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December 2, 2011
Asia/GEMs Strategy Asia Insight: 2012 Outlook: maximum overweight (again)
In this note, we provide our 2012 Outlook and upgrade our equities weighting to maximum overweight (10% above benchmark) for the first time since October 2008.
We are far more bullish than consensus on the outlook for APxJ/EM equities in 2012. We set a revised scenario-weighted PT of 1,210 for MSCI EM (vs. 1,355 previously) at end 2012, which is 30% above current levels. Our price target for MXAPJ is 530.
We reassert our belief that the general global macro- environment is characterized by the painful birth of the Asia/EM centric global economy. More pertinently perhaps, we believe that APxJ /EM equities remain in an earnings-driven secular bull market.
Our 55% probability base case for 2012 comprises: 1) 5.7% weighted EM GDP growth per MS economics team’s recently updated base case forecast; 2) 9% USD EPS growth derived from a formal four-factor regression model, which implies ROE of 14.7% vs. a 10-year average of 14.3%; and 3) an exit P/E of 13.0x for end- 2012, derived as the average year-ahead prediction from four separate quantitative models. This is 7% below the 10-year average. We also consider four risk scenarios: bull, bear, and base, as well as an extreme bear.
Key Potential Surprise #1: China eases monetary policy preemptively and more aggressively than MS base case. Key Potential Surprise #2: EU sovereign crisis is resolved one way or another by early 2012.
Key Themes: 1) EM equity outperformance vs. DM to resume; 2) prefer mega-caps to the rest of the market; 3) dividend yield and dividend growth; 4) quality in the form our Best Business Models v2; 5) Asia to outperform EMEA; and 6) gold mining exposure.
We also highlight our current Country and Industry quant model allocations and stock focus lists in this report. We are adding Agile Property and removing Fosters (APxJ) and BIM (GEMs) from our focus lists.
Recent Reports Best Business Models v2: Identifying Highest Quality Stocks in APxJ/EM
Oct 28, 2011
Jonathan Garner, Pankaj Mataney, Pauline Yeung
Launch of Asia/GEMs Industry Selection Quantitative Model
Oct 11, 2011
Jonathan Garner, Yang Bai, Manas Dwivedi
US Dollar Sensitivity to EM Equities Oct 05, 2011Jonathan Garner, Manas Dwivedi, Pankaj Mataney
Upgrade South Africa to OW; Downgrade Malaysia to EW
Sep 27, 2011
Jonathan Garner, Pankaj Mataney, Pauline Yeung
Focus Lists Shine in Volatile Markets; Add Tencent and BIM
Sep 22, 2011
Jonathan Garner, Pankaj Mataney, Pauline Yeung
Exposure to Developed Europe Sep 22, 2011Jonathan Garner, Manas Dwivedi, Pankaj Mataney
Revisiting the Dividend theme in APxJ/EM Aug 29, 2011Jonathan Garner, Pankaj Mataney, Pauline Yeung
Upgrade Thailand and Peru to EW; Downgrade Czech to UW
Aug 28, 2011
Jonathan Garner, Pankaj Mataney, Pauline Yeung
Raising Our Equity Weighting Again, to its Highest Level Sicne April 2009
Aug 14, 2011
Jonathan Garner, Pankaj Mataney, Pauline Yeung :
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
M O R G A N S T A N L E Y R E S E A R C H A S I A / P A C I F I C
Morgan Stanley Asia Limited+ Jonathan F Garner
[email protected] +852 2848 7288
Pankaj Mataney [email protected] +852 2239 7830
Manas Dwivedi [email protected] +852 2239 7836
Yang Bai [email protected] +852 2239 7685
We appreciate your support in Institutional Investor’s All-Asia Research and Sales Team Survey as part of the feedback that helps us understand who you value and align our research offering with your needs.
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M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
2012 Outlook: maximum overweight (again)
Key Themes of this Report • We are far more bullish than consensus on the
outlook for APxJ / EM equities in 2012.
• We return our equity weighting to maximum overweight (10% above benchmark) for the first time since 2008, taking cash to zero.
• We set a revised scenario-weighted Target Price of 1,210 for MSCI EM (vs. 1,355 previously) at end-2012, which is 30% above the current level.
• We explore four scenarios: base, bull and bear as well as an extreme bear using inputs from the MS Global Economics team.
• The average of four separate models we have built to predict trailing P/E suggest a base case 27% expansion to 13.0x in 2012.
• Our four-factor earnings forecast regression model suggests 2012 base case of 9% nominal USD earnings growth and 14.7% ROE.
• Valuations, technical, flows and sentiment indicators back test for positive returns at least in line with our Target Price 12 months after reaching current levels.
