Investment Rating - The report initiates CATL-H with an Overweight (OW) rating and a price target (PT) of HK$400, indicating a 25% upside from the previous close. CATL-A is upgraded to OW with a PT of Rmb370 from Not Rated [2][6]. Core Insights - The Chinese EV battery supply chain stocks have rebounded by 8-17% since April, driven by CATL-H's strong performance post-listing and ongoing investment interest in solid-state batteries [2]. - Industry capacity utilization rates have improved, with key players achieving over 80% utilization in the second half of 2024, leading to a new capital expenditure (capex) cycle [5][10]. - Battery prices have stabilized after significant declines, with some players in the energy storage system (ESS) segment experiencing price recovery due to strong demand [5][10]. Summary by Sections Industry Capacity Utilization - The report notes a recovery in industry capacity utilization rates, with improvements seen in 2024, particularly in the second half, driven by better-than-expected demand for EVs and ESS [10][12]. - A significant increase in new orders for battery equipment is anticipated in 2025, with top suppliers expecting over a 45% increase compared to 2024 [5][12]. Battery Prices and Market Dynamics - Battery prices for lithium iron phosphate (LFP) and nickel-cobalt-manganese (NCM) have decreased by 40-60% from their peak in late 2022/early 2023, but have stabilized in 2024 despite a further 20% drop in lithium carbonate prices [5][10]. - Select ESS battery manufacturers have seen a small price recovery, attributed to robust domestic and international demand [5]. Financial Performance and Projections - CATL's shipments for EV and ESS batteries are projected to reach 475 GWh in 2024, up from 390 GWh in 2023, with a strong performance expected in the second half of 2024 [31]. - The report provides a detailed comparison of battery makers' financial results, highlighting CATL's gross profit margin (GPM) improvements and net profit per unit stability [35][40]. Market Share and Competitive Landscape - CATL continues to dominate the Chinese EV battery market, with a significant share in both domestic and overseas markets, while competition remains intense among local players [7][38]. - The report discusses the implications of Chinese OEMs shortening payment terms to suppliers, expressing skepticism about its impact on material suppliers' cash flow [5].

Investment Rating - The report does not explicitly provide an investment rating for the emerging markets (EM) sector, but it discusses the current state of capital flows and economic conditions, indicating a cautious outlook due to various factors affecting inflows [2][4][14]. Core Insights - The report highlights a "sudden stall" in capital flows to emerging markets, with cumulative net outflows of $27 billion through April 2025, driven primarily by portfolio investments [10][14]. - Despite a weaker dollar acting as a push factor for inflows, the lack of stronger growth in emerging markets limits the pull factor, resulting in sluggish inflows [7][9]. - The report notes that current accounts in emerging markets are generally in good shape, which has insulated them from significant macroeconomic damage despite the capital flow challenges [14][16]. Summary by Sections Economic Overview - The report discusses the elevated probability of a US recession at 40%, with uncertainties surrounding US trade policies and geopolitical risks impacting global economic conditions [1]. - It mentions that the dollar has weakened significantly since March, which typically would benefit emerging markets, but this has not translated into expected inflows [2][4]. Capital Flows Analysis - The report identifies both push and pull factors influencing capital flows, with a weaker dollar serving as a push factor and the growth differential between emerging and developed markets acting as a pull factor [3]. - It notes that portfolio inflows have been weak since October, with a significant outflow of $115 billion in April 2025, attributed to market turmoil [10][12]. Growth and Inflation Outlook - The report suggests that domestic demand in emerging markets remains soft, and any escalation in tariffs could skew risks further to the downside, impacting growth differentials [9]. - It emphasizes that while inflation is expected to move lower, some central banks in emerging markets may have room to cut rates due to contained macro risks [14][16].

