From online ad growth to precision agriculture, seven themes could shape industries and drive asset prices this year. Here’s how—and why—our views on each diverge from the market consensus.
Is Asia entering a goldilocks era? Is the growth in online advertising sustainable? Should investors be bullish on banking?
In a new edition of its annual “Big Debates” series, Morgan Stanley Research has identified dozens of key global equities debates that are likely to be settled (or significantly advanced) this year. They also happen to be areas where the firm’s analysts, economists and strategists take a view counter to the current market consensus.
Following the extraordinary events of 2020, this year's roster of Big Debates—which cover nearly one hundred topics globally—represents a pivotal moment. They reflect not only the many profound and potentially long-lasting implications of the COVID-19 pandemic and recovery, but also the significant gap between winners and losers, as well as the related opportunities and risks.
Here are seven Big Debates for 2021:
Investors have been wondering about the durability and pace of the growth recovery in Asia. Key concerns center around whether the lack of policy space could constrain the recovery and whether COVID-19 would have a longer lasting impact on growth amid virus mutations and vaccine rollouts.
Morgan Stanley remains bullish. Last fall, the firm's economists suggested that investors should get ready for a Goldilocks phase in Asia, ex-Japan in 2021. “This Goldilocks phase would feature a combination of accelerating and above-trend growth, rising but still benign inflation and 'big easy' policies," says Deyi Tan, Asia Regional Economist.
Last year, North Asia outperformed in terms of growth. This year, Tan thinks the growth divergence will give way to growth convergence and laggards will catch up. Morgan Stanley’s growth expectations are significantly above consensus for Asia and India with Indonesia and the Philippines likely better positioned in this Goldilocks environment.
Still, the recent rise in U.S. and China rates have sparked concerns of a “Taper Tantrum 2.0”—in which markets would react badly to an outlook for rising rates, as they did in 2013. However, Tan believes this would not jeopardize the Goldilocks view as the rise in rates are likely to be gradual and domestic macrostability conditions in Asia are also more benign than 2013.
Precision agriculture uses new technology, such as satellites, robotics and big data, to increase crop yields and reduce farm waste. Morgan Stanley analysts believe that this segment, which plays a growing role in the future of food, could be poised for 50% revenue growth in 2021, complementing double-digit growth in underlying equipment demand.
“Precision ag was previously viewed as an insulator against potential choppiness in equipment sales,” says analyst Courtney Yakavonis. “We think the market isn’t appreciating the product mix and potential for pricing to complement a multiyear recovery in equipment demand.”
The market view on U.S. banks is that investors “need to see it to believe it," as investors are unsure about how smoothly the economy will handle the reduction in stimulus as the vaccine is fully distributed.
“The market is missing that the pace of vaccine distribution essentially acts like a crystal ball in terms of when we return to normal.," says Betsy Graseck, Global Head of Banks and Diversified Financial Research. Graseck and her team believe that vaccine distribution will help normalize the U.S. economy by the end of 2021, which should drive down unemployment and loan losses and drive up loan growth and long-end interest rates.
Together, this should increase earnings and stock buybacks, accelerating EPS growth. “Our 2022 earnings estimates land at about 8% above consensus, with a median 18% upside in our base case," says Graseck, whose colleagues covering banks across the globe also have constructive views.
Banks could return a median of 14% of market cap over the next two years (2021-2022 capital return as a % of market cap)
Investors have long been wary of European value, but that sentiment shifted in late 2020, as cheaper stocks in the region finally began to close the gap with their growth peers. The big question now is whether this rally has staying power. Morgan Stanley strategists believe it does—the biggest reasons being strong earnings-per-share growth, policy support, higher bond yields and a wide valuation dispersion.
“We believe policymakers and central banks are likely to continue easing into the recovery, providing the backdrop for both strong multi-year growth equity price/earnings ratios to stay elevated even as earnings-per-share rebounds,” says Graham Secker, head of Morgan Stanley's European and UK equity strategy team.
This view diverges from the consensus, which holds that persistently low bond yields will take the wind out of the rally.
Periods of strong EPS growth tend to correspond with better performance for Value over Growth
Online ad markets proved more durable in 2020, thanks to the surge in e-commerce and advertisers' willingness to shift their budgets from traditional media to digital channels. The consensus hold that this uptick is fleeting; Morgan Stanley takes the opposite view.
“Our analysis shows that there is some consistency between online advertising and e-commerce growth," says Brian Nowak, who covers the U.S. Internet industry. The overall macro recovery, coupled with the rising importance of performance-driven and e-commerce-related ad spend, suggests that digital-ad spend could snap back to 18% of e-commerce in 2021, translating to 20% year-over-year online ad growth.
U.S. online advertising could grow roughly 20% in 2021
(U.S. online advertising Y/Y growth)
E-commerce is booming in China and, unsurprisingly, click-and-buy grocery shopping has surged in popularity during the COVID era. However, according to the consensus view, digital fresh grocery sales in China will subside as businesses fully reopen.
Morgan Stanley's analysis finds that the convenience of online grocery shopping could stick—and that the current low penetration rate provides plenty of room for further growth, particularly as leading e-commerce platforms expand into this category.
Throughout much of 2020, investors closely followed the development of various COVID-19 vaccines, to understand both the timeline for reopening and the investment landscape.
Today, Morgan Stanley strategists think that the pandemic could be under control by late summer and early fall of this year; but whether vaccines as a product category can be a sustained source of revenue for biopharma is less clear.
Much of the debate hinges on the need for boosters—additional shots of vaccine to enhance protection against COVID-19. “Valuations suggest that the market believes that there is a reasonable booster market," says analyst Matthew Harrison, noting that the potential size and scope of that booster market is wide-ranging, while longer-term sales dynamics are murky.
The outlook for medtech, specifically technology used for COVID-19 testing, may be clearer—and is the topic of its own debate within European coverage. Here, Morgan Stanley forecasts that sustained demand for testing could improve margins for the two companies it covers. “Near-term demand outstrips supply, and many diagnostic companies are in backlog," says analyst Alex Gibson. “A vaccine rollout could slow the need for testing toward the end of 2021, but we are yet to reach peak test output."
For more?Morgan Stanley Research?on this year’s Big Debates, ask your Morgan Stanley representative or?Financial Advisor?for the full series of reports. Plus,?more Ideas?from Morgan Stanley's thought leaders.