• Major risks to our base-case scenario are: a) China hard landing; and b) EU sovereign risk and associated bank deleveraging triggering global recession.
• Key potential surprises are: 2) China eases monetary policy earlier and more aggressively than our base case; and b) EU sovereign crisis is resolved early in 1H12.
• Key Themes and Trades: 1) EM equity outperformance vs. DM to resume; 2) prefer mega-caps to the rest of the market; 3) dividend yield and dividend growth; 4) quality in the form our Best Business Models v2, 5) emerging Asia to outperform EMEA; and 6) gold mining exposure.
Today we both publish our 2012 Outlook and raise our equities weighting to the maximum overweight (10% above benchmark) in our asset allocation model, and reduce our cash weighting to zero. This is the first time we have been this Overweight since October 2008.
Revised Target Price of 1,210 for end-2012 is 30% above current levels
We are far more bullish than consensus on the outlook for APxJ / EM equities in 2012. We set a revised scenario- weighted Target Price of 1,210 for MSCI EM (vs. 1,355 previously) at end 2012, which is 30% above current levels. The last time we had such a high forecast return for MSCI EM looking one year out was at the end of 2008. Our Target Price for MXAPJ is 530 (up 35% from current levels).
Exhibit 1 MSCI EM Target Price History and 2012 Target
300
450
600
750
900
1,050
1,200
1,350
1,500
Dec
-05
Mar
-06
Jun-
06Se
p-06
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12Se
p-12
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-12
MSCI EM BenchmarkMSCI EM Index Price TargetMSCI EM Index Bear CaseMSCI EM Index Extreme Bear Case
December 11th, 2006MS GEMs Strategy
Initiation
MSCI EM USD Dec-2012 Price Target 1210
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
Our equity weighting raise follows earlier increases in July and August. As in 2H08, these earlier attempts by us to buy back the market were too early. Our final “all-in” move in the last cycle came in October 2008, when, as now, we reduced cash to zero. This was more successful. See Exhibit 3. The CAGR in USD terms from our recommended asset allocation (unaudited) is 5.6% per annum since January 2007.
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December 2, 2011 Asia/GEMs Strategy
Exhibit 2 MS Asia / GEMs Strategy Recommended Asset Allocation
Neutral MS Over (Under)EM Dec-11 14-Aug-11 EM Weight Relative toAsset Classes Allocation Allocation Delta Portfolio Neutral Portfolio
EM Equities 60% 58% 2% 50% 10%
USD & EUR EM Debt 20% 20% 0% 25% -5%
Local Currency EM Debt 20% 20% 0% 20% 0%
Cash 0% 2% -2% 5% -5%
Source: Morgan Stanley Research
Exhibit 4 shows the long-run performance of MSCI EM versus the GBI-EM local currency EM debt proxy and the JP Morgan EMBI+ Index. For the latest views of our EM fixed income team, please see EM Macro Strategy Comment: Reduce Long-Side EM Risk, by Rashique Rahman and others.
Exhibit 3 MS Recommended Equity Allocation vs. Multi Asset Recommended Portfolio Returns*
60
70
80
90
100
110
120
130
140
150
160
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
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08
Apr
-08
Jul-0
8
Oct
-08
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Apr
-09
Jul-0
9
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-09
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10
Apr
-10
Jul-1
0
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-10
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11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
MS Recommended Portfolio Returns Equity OW (right)
Max. OW Max. OW
Source: MSCI, FactSet, Morgan Stanley Research. *Multi-asset portfolio represents a portfolio comprising MSCI EM Index, JPM EMBI+ Index, JPM GBI-EM Index & US$ Cash. EMBI+ and GBI-EM are proxies for USD & EUR denominated EM Debt and Local Currency EM Debt respectively. Unaudited performance show that the MS recommended portfolio had a CAGR of 5.6% since Jan-07. Greatest OW (UW) position for any asset set at +10% (-10%). Data as of 30 Nov, 2011
Exhibit 4 MSCI EM Equities vs. EMBI+ and GBI-EM Index (US$ terms)
60
80
100
120
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240
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-01
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11
EM Relative to EMBI+ Index
EM Relative to GBI-EM Index
Source: Bloomberg, MSCI, Factset, Morgan Stanley Research. Data as of 30 Nov, 2011
Firing the last round
To explain why, since initiation in late 2006, we have framed our market call by varying our equities weighting within pre-defined limits, a digression into Jonathan’s personal history may be relevant:
I would not be here if my grandfather had not avoided death by goring from a water buffalo in Kenya in the 1920s. These are, other than hippopotami, the most dangerous animals in Africa. They weigh well over a ton. He had a single-shot rifle with no time to reload. As it came thundering towards him, he had to stand his ground and wait to fire until it was within 20 yards, as he told it because the skull is so thick. The beast's head ended up over his mantelpiece with the bullet hole clearly visible right between the horns, which were sharply pointed. The moral of this tale, as my grandfather made clear to me as a small boy, is two-fold. First, keep your nerve. Second, try not to get into a situation where you only have one shot to survive.