Investment Rating - The report suggests a long position in UST duration at the 5-year key rate and recommends maintaining long positions in UST 3s30s and term SOFR 1y1y vs. 5y5y steepeners ahead of potential range breakouts post-month-end [6][10][41]. Core Insights - The report emphasizes that the performance of the S&P 500 Index often does not accurately predict economic recessions, with historical data showing that in 27% of NBER-declared recessions, the S&P 500 peaked in or after the month the recession began [6][21]. - It highlights the importance of upcoming US labor market data, particularly the May JOLTS and June employment reports, which could significantly influence the yield curve and Treasury yields [18][32]. - The report notes a significant decrease in the US Treasury's cash flow deficit over the past three months, attributed to higher tax revenues, tariff revenues, and reduced government spending [19][29]. Summary by Sections Economic Data and Market Performance - The report argues that investors should focus on economic data rather than the stock market, as historical trends indicate that equity performance often misleads regarding impending recessions [9][11]. - It points out that the S&P 500 Index's performance leading up to recessions has often been misleading, with many instances where the index was near its peak when recessions began [15][21]. Labor Market Insights - The upcoming labor market data is critical, with expectations for total payroll growth of 140,000, which aligns with recent trends but contrasts with rising unemployment claims [32][36]. - The report suggests that the labor market data could catalyze a repricing of risks in the US rates market, particularly if the data indicates downside risks [30][41]. Treasury Financing Needs - The report discusses the US Treasury's financing needs, noting a significant reduction in the cash flow deficit, which fell to $111 billion over a recent 63-day period, down 75% from the previous year [29][30]. - It highlights that tariff revenues have played a significant role in reducing the cash flow deficit, with annualized tariff revenue reaching $323.9 billion, or 1.1% of nominal GDP, a notable increase from historical averages [25][26].

Investment Rating - The investment rating for the report is "Overweight" [3][16]. Core Insights - The report highlights the technology and leadership position of Contemporary Amperex Technology Co. Ltd (CATL) in the global electric vehicle (EV) and energy storage system (ESS) battery markets, emphasizing its ability to maintain resilient profits despite pricing pressures in the supply chain [11][16]. - The price target for CATL is set at Rmb370.00 for June 2026, based on a projected P/E ratio of 20x for 2026E-27E, which is at the lower end of the company's historical trading range due to slower industry growth compared to earlier stages [12][17]. Financial Estimates - For FY25E, net sales are projected at Rmb404,942 million with a year-over-year growth of 12% [5]. - The gross profit for FY25E is estimated at Rmb99,220 million, maintaining a gross margin of 25% [5]. - The adjusted net income for FY25E is forecasted to be Rmb61,861 million, reflecting a net profit growth of 22% year-over-year [5][20]. Performance Drivers - The report identifies various performance drivers, including market factors contributing 27%, regional factors at 23%, and macroeconomic factors at 13% [13]. - The correlation of CATL's performance with the MSCI Asia Pacific ex-Japan index is noted at 0.62 over six months and 0.53 over one year [13]. Valuation Metrics - The report provides valuation metrics, indicating an expected revenue growth of 19.7% for FY26E and an EBITDA margin of 25.5% for the same year [14]. - The adjusted P/E ratio is projected to decrease from 21.8 in FY24A to 12.4 in FY27E, reflecting a more favorable valuation over time [14][20].

Investment Rating - The report maintains a bearish stance on the USD and anticipates the S&P 500 to close near 6,000 by year-end, driven by accelerated earnings growth [10][25]. Core Insights - The interplay of policy uncertainty and business cycle dynamics is crucial, with US trade and fiscal policies being significant drivers of the global business cycle [7][8]. - A substantial shift in US trade policy, with an over 10%-point rise in the effective tariff rate, is expected to generate a broad-based downshift in global growth and a rotation in inflation pressures toward the US [18][45]. - The report places recession risk at an elevated 40%, reflecting concerns around building growth drags and recent declines in global business sentiment [18][54]. Economic Outlook - Global growth is expected to dip to 1.4% in 2H25, down from a potential of 2.2%, marking the weakest performance in over three years [25][52]. - US GDP growth outlook has been lowered from 2.0% to 1.3% for the year, with a one in three chance of slipping into contraction in the coming four quarters [18][59]. - China’s GDP growth forecast stands at 4.8%, reflecting external uncertainties and domestic housing market weaknesses [18]. Market Outlook - The report anticipates a continued rotation into international markets, with USD weakness benefiting international equities [18][21]. - US equities are expected to experience narrow leadership and high market concentration, similar to the 2023-2024 playbook [10][18]. - High-grade credit is viewed positively due to attractive yields, declining net supply, and solid corporate results [10][20]. Commodity Outlook - Oil prices are projected to trade in the low-to-mid $60 range for the remainder of 2025, with a forecasted settlement at $60 in 2026 [24]. - Gold prices are expected to reach an average of $3,675/oz by 4Q25, supported by geopolitical tensions and economic growth concerns [24]. Risk Scenarios - The report outlines three potential scenarios: a higher for longer/incomplete cutting cycle, a sharper slowdown or recession, and a Goldilocks scenario where growth quickly returns to trend [33][35][37]. - The baseline scenario suggests that a moderate macro shock from tariffs could lead to upward pressure on risk assets, while a downside scenario anticipates wider credit spreads and underperformance in low-quality assets [33][35].

