Morgan Stanley
  • Research
  • Jan 10, 2018

U.S. Equities: Big Debates for 2018

Auto 2.0, cryptocurrencies and the future of streaming TV are just a few of the key debates that could shape industries and drive stocks in the coming year.

Could cryptocurrencies soon become a mainstream form of payment?  How will Auto 2.0 change the landscape of auto manufacturing?  Are we at an inflection point where attractive economics—not policy—drive rapid growth of renewable energy for the U.S. power sector?

While every year contains debates that redefine industries, 2018 promises some potentially major shifts. Investors continue to work through the implications of public policy, a leadership transition at the Fed, geopolitical developments and technology’s widening sphere of disruption in areas such as finance, energy and media.

In a new report, “Big Debates 2018—North America,” Morgan Stanley Research has identified 25 key debates for coming year. These are the debates that are likely to matter, that are likely to be settled (or significantly advanced) in the coming year and take a view that differs meaningfully from the current market consensus.

Here are 4 of those debates which are likely to drive marketplace conversations in 2018.

Will Auto 2.0 Carve-Outs Lead to Substantial Re-ratings?

Auto 2.0 is poised to bring more than just tech innovations like long range electric cars, shared mobility and driverless vehicles. It brings a collision of unprecedented secular, technological, and regulatory forces.

These are the debates that are likely to matter and are likely to be settled or significantly advanced in the coming year.

For Auto 1.0 firms, this could mean a window of opportunity to reassess and restructure their business portfolio. According to Adam Jonas, Head of Global Auto & Shared Mobility Research, the need for auto manufacturers and suppliers to attract capital, talent and partnerships means 2018 could be a year of strategic sub-IPO carve-outs across the auto industry.

“We’re entering year nine of the longest uninterrupted auto credit cycle on record, and auto makers and suppliers will find it hard to push earnings much higher, which will drive them to get creative on expanding the multiple. Carve-outs and other strategic actions could be a dominant auto theme this year.”

While some market observers still view carve-outs as occasional one-offs, mostly concentrated in the U.S., Jonas believes these carve-outs, along with numerous industry actions in 2018, will lead to substantial re-ratings across the entire auto space—and potentially have a bigger impact on stock prices than even the auto credit cycle.

Could Cryptocurrencies Pose a Threat to Incumbent Digital Payment Solutions?

A number of cryptocurrencies saw their values soar through 2017 and along with it, the perception by some industry analysts that cryptocurrencies could become an innovative payment tool near-term which could eventually threaten the existing credit card payments ecosystem.

But according to James Faucette, Equity Analyst for U.S. Communications Systems and Payments, while there is value in decentralized/distributed ledger technology, centralized systems for consumer payments still have formidable cost and efficiency advantages over cryptocurrencies.

“The higher structural costs associated with decentralization of a scaled payments ecosystem are likely to offset any benefits of security and speed. Distributed ledger systems also have clear disadvantages at the point-of-sale such as the ability to contest a charge, fraud protection and near-universal acceptance.”

He adds that although there are pockets of opportunity for cryptos in areas such as cross-border payments and large B2B transactions, centralized digital payment players can also develop blockchain technology to resolve some of these issues.

What Will 2018 Mean for the Future of Streaming TV Services?

Global adoption of over-the-top (OTT) “streaming” video consumption is accelerating—and the competition is heating up. According to some market analysts, the arrival of new entrants into the streaming space will bring about a market share battle, putting pressure on both streaming incumbents and traditional TV networks which already face subscriber erosion. The result could be further M&A activity in the industry, and increased concerns about the future of TV network distribution.

But according to Benjamin Swinburne, Head of Media Research, the more the merrier.  “We believe new competition in OTT video consumption could actually further accelerate adoption, supported by more cable set-top integrations, continued growth in connected TVs, and additional migration of content over to OTT.”

Swinburne’s industry view for media reflects the opportunity for the adoption of streaming live TV services to be a growing offset for stabilizing aggregate pay-TV trends.  “I’d say we’re bullish on media companies with clear tailwinds from the ongoing shift towards OTT video consumption. Additionally, further evolution of direct-to-consumer product offerings from some of these players highlights the importance of scale.”

Will Utility Growth in Wind Power Slow Due to Policy and Regulatory Uncertainties?

Since his 2016 campaign, President Trump has expressed a firm commitment to fossil fuels. Congress followed suit, cutting subsidies for electric cars, wind farms, and solar panels in early drafts of the recent tax bill.  Although the final tax reform policy keeps the subsidies in place, some market analysts have grown concerned that these developments—as well as regulatory hurdles for new wind projects—will prohibit or slow the rate of deployment of renewable energy by utilities in the U.S.

But according to Stephen Byrd, Head of North American Research for the Power & Utilities and Clean Energy industries, increasingly favorable economics will outweigh policy dynamics.  “Wind blade lengths have increased much more rapidly than we, and the market, have expected. In the middle third of the U.S., wind farms have an all-in cost that is less than a third that of a new natural gas-fired plant, and wind power is also well below the cost of power from large-scale solar farms.”

As a result, many utilities could pursue a “virtuous cycle”–spending more capital on more wind farms, while in turn increasing earnings-per-share growth and lowering customer bills given how cheap wind power has become. Additionally, states without formal environmental goals tend to have the greatest wind conditions, alleviating the regulatory hurdle.

Adds Byrd, “The U.S. power sector has simply reached an inflection point where renewables have become the cheapest form of new generation across much of the country. It’s a true structural shift in the demand profile for renewables: a move away from changeable policy drivers over to stable growth driven by increasingly attractive economics.”

For Morgan Stanley Research on U.S. equities and sector trends, ask your Morgan Stanley representative or Financial Advisor for the full report, “Key Investor Debates Likely to Drive Stocks in the Coming Year" (Dec. 15, 2017). Plus, more Ideas.