So, that's why we – and we suspect most investors and asset allocators - vary our equities weighting rather than make binary market calls. One of the horns of the charging buffalo today is the EU sovereign crisis, whilst the other is fears of a China hard landing. Our views on both are discussed in detail below. However, having wasted two shots earlier in the year, with the buffalo now at 20 yards and closing, and with only 2% cash left in our asset allocation model, our judgment is that it has now come to the right time to – once again - fire the last bullet.
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December 2, 2011 Asia/GEMs Strategy
Reiterate thesis of the painful birth of the Asia/EM centric global economy
As in 2008, we reassert our belief that the general global macro-economic and financial market environment is characterized by the painful birth of the Asia/EM centric global economy. For more details, see in particular our December 2006 initiation piece, Taking Centre Stage: Five Themes and 2007 Outlook, dated December 11, 2006, and Third Transition in Global Manufacturing – Investment Implications, dated July 25, 2010.
Exhibit 5 Share of World Manufacturing Output 1750-2010
0%
20%
40%
60%
80%
100%
1750
1760
1770
1780
1790
1800
1810
1820
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1850
1860
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1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2009
China
U.S.
Japan
Europe
India, Brazil, Mexico and other EM/DM*
Russia & FSU
Source: Paul Bairoch, “International Industrialization Levels from 1750-1890” Journal of European Economic History; Samuel P. Huntington, “The clash of civilizations and the remaking of world order; Manufacturing Value added from International Yearbook, United Nation Statistical Database, Euromonitor, IHS Global Insight, Morgan Stanley Research. *In 2010, all non-China EM countries (ex Russia & FSU) combined accounted for 19.3% of manufacturing output versus 3.7% for smaller DM markets. Since 1970, Europe comprises Developed European countries only
Exhibit 5 shows that, led by China, EM is taking a dramatically rising share of World Manufacturing Output. Exhibit 6 shows that Emerging Markets’ share of global nominal USD GDP is now forecast to be level with that of Developed Markets (IMF definition) by 2016.
Exhibit 6 Actual and IMF Forecast Shares of World GDP (Nominal US$ bn)
0%
10%
20%
30%
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50%
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80%
1980
1981
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2011
E20
12E
2013
E20
14E
2015
E20
16E
Developed Markets* Emerging Markets*
IMF Forecast
Source: IMF, Morgan Stanley Research. *IMF definition of G7 and Emerging Markets. *Rest of World countries
EM remains in an earnings-driven secular bull market
More pertinently perhaps, we believe that APxJ /EM equities remain in an earnings-driven secular bull market. Exhibit 7 shows the USD earnings per share integers for the major regional equities indices since the end of the Asian crisis. MSCI EM USD EPS has set a new post global recession high during the course of 2011 some 6% well above the prior peak, outperforming other regional equity indices in this regard.
Exhibit 7 US$ EPS Integer (Indexed to 100)
0
100
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Jan-
00
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Jan-
11MSCI Japan MSCI USA
MSCI EM MSCI Europe
Jan-00 = Indexed to 100
Source: IBES, MSCI, FactSet, Morgan Stanley Research
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December 2, 2011 Asia/GEMs Strategy
Moreover, the proposition that MSCI EM remains in a secular bull market is supported by the data given in Exhibit 8. Of the major equity regions, MSCI EM is the only one to show a positive CAGR in USD total returns over the three-, five- and 10-year time horizons.
Exhibit 8 Comparison of Regional Performance (US$ - Total Return)
7%
-6%
4%
14%
0%
3%
24%
4%
15%
5%
-6%
2%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
3Yr 5Yr 10Yr
S&P 500Euro StoxxMSCI EMTopix
Source: Factset, MSCI, Morgan Stanley Research. Data as of 30 Nov, 2011
Base-case scenario for 2012: 9% EPS growth and 14.7% ROE
Our 55% probability base case for 2012 is comprised of:
a) 5.7% weighted EM GDP growth per MS economics team’s recently updated base case forecast;
b) 9% USD EPS growth derived from a four-factor regression model. This would imply an ROE of 14.7% versus a 10-year average of 14.3% and a 1H09 trough of 11.9%. Our USD base-case EPS of 100 compares with a consensus forecast of US$102 (down from US$109 three months ago (see Exhibit 10 and 13); and
c) an exit P/E of 13.0x for end-2012 derived as the average year-ahead prediction from four separate quantitative models. This is 7% below the 10-year average.