Investment Rating - The report maintains an overweight stance on Japanese equities, with unchanged end-2025 share price targets of TOPIX at 2,800 and Nikkei 225 at 40,000 [2][7][26]. Core Viewpoints - The report anticipates support for Japanese stocks in the second half of 2025 from corporate reforms, fund flows, and macroeconomic factors such as Fed interest rate cuts and a potential Japan-US tariff agreement [2][14][39]. - Two main themes are identified as structural support for Japanese equities: corporate reform and fund flows [3][14][59]. Summary of Key Themes Corporate Reform - Corporate reforms are accelerating, with share buybacks announced in FY2024 nearly doubling year-on-year, indicating a strong momentum for profitability [4][15][39]. - The total shareholder return ratio for Japanese companies has risen to 60%, with 16% of TOPIX companies exceeding a total return ratio of 100% in FY2024 [41][42]. - Balance sheet normalization could potentially boost corporate value by up to 20%, with expectations for ROE to rise to the mid-9% level by FY2026 [17][42]. Fund Flows - A significant rotation of funds from overseas to Japan is expected, driven by rising interest rates and a shift in investment strategies among public pension institutions and banks [5][60]. - The report highlights a historical outflow of funds from Japan to the US, with expectations for a repatriation of capital back to Japan, providing structural support for Japanese equities [25][60]. - Fund inflows are anticipated to continue as the yen appreciates, leading to a decline in overseas securities investment by individuals [61][62]. Sector Outlook - The report recommends a barbell strategy focusing on domestic demand sectors while seeking upside in semiconductors and machinery, depending on trade agreement outcomes [29][39]. - The performance of domestic demand-driven stocks has outpaced overseas demand-driven sectors during the recovery from the US tariff shock, with software, media, and food sectors leading the market [77].

Investment Rating - The report indicates a neutral outlook on emerging markets (EM) equities, with a focus on the contrasting performance between ETFs and non-ETFs [1][9]. Core Insights - Emerging market equity inflows have significantly slowed to +$680 million from +$4.1 billion the previous week, primarily driven by ETF subscriptions of +$2.2 billion, while non-ETFs experienced a sell-off of -$1.5 billion [1][9]. - Year-to-date (YTD) flows for EM equities stand at -$13.6 billion, with non-ETF flows at -$33.2 billion, contrasting with ETF inflows of +$19.5 billion [1][9]. - Regional fund flows show that GEMs attracted +$1.5 billion, while Asia ex-Japan saw outflows of -$881 million, indicating regional disparities in investment trends [1][4]. Summary by Sections Overall EM Equity Flows - Total EM equity flows for the week were +$680 million, with YTD flows at -$13.6 billion [1][4]. - ETFs contributed +$2.2 billion, while non-ETFs saw a decline of -$1.5 billion [1][9]. Regional Performance - GEMs experienced inflows of +$1.5 billion, while Asia ex-Japan faced outflows of -$881 million [1][4]. - EMEA and LatAm saw marginal inflows of +$31 million and +$22 million respectively, while EM ex-China recorded redemptions of -$241 million [1][4]. Market Specifics - Taiwan attracted moderate inflows of +$1.5 billion, while India saw small inflows of +$514 million [2][4]. - South Africa and Turkey reported significant outflows of -$706 million and -$109 million respectively [2][4].

