have surpassed that of PC in the quarter. A risk here though is that GDP growth correlates well with BIDU core search rev growth. Although mobile is incremental this time due to increased user time spent and advertising rev, Rob is not ruling out some softness in key accounts (30% of rev) going forward. Hence, he takes down rev by 3%/2% in 2016/17e leading to 5%/6% cuts in non-GAAP EPADS – core search rev + 25% YoY in 2016. BIDU’s video biz iQiyi could surprise on the upside thanks to strong advertising rev and membership fees. iQiyi surpassed 10mn subscribers in the last quarter and traffic went up sharply thanks to its exclusive TV show “Running Man.” Regardless, O2O spending is a key driver of BIDU’s share price, and will cap the upside for now as 4Q15 earnings are set to decline 23% due to this O2O drag. Download the Complete Report
ì EEMEA– Ulker Initiation – Nick Ashworth (EEMEA consumer analyst) initiates at OW (PT TL24) and positions Ulker as his top pick in Turkey due to its best-in-class growth (2014-17e EPS CAGR of 21% versus mature FMCG peers at 11-12%), optionality of stronger export growth, and valuation - it trades on a similar multiple (21x 2016 PE) to FMCG peers. Nick sees a positive risk-reward skew at Ulker, driven by upside to export volumes (thanks to the Pladis distribution platform) and upside to margins (helped by scale and further cost saving measures). Nick models a 2015-17 sales CAGR of 17%, helping push 21% EPS CAGR. For an FMCG company, this is strong. It is almost twice the growth of a mature FMCG, for the same multiple (22x 2017 EPS). Download the Compete Report
Negative
î US – Xerox – Brian Essex, US Software & Services Analyst, is downgrading Xerox from OW to EW and is lowering his price target from $13.50 to $12. While he views the split as a positive catalyst, he is adjusting his estimates lower on weaker core fundamental performance and outlook. He also sees incremental risk to a CFO search still in process, initiation of a CEO search for the Services business, financing costs and restructuring initiatives associated with the spin. His price target of $12 is based on 10.0x FY16e EPS of $1.17, relatively in-line with peers going through transition and restructuring efforts. Download the Complete Report
î Europe – Saipem – MS EU Oil Services analyst Rob Pulleyn and team downgrade Saipem to Underweight relative to their coverage universe. Following their reassessment and adjustment of the risk-reward profiles for all the stocks in their coverage universe, Saipem compares less favorably. Their base, bear and bull valuations imply 19% downside to their price target, 64% downside to the bear case and 81% upside to the bull case. Despite the attractive upside to their bull case, this spread is consistent with their Underweight-rated names. They also consider valuation demanding for Saipem. The current price implies: P/BV of 0.7x, which compares to their forecast ROE of 2-4% 2017/18, and at the rights issue price of €0.362 the P/BV would be 0.5x.On EV/ IC, they estimate that the stock trades at 0.8x for ROCE also of 2-3%. This is demanding vs Technip trading at 2016 EV/ IC of 1x with ROCE >10%, Subsea 7 trading at 0.4EV/IC and Wood Group at 1.3x EV/ IC for >10% ROCE.EV/2016 EBITDA 6x, at a significant premium to peers such as Technip at 3.8x (which is net cash).FCF yield of 4% for 2016 and 5% for 2017 is not overly attractive, and risks for FCF forecasts are skewed downwards. P/E of 21x their 2016 estimates compares to Technip at 9x. Download the Complete Report
î ASEAN – Axiata Group – Navin Killa, ASEAN Telecoms and Media Analyst downgrades Axiata to UW as there are sizeable exposures to fast-growing and relatively underpenetrated mobile markets, such as Indonesia, Sri Lanka, Bangladesh, and India, together with steady cash flow from domestic operations. Historically, the government has offered telecom spectrum using a "beauty contest" – but the 2016 budget proposes that spectrum will be redistributed and offered for bidding. With plunging oil prices, the government deficit is targeted at 3.1% of GDP vs. 3.2% in 2015 and 3.4% in 2014, prompting the need for funding measures. New domestic competition and capex risk from domestic spectrum auction limit upside to stock price. Download the Complete Report
î LatAm – Itau Unibanco – Last quarter delinquency soared yet the balance sheet transfers helped. Itaú was able to meet bottom line expectations by using a large chunk of its excess reserves for loan losses. Jorge Kuri (our LatAm banks analyst) calculated that around R$1,822 million of pre-tax earnings, or 21% of the total, came from the balance sheet. Delinquency soared, way above Jorge’s already very negative expectations. The bank provided 2016 guidance that includes a significant jump in provisions next year. The consensus numbers have to adjust downward; as Jorge has argued before, current consensus of 13% net income growth for Itaú is unrealistic. Jorge’s forecast is -5%. Download the Complete Report
î US – Sysco – Vinnie Sinisi, US Retail, Food, & Drug Analyst, is downgrading Sysco from EW to UW given valuation and the lack of any meaningful positive medium-term catalysts. SYY’s valuation versus the S&P 500 is near the 90th percentile of the 10-year range. Additionally, consensus estimates imply an upward inflection in earnings after a multi-year period of essentially no growth. His $40 price target remains the same and is in-line with the current share price. Download the Complete Report
