From streaming media to China’s bond market, Morgan Stanley identified dozens of debates where the firm’s views diverge from market consensus. Here are five highlights.
The New Year will likely ring in a new investing narrative, marked by slowing growth in the U.S. and the revival of emerging markets. While the broader themes of higher core inflation, tighter monetary policy and trade tensions factor into the overall outlook, investors will find no shortage of nuance within regions, asset classes and sectors.
Morgan Stanley Research recently identified dozens of global debates in which the firm's views diverge from market consensus. These ideas are wide-ranging—from analyses on individual stocks to regional forecasts—but all have the potential to affect relative performance. Here are five highlights for global investors.
In 2018, market volatility and high valuations dampened investor enthusiasm for music and video streaming platforms. At the same time, those factors darkened the already gloomy outlook for cable and satellite companies. But regardless of how markets moved, consumers continued to eschew traditional media in favor of the “on-demand” model of viewing—and Morgan Stanley believes that trend could continue to surge in 2019.
“Both TV and music are transitioning to a streaming-first distribution model due to the proliferation of high bandwidth networks and smart devices," says Morgan Stanley Head of Media Research Benjamin Swinburne. “This has created massive uncertainty around technology, media and telecommunications stocks and, in some cases, masks real opportunity."
Swinburne and his team project that customer growth for the leading video platform and music platform could translate to upward of 25% and 30% revenue growth, respectively, in 2019. Meanwhile, share prices for these players ended the year roughly 40% below their 2018 highs.
Meanwhile, investors should not assume that all cable stocks are doomed to fail, as consumers favor on-demand media. On the contrary, the two largest cable companies in North America now have more broadband customers than video customers, and generate more gross profit from connectivity than pay-television.
“Rising consumer demand for bandwidth and the proliferation of connected devices in the home play to cable's network strengths," says Swinburne, who expects the cable giants to add more than a million broadband customers each in the coming year.
In 2018, the China government bond (CGB) market saw unprecedented inflows, to the tune of $79 billion in the first 10 months. Could 2019 set another record for inflows?
“If we extrapolate the year-to-date inflows to come up with an expectation of 2018 inflows, the one-year inflows would be similar to the entire stock of Brazil, the largest foreign holding in emerging markets," says Emerging Market Fixed Income Strategist Min Dai.
While the consensus view holds that China’s loosening fiscal policy and weakening yuan will stifle such flows in 2019, Morgan Stanley strategists believe that China’s bond market will continue to garner new foreign investment.
As of October, around $240 billion in Chinese bonds, most of which are CGBs, were held outside of the country. Central banks and sovereign wealth funds are the primary buyers; asset managers are notably absent. However, in April, Bloomberg will add China to its Global Aggregate Index, phasing it in over 20 months, until it accounts for 5.5% of that benchmark.
This should open doors for asset managers to begin allocating some of their fixed income assets to China. “Assuming that $2 trillion of assets under management are tracking the index, such an inclusion could trigger $110 billion in inflows," says Dai. Other index providers could follow, ushering in an average of $80 billion a year in new money to the CGB market between 2019 and 2021.
Fast fashion has been a driving force in retail for the past several years, as large brands offer trendy and inexpensive apparel designed to be worn one season and discarded the next.
The consensus view is that this movement will continue, as social media drives consumer demand for newness, but Morgan Stanley’s analysts see another trend unfolding: a sustainability backlash, both from consumers and regulators. Among other catalysts, the UK's Environmental Audit Committee is now investigating the sustainability of the fashion industry.
“There are striking parallels between fast fashion and single-use plastic," says Jessica Alsford, Head of Global Sustainability Research at Morgan Stanley, referring to the steady slide of demand for single-use plastic for water bottles, household products and take-out food.
Clothing utilization has been on a steady decline, as individuals buy, wear and discard at a higher frequency. This is increasing the number of apparel items sold globally from less than 10 per person in 2003 to nearly 15 in 2020. While fast fashion isn't single use, materials like polyester, nylon acrylic and elastane are made from plastics, which make them difficult to recycle. There are also social issues, such as questionable labor practices.
It would be difficult for regulators to impose a minimum selling price without affecting low-income consumers, but Alsford and her team note that there is the possibility for greater disclosures around fabric sourcing or new incentives to encourage reuse and recycling. Meanwhile, Morgan Stanley AlphaWise surveys have indicated that more than half of UK and German consumers factor ethics into their buying decisions.
Japan is a notable bright spot in 2019, with Morgan Stanley strategists calling it one of the most under-recognized turnaround stories in the global economy. Such economic tailwinds—coupled with easing visa requirements for tourists from China and a packed calendar year—could put Japan's travel industry on track for 3.9% growth in 2019.
While the consensus outlook calls for merely “solid” growth, Morgan Stanley strategists believe that the industry could surprise with its third straight record year. Growth will likely be led by inbound demand—estimated to increase 14.8%—factoring in the expected rise in Chinese visitors, as well as major events, such as the G20 in June and Rugby World Cup beginning in late September.
Improvements in domestic travel and outbound demand should also contribute to records for the industry, with airlines, hotels, and airport and hotel operators among the biggest beneficiaries.
The second half of 2018 wasn’t kind to emerging markets, and India suffered its share of setbacks. Yet, as a long-term growth story, India continues to intrigue. The country's economy has been growing by an average of 6.8% a year over the past 15 years—and Morgan Stanley economists see above-trend growth for 2019.
One sticking point for investors is how the outcome of elections later this year will impact Indian equities. The consensus view urges investors to be wary of a possible weak ruling coalition, which would induce political uncertainty, derail reforms and hamper growth.
Yet, history has shown that a strong government is not a prerequisite for strong equity performance. “In the past seven elections, spread over 27 years, India has had only one majority government—the latest regime," says India Equity Strategist Ridham Desai. All the while, Indian equities have appreciated in value.
“Eventually, stocks respond to growth and inflation, which are economic metrics that are a function of policy choices and global factors," says Desai, who favors a barbell approach that balances defensive and cyclical stocks; overweight banks, consumer discretionary and industrials and underweight consumer staples and technology.