June 27, 2025 06:17 PM GMT US Credit Strategy: 1Q25 Fundamentals Modest Deterioration, but Interest Coverage a Bright Spot M O R G A N S T A N L E Y R E S E A R C H North America Morgan Stanley & Co. LLC Vishwas Patkar Strategist Vishwas.Patkar@morganstanley.com +1 212.761.8041 Joyce Jiang Strategist Joyce.Jiang@morganstanley.com +1 212.761.0165 Karen Chen Strategist Karen.Chen@morganstanley.com +1 212.761.1199 Christina Sigler Strategist Christina.Sigler@morganstanley.com +1 212.761.4116 Source: Bloomberg, ...

Investment Rating - Industry View: In-Line [3] Core Insights - Japanese electronic component companies are distinguished by their value-added products, which are characterized by more layers and components that are smaller, thinner, lighter, and more durable [5][11] - The demand for high-performance computing and data centers is expected to accelerate due to advancements in deep learning and AI [5][11] - The automotive sector is transforming into mobile communication and sensor devices, necessitating more sophisticated components [5][11] - The rise of 5G smartphones and AI smartphones will require components that are more value-added, smaller, thinner, and lighter [5][11] - AI smartphones and AI PCs will demand higher electric power and batteries with increased capacity [5][11] Summary by Sections Market Demand - There is a growing need for value-added components in high-performance computing, AI smartphones, and automotive applications [13][14] - The server market is experiencing growth driven by AI servers that require high value-added components [31] Component Specifications - High-performance computing requires more advanced ABF (flip chip) package substrates for CPUs and GPUs [14] - The automotive sector, including ADAS and electric vehicles, requires durable components with enhanced value [14] - AI smartphones are projected to consume more electricity and necessitate batteries with higher energy density, such as silicon anode lithium batteries [14] Market Share and Growth - Murata held a 47% market share in MLCCs in 2023, an increase from 28% in 2004, showcasing its leadership in value-added products [14] - The total sales in the electronic components market for F24 reached JPY 12,548.1 billion, with significant contributions from various sectors including smartphones and automotive [16] Component Usage - The number of components required in various applications highlights the importance of MLCCs, with smartphones requiring approximately 1,000 MLCCs per device [18] - The automotive sector can require between 5,000 to 8,000 components, emphasizing the complexity and demand for high-quality parts [18] Future Trends - The shift towards Chiplets in HPC semiconductors is anticipated, which will involve more complex packaging solutions [14] - Business opportunities in the mobility industry utilizing IoT technology are expected to expand, leading to increased demand for high-performance modules [14]

Investment Rating - The report indicates a cautious outlook on global economic growth, with a projected downshift in GDP growth to 1.4% annualized rate in the second half of 2025, the slowest pace in over three years [2][3]. Core Insights - Global GDP growth is expected to slow significantly, influenced by various factors including trade tensions, labor market softening, and geopolitical risks, particularly in the Middle East [3][11]. - The report highlights a potential recession risk, with a 40% probability of a US/global economic recession due to household purchasing power pressures and business sector retrenchment [3][15]. - Inflation dynamics are shifting, with US core CPI inflation anticipated to accelerate towards a 4% year-over-year pace, while Euro area inflation is expected to drop to 2% [2][11]. - The report emphasizes the importance of monitoring global services PMI and business expectations as indicators of economic resilience [14]. Summary by Sections Global Economic Outlook - Global GDP growth is projected to be 2.3% in 2025, with a significant slowdown anticipated in the second half of the year [33]. - The report notes a 0.7 percentage point reduction in global GDP growth due to rising oil prices and geopolitical tensions [17]. Trade and Tariffs - The impact of tariff-related growth impulses is being felt, particularly in the global goods sector, with a noted decline in manufacturing output and softening goods demand [4][11]. - The report discusses the limited pass-through of tariff hikes to US inflation, suggesting that firms are currently absorbing the costs [12]. Regional Insights - In Asia, the report indicates that while some countries are experiencing growth, the overall sentiment is cautious due to trade policy uncertainties and potential impacts from rising oil prices [29]. - The report highlights that China is expected to see a moderation in growth, with a revised GDP forecast of 3.5% annualized rate for Q2 2025 [28]. Central Bank Policies - The Federal Reserve is expected to respond to labor market weaknesses with cautious easing, while other central banks, such as those in Scandinavia, are also leaning towards easing monetary policy [19][20]. - The report anticipates that the Bank of Japan will continue its quantitative tightening, with a focus on reducing its holdings of government bonds [23].