î Europe – Logitech – Logitech has the highest exposure in MS EU Tech analyst Andrew Humphrey and team’s coverage to a structurally challenged PC market, and they think fully prices in long-term targets. They think FY17e guidance at the March 2nd investor day could disappoint on margins, and downgrade to UW. Management has reorganised Logitech around newer growth verticals (Mobile Speakers, Video Collaboration), in tandem with a vigorous cost-reduction programme. The shares have traded up to the top of the historical valuation range at 1.1xEV/Sales and 12x EV/EBIT, and they think now fully price in long-term targets. From here they see more downside potential than upside, given PC-related peripherals will be ~60% of FY17e revenue in a market declining in double digits with weak macro. They think Logitech would still need to invest heavily to offset PC-related declines, and operating leverage could drive margins to undershoot. This is the largest exposure in their coverage to a part of the market where they expect greatest structural challenges, and they are concerned at 60%potential downside to fair value in their bear scenario. Download the Complete Report
î ASEAN – International Container Terminal Service – ICTSI underperformed MSCI PH by 36% in 2015 on earnings concerns amid global trade headwinds. Three years of price gains were erased in 2015. Yet Daniel Lau, ASEAN Healthcare and Transportation Analyst anticipates a further de-rating in 2016 as earnings come under pressure from lower throughput and given the margin impact from new port expansions and higher financing charges after an increase in perpetual financing. He initiates with a counter-consensus Underweight rating. Hi price target of PP34 is based on an EV/EBITDA multiple of 8x, 20% below the 10-year mean. Download the Complete Report
î US – GoPro – James Faucette, US Communications Systems & Applications Analyst, is reducing his PT from $12 to $9 and remaining UW due to the ramp in opex that will cause higher than expected losses for the foreseeable future. James had previously given the stock credit for ~$3/share in cash and marketable securities on the likelihood that management could choose to preserve cash and run the business for profitability. However, he thinks yesterday afternoon's commentary suggests substantial cash burn as management attempts to stimulate demand to return the company to growth. Download the Complete Report
î Europe – Credit Suisse – Q4 poses 4 tough questions for the company’s transformation plan. At ~0.75x 16e TNAV, or 9.3x 17e, there should be value, but MS EU Banks analyst Huw Van Steenis and team find risk-reward more attractive elsewhere. Move to EW. CS missed its pro forma capital ratio by 80bpsthrough higher-than-anticipated one-offs and the inability to lower RWAs enough. Whilst they appreciate that patience is required to look through to2018, CS has missed its only near-term target. They think this suggests CS's strategy may have been too top-down. The sub IPO of the Swiss unit should help capital ratios. However, weak capital formation, further litigation and expectations for incremental restructuring suggest a risk that CS could need to sell more, conceivably diluting earnings further to reach the 13% cT1 target (vs11.4% today). They no longer see CS's target of 13-14% RoE in 18e as plausible. Their new price target is based on 18e RoE nearer 10%. The fundamental challenge for CS, in their view, is its high operational leverage. Eg the new Markets division made a loss, even excluding one-offs in Q4. With management today signalling that cost cutting will be challenging, given its desire to reinvest, they believe its original cost-cutting strategy could come under review. They now forecast sales and trading -representing one-third of the Group's leverage capital - to be a near break-even business in 16e, well below that of its peers, and they lack confidence on18e PBT. Download the Complete Report
î China – Guangdong Alpha Animation and Culture – Ansel Lin, China Telecoms and Media Analyst thinks the transition from TV to new media and exposure to film investments helps premium content providers, but he sees significant downside risk to consensus estimates given uncertainty around new initiatives. At expensive 2016 P/Es of 49-71x on his estimates, he initiates on Alpha at UW with 31% downside. As it is the leading animation company with full value chain operations, he expects Alpha to accomplish IP-based OSMU content development after the acquisition of U17.com, the largest original comics web-platform in China. However, he has low visibility on this development due to 1) the variance of target customers between U17.com (teenagers and youth) and Alpha's existing business (low K12 age); 2) the change of strategy to high-budget IP content production; and 3) the hit-or-miss risk of content development. He estimates 13.7/23.3/21.7% revenue/OP/NPAT CAGR in 2014-17, and his earnings are 19-29% below consensus in 2016-17. He thinks positives are more than priced in at 71.1x 2016 P/E, and his price target is based on 50x 2016 P/E (a discount to film CP peers' target P/E at 60-70x due to low earnings visibility). Download the Complete Report