Exhibit 9 MSCI EM Factor Model Earnings Growth Projections (US$, YoY%)
-60%
-40%
-20%
0%
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100%
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12
Bull +24.1%
Extreme Bear -35.0%
Base +9.1%
Bear -12.7%
Source: MSCI, Factset, Morgan Stanley Research
Exhibit 10 Consensus MSCI EM US$ EPS forecasts
2012
2013
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Dec
-87
Dec
-88
Dec
-89
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-91
Dec
-92
Dec
-93
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-94
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1986 1987 1988 1989 1990 1991 1992 19931994 1995 1996 1997 1998 1999 2000 20012002 2003 2004 2005 2006 2007 2008 20092010 2011 2012 2013
MSCI EM
Source: MSCI, Factset, Morgan Stanley Research. Data as of 30 Nov, 2011
Exhibits 9 and 11 show the historical and forecast evolution of EPS and ROE using the base-case forecast.
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December 2, 2011 Asia/GEMs Strategy
Exhibit 11 MSCI EM ROE with MS Top-down forecasts
4%
6%
8%
10%
12%
14%
16%
18%
Jan-
92Ja
n-93
Jan-
94Ja
n-95
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n-97
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98Ja
n-99
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00Ja
n-01
Jan-
02Ja
n-03
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04Ja
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06Ja
n-07
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08Ja
n-09
Jan-
10Ja
n-11
Jan-
12
Bull16.2%
Extreme Bear10.3%
Bear12.7%
Base14.7%
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
Exhibit 12 Return on Net Operating Assets (RNOA) for EM*
0%
2%
4%
6%
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10%
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16%
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e
2012
E
0.0x
0.2x
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0.6x
0.8x
1.0x
1.2x
1.4x
1.6x
RNOA NOPAT Margins Operating Asset Turnover
Source: Worldscope, Morgan Stanley Research. *See our 28th October note: “Best Business Models v2- Identifying Highest Quality stocks in APxJ/EM. *Sample of 750 ex financials stocks
We expect the EM ROE to fall to 14.7% from current level of 15.3%. We forecast margins in EM to fall in 2012 but expect Operating Asset Turnover to improve further (See Exhibit 12). We also estimate the financial leverage contribution to ROE to be marginally lower than in 2011.
Other risk scenarios for 2012
We also consider three other risk scenarios: one more bullish and two more bearish scenarios. Together these deliver the scenario weighted target price of 1210. We place a 15% probability on the bull scenario and 20% on the bear scenario.
Our 55% probability base case delivers 40% upside in price terms to end 2012.
A summary of the macro-economic, earnings growth and exit P/E assumptions for the four risk scenarios are given in Exhibit 13.
Exhibit 13 MSCI EM Top-down Scenario Analysis for 2012 Scenarios 2012 MSCI EM Global Implied2012 Assigned Dec 2012E Growth Outlook Trailing PE Total US$ ReturnOutlook Weight EPS 2012 Assumptions* Upside (Dec 2012 )
Bull Scenario 15% US$ 114Global growth of
4.2% with EM growth of 6.5%
14.9 87%
Base Scenario 55% US$ 100Global growth of
3.5% with EM growth of 5.7%
13.0 44%
Bear Scenario 20% US$ 80Global growth of
1.9% with EM growth of 4.3%
11.2 0%
Extreme Bear Scenario 10% US$ 60
Another 2008/09 type recession or
worse9.3 -38%
Source: MSCI, FactSet, Morgan Stanley Research. Data as of November 30, 2011. Growth forecasts per MS Global Economics teams scenarios. *Trailing PE assumption discussed later in the report.
Exhibit 14 provides summary valuations, earnings growth, ROE and dividend yield information for the four scenarios.
Exhibit 14 MS Top-Down MSCI EM 2012 Earnings Growth and Valuations* Scenarios
2012 AssignedOutlook Weight 2012 2012 2012 2012 2012
Bull Scenario 15% 24.1% 8.1x 1.32x 16.2% 3.9%
Base Scenario 55% 9.1% 9.2x 1.36x 14.7% 3.4%
Bear Scenario 20% -12.7% 11.6x 1.47x 12.7% 2.7%
Extreme Bear Scenario 10% -35.0% 15.5x 1.60x 10.3% 2.0%
US$Div
YieldUS$ EPS Growth
US$P/E
US$P/B
US$ROE
Source: MSCI, FactSet, Morgan Stanley Research. Data as of November 30, 2011 *Derived from a four factor model discussed below.
Exhibit 15 decomposes the base, bull, bear and extreme bear case scenarios into P/E expansion and EPS growth, respectively, and compares the results to history. The base case looks somewhat similar to 2003.
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December 2, 2011 Asia/GEMs Strategy
Exhibit 15 Price Decomposition of Four Scenarios into Multiple Expansion and EPS Growth
-80%
-60%
-40%
-20%
0%
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40%
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100%
1993
1994
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Bas
e '1
2B
ull '
12B
ear '
12Ex
trem
e B
ear '
12
(YoY
%)
PE Expansion (left) EPS Growth (left) MSCI $ Price Perf (YoY%)
Source: MSCI, IBES, Morgan Stanley Research. Data as of November 30, 2011
MS Global Economics Team’s Scenarios for 2012
Our four scenarios are linked to the latest thinking of Morgan Stanley’s Global economics team, which published its most recent forecast update on November 28, 2011, Global Forecast Snapshots: Outlook 2012: Policy Make or Break.
The team also has four scenarios for the global economy in 2012, although they do not publish formal probabilities for each scenario. Hence, the probabilities shown in Exhibit 13 are – as in our previous scenario analyses – those assigned by ourselves on the APxJ/EM equity strategy team.
Exhibit 16 Morgan Stanley Global GDP Forecasts (%Y)
2010 2013ENov Aug Nov Aug Nov
Global 5.2 3.9 3.9 3.5 3.8 3.9G10 2.7 1.4 1.5 1.2 1.5 1.4United States 3.0 1.8 1.8 2.2 2.1 1.8Euro Area 1.8 1.6 1.7 -0.2 0.5 0.9Japan 4.1 -0.4 -0.6 1.1 1.3 0.5UK 1.8 0.9 1.2 0.6 1.4 1.8
EM 7.9 6.4 6.4 5.7 6.1 6.2China 10.3 9.0 9.0 8.4 8.7 8.7India 8.9 7.3 7.3 6.9 7.4 7.5Russia 4.0 4.5 4.7 5.0 5.2 4.0Brazil 7.5 3.1 3.7 3.5 3.5 4.5
2011E 2012E
Source: Global Forecast Snapshots, published on Nov 28, 2011, Morgan Stanley Research
Exhibit 16 provides a high-level summary of our economics team’s forecast for 2012. Detailed forecasts for GDP growth, inflation and FX parities versus the US dollar for the major constituents of the MSCI EM index are provided in Appendix 2 of this report.
Base Case: The MS economics team’s base case is now for 3.5% global GDP growth in 2012 versus 3.8% previously. This is below the long-run average growth rate for the global
economy. The team now expects an outright recession in the Eurozone with -0.2% growth in 2012. Its US base case remains “anemic” growth of just over 2%, but this depends on the assumption that Congress will extend most of this year’s fiscal stimulus into next year – expiration could tip the US into a double dip in the team’s view. Against this backdrop, growth prospects for emerging markets are described by the team as having “dimmed further”. It now expects GDP growth for the EM universe of 5.7% versus 6.1% previously, with China 2012 GDP at 8.4% versus 8.7% previously.
Bull Case: The MS economics team’s “reasonable” bull case assumes a swift and convincing solution to Europe’s sovereign crisis and a balanced US medium-term deficit- reduction plan combined with extension of fiscal stimulus into next year. Confidence and domestic demand would pick up and world trade would grow by 2ppt more than in the base case. In this scenario, global GDP expands by 4.2% in 2012, against 3.5% in the base case and 1.9% in the bear case. See below for our own discussion of a swift resolution of the EU sovereign crisis as a Key Potential Surprise for 2012.
Exhibit 17 Risks to Global Growth Skewed to the Downside for 2012 (MS Economist 2012 GDP Forecast Scenario- YoY% Chg.)
Bear
Bull
Base
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Global G10 US Euroarea
Japan EmergingMarkets
Key
Source: Morgan Stanley Economics, Morgan Stanley Commodity Research
Bear Case: The MS economics team’s bear case is a global recession: To model such a global bear case, it assumes that, contrary to the base-case assumptions, US Congress fails to extend the payroll tax cut and the extended unemployment benefits into 2012, which would result in a fiscal tightening of a little more than 1% of GDP. In Europe, the bear case assumes governments do not come up with a convincing fiscal solution on December 9, and bond yields in response push higher still.
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December 2, 2011 Asia/GEMs Strategy
These policy moves depress confidence and domestic demand further. Transmission to the rest of the world follows through the asset price channel, through further bank deleveraging, and the trade channel – the team assumes a halving of world trade growth compared to the baseline. As a consequence, global growth falls to 1.9% in 2012 and thus below the recession threshold of 2.5%. The US economy contracts for most of 2012, and Europe through all of the year. China’s GDP growth slows to 7.7%, with rapid fiscal easing preventing a worse outcome.
Extreme-Bear Case: Finally, the Morgan Stanley economics team consider a fourth scenario which may arise depending on the policy decision taken or not taken over the next month, our bear case for the global economy may soon become the base case. If European governments fail to agree on a big step towards fiscal integration on December 9, and if the ECB refuses to step up support, a super-bear scenario could ensue including serial private and public sector defaults, and the possibility of euro break-up. To be sure, the team still view this as a tail event, even though the tail has become fatter recently. Putting numbers for GDP and other economic indicators to such a scenario is extremely difficult. We in the APxJ/EM strategy team apply a 10% weighting to this scenario to derive our price target, although we recognize the difficulty of applying a specific number in this time of uncertainty.
EM can ease if needed
Our economics team is not currently forecasting a major round of interest rate reductions in the emerging world (see Appendix for individual country details). For the GDP weighted average policy rate, it expects a 20bp reduction during 2012 that would reverse around 6% of the tightening since early 2010. However, the more quickly EM inflation falls, particularly if DM growth moves into the bear-case zone, the more quickly monetary policy easing is likely to be deployed by EM countries. Again, see below for our detailed discussion of another Potential Surprise for 2012 in relation to China’s monetary policy stance.
Exhibit 18 EM vs. US Policy Rates
0
2
4
6
8
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12
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16
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01
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-01
Jul-0
2
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-03
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5
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-06
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07
Oct
-07
Jul-0
8
Apr
-09
Jan-
10
Oct
-10
Jul-1
1
Apr
-12
EM Policy Rate*US Policy Rate
* Nominal GDP Weighted
MS Forecast
Source: DataStream, Haver, Morgan Stanley Research. Data as of 30 Nov, 2011
Commodities market forecasts for 2012
On the back of a slower growth environment, our commodity team remains selective about commodity exposure, preferring relative value trades and commodities that perform well in low-growth environments. It believes dollar strengthening could act as an additional headwind for the commodities complex. Given that most commodities are priced in US dollars, a US dollar rally may not affect commodity prices in real terms (or PPP), but will weigh on nominal prices.
Our commodity team prefers defensive areas and remains bearish on industrial production-sensitive cyclicals. Its most preferred commodities are gold, silver and livestock, while base metals (lead, zinc and nickel) and crude oil are among the least preferred commodities. The team remains cautious on base metals as they are highly cyclical and tend to sell off during global slowdowns. Although industrial base metals have already seen significant underperformance, the team believes there will further downside risk to these commodities due to concerns of economic slowdown. The team believes the defensive nature of gold and silver will create investment demand, as investors look for safe havens in periods of volatility and risk aversion. Although the current USD strength is a headwind to USD gold prices, in its view expectation of aggressive Fed easing and adoption of QE3 in 1H12 could to boost gold’s performance. Also, the gold to oil ratio highlights that on a long-term purchasing power basis, gold is once again close to long-term fair value, creating an attractive entry point.
Our commodity team expect Brent to average near US$100/bbl for full-year 2012, with 1H12 significantly weaker
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than 2H and prices potentially falling as low as US$85-90/bbl. The team is bearish on crude oil near term, as it expects a recover in oil supply and slowing demand to drive prices oil prices lower in 1H12. However, it remains constructive on crude over the medium term, and believe that structural supply constraints will reassert themselves in 2H12. For details please see the Appendix.
Macro Buffalo’s Horn #1: China Hard Landing
We now turn to our own perspective on the two key macro-risk issues from an APxJ/EM equities perspective: a China hard landing, and EU sovereign risk and associated bank deleveraging. In doing so, we describe two key Potential Surprises to the Consensus that may positively affect EM equities.
The likelihood of a China hard landing – defined as two quarters of below 7% officially reported GDP growth – would seem to us to be low. MS China economics team is currently forecasting base case GDP growth in 2012 of 8.4% to reflect: i) deterioration in the external environment, ii) weakness in the domestic housing market, and iii) constraints in policy easing versus three years ago. It forecasts CPI inflation to ease gradually to 3.4% in 2012 and 3.6% in 2013. Domestic demand is likely to be a key factor supporting growth with robust consumption and firming gross capital formation growth in 2012. The team expects consumption growth to accelerate from 8.3% in 2011 to 8.6% in 2012. For details see China Economics: 2012 Stable Growth amid Disinflation, by Helen Qiao and team published on November 28, 2011.
As regular readers of our product will know, we think the China economy is larger and more diversified than officially stated. (See our September 2009 report, China’s Under-consumption Over-stated). In particular, we find compelling evidence that both household consumption expenditure and household incomes are understated. This larger than officially stated size, and greater diversity, of the China economy played an important role in cushioning the impact of the 2008/09 Great Recession on China. It is likely to do so again if downside scenarios for global trade and / or the China property sector are realized in 2012.
China economy less externally dependent than prior to Great Recession
One consequence of the 2008/09 hard landing in China is that the Chinese economy has become less externally demand dependent. It is noteworthy that on official statistics, China’s export / GDP ratio has fallen by around 10ppt to 27% since late 2007, and its trade surplus is running at 1/4th the level.
Hence, barring the most extreme outcomes for global trade and exports, in our view a China hard landing this time would have to be domestically driven.
Exhibit 19 China Exports as Percentage of GDP (3MMA) – Less Export Dependent
10%
15%
20%
25%
30%
35%
40%
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92
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93
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Source: CEIC, Morgan Stanley Research
Exhibit 20 China Trade Surplus as Percentage of GDP (3MMA)
-4%
-2%
0%
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4%
6%
8%
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Source: CEIC, Morgan Stanley Research
China’s economy is showing a loss of momentum
Currently, China’s economy is showing a loss of momentum. The MS China leading indicators are pointing to headwinds for Industrial Production growth in the coming months. Moreover, the just-announced November China PMI showed a below consensus print of 49.0 with New Orders at 47.8 and New Export Orders of 45.6.
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Exhibit 21 MS China Leading Indicator vs. Industrial Production (yoy change)
-
10
20
30
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
MS China Leading Indicator_trend-restoredIndustrial Production
%, y/y
Source: CEIC, MS China Economic Team, Morgan Stanley Research
However, as Exhibit 22 records, the level and change in various China macro indicators currently are a some distance from the hard-landing trough levels of 2008.
Exhibit 22 China Macro Economic Indicators: Now versus 2008/09 hard landing trough
Current 2008/09 Trough
Month of Trough
IP (YoY%) 13.2% 5.4% Nov-08Exports (YoY%) 15.8% -26.3% May-09Retail Sales (YoY%) 17.2% 11.6% Feb-09Electricity Production (YoY%) 9.3% -12.3% Jan-09M2 (YoY%) 12.9% 14.8% Nov-08PMI (Mfg.) Level* 49 38.8 Nov-08Auto Sales -1.1% -14.5% Nov-08Macao Gaming Revenue** 38.70% -17.40% Jun-09MS China LEI (YoY%) 12.5% 4.80% Nov-08China CPI 5.5% -1.8% Jul-09
Note: All the current data points are as of Oct-11,* data as of Nov-11, ** data as Sep-11 Source: CEIC, Morgan Stanley Research
A hard landing would have to be driven by a slump in domestic fixed capital formation
If there is to be a China hard landing in 2012, a slump in domestic fixed capital formation is a more likely candidate than external demand pressures, in our view. In this regard, the market appears particularly concerned about the real estate sector. Exhibit 23 shows that real estate accounts on our Economics team’s estimates for around 24% of total Gross Fixed Capital Formation.
Exhibit 23 China: Gross Fixed Capital Formation by Type of Investment
Mfg.32%
Real Estate24%
Mining4%Others
14%
Infra26%
Source: MS China Economics Team, Morgan Stanley Research. Note: The share is estimated from FAI by industry
MS analyst Brian Leung recently initiated coverage on the China Real Estate sector with an Attractive view on listed equities in the sector. (See China Property: Capex Pressure Swings Policy Pendulum, dated November 23. 2011.) Brian sees near-term challenges in the physical market and expects the fall in transaction volumes and prices to accelerate in the coming months, approaching the monthly yoy levels of 2008’s cycle lows. Prices in Tier 1 cities may fall 15% in 2012. However, in his view, policy risk to the sector is diminishing. In his base-case forecasts property under development and residential real estate fixed asset investment growth slows to 11% and 15%, respectively, from 27% and 34% YTD under the normal rate of inventory replenishment (see Exhibit 24).
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Exhibit 24 China Residential Real Estate Investment Growth (yoy) - Slowing
0%
5%
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45%
50%
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-11
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Source: CEIC, Morgan Stanley Research
Exhibit 25 China YTD Residential GFA Sold vs. ASP (YoY)
-40%
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120%
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-4%
-2%
0%
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4%
6%
8%
10%
12%
14%
16%
18%Residential Floor Space Sold: YTD YoY (LHS)
Property Price Index: New Constructed: Residential (YoY)
Source: CEIC, Morgan Stanley Research
Key Potential Surprise for 2012 #1: China eases more aggressively and earlier than consensus expects
At the moment, neither consensus nor MS economics team expects an aggressive monetary policy easing phase from China. Our economics team expects as a base case no rate cuts throughout 2012. The rationale for this is two-fold: a) forecast stickiness of inflation; and b) the overhang of debt relative to GDP as a result of the aggressive expansion of lending in the 2009/2010 period. We estimate China’s total debt stock as a ratio of official GDP at 214% currently, up from 154% in 2008.
Exhibit 26 China Debt Stock as a Percentage of Official GDP
CHINA'S DEBT / GDP
79 7995 103 106 114
19 18
2428 29
27
15 15
1717 18 18
17 18
2627 25 24
27 24
2525 25 24
8 8
0
50
100
150
200
250
2007 2008 2009 2010 2Q11 3Q11
% o
f GD
P
Corporate HouseholdFinancial Local GovtCentral Govt with AMC & Railway Debt Shadow Loans
211200
187
154157
214
Source: Morgan Stanley Asia Credit Team
However, the consensus was surprised by the earlier-than- expected 50bp reduction in China’s required reserve ratio (RRR) on November 30, 2011. This is the first commencement of an RRR reduction cycle since October 9, 2008 (when China also eased policy concurrently with a group of other DM central banks). It may indicate that a more accelerated and significant phase of monetary policy easing lies ahead .
At the moment, we judge that the market does not expect China bank credit growth to exceed nominal GDP growth by a significant amount. (MS economics team forecasts around 15% bank credit growth in 2012, rising to 17-18% in the bear- case economic scenario and reaching 20% only in the extreme bear scenario.) Faster growth in bank lending earlier in the economic downswing would be a Potential Positive Surprise for the market, and is likely to benefit the banks, real estate and capital goods and industrials segments of the China equity market in particular. Moreover, on the wider EM stage, energy and mining equities would likely benefit from an upside surprise in China credit growth.
So, the potential surprise may be that we are seeing the early signs of a repetition of the policy easing cycle of late 2008/09 as China’s senior leadership reveals wider preference for continued growth and a willingness to take risks with a resurgence in inflation. As Exhibit 27 shows, historically, the easing of RRR restrictions has been followed by accelerations in the growth rate of bank lending and strong performance from MSCI China – and indeed emerging market equities more generally. The last time that China began an RRR reduction cycle coincided with the cyclical trough in both MSCI
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EM and MSCI China equities the same month. (This time, we think the trough in the market occurred on October 4, 2011 at the height of the China hard-landing concerns).
Exhibit 27 China Loan Growth and RRR ratio vs. MSCI China yoy Performance – RRR Reduction in 2008 Associated with Market Trough
-100%
-50%
0%
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100%
150%
Apr
-98
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-99
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-11
5%
10%
15%
20%
25%
30%
35%
40%MSCI China YoY (Left)China Loan GrowthRRR
Source: MSCI, FactSet, Morgan Stanley Research
Importantly, China’s banks loan to deposit ratio remains well within the recent historical range of 68% to 72% (see Exhibit 28)
Exhibit 28 China Banks Loan to Deposit Ratio
60%
64%
68%
72%
76%
80%
Jan-
03Ju
n-03
Nov
-03
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-04
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04Fe
b-05
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5D
ec-0
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ay-0
6O
ct-0
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ar-0
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ug-0
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ov-0
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pr-0
9Se
p-09
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l-10
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-10
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-11
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-11
China
Source: CEIC, Morgan Stanley Research
Monitor the CNH/CNY spread as an index of fear of China hard landing
The relationship between onshore and offshore RMB is a key variable we will be monitoring for early warning signals of whether we are correct in putting the probability of a China hard landing as low. In recent trading, the offshore Hong Kong CNH market has firmed versus the onshore official market, indicating to us a decrease in concerns of a China hard landing.
Exhibit 29 CNH / CNY Spread as an Index of China Hard landing Fears
0.97
0.98
0.99
1.00
1.01
1.02
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-10
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-11
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-11
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-11
Fear of China hard landing
Easing of China hard landing fears
Source: Bloomberg, Morgan Stanley Research
Macro Buffalo’s Horn #2: EU sovereign crisis and European bank deleveraging
The likelihood of a worse-than-base case outcome in relation to the Eurozone’s twin sovereign and banking crisis would seem to us to be materially higher than that of a China hard landing.
MS’s economics team’s base case is a two-quarter EU recession, beginning in 4Q11. Meanwhile, the accelerated adoption of Basel 3 capital adequacy and the deterioration in peripheral European bond markets are forecast by our banks team to lead to €1.5-2.5trn of near-term EU bank deleveraging.
Recent MS reports have covered the implications for Asia and global emerging markets in detail. A key conclusion of these works is that we are likely to see a heterogenous impact. See in particular MS Asia credit strategist Viktor Hjort’s report, The Challenge to Asia of European Deleveraging and Huw van Steenis and others’ note European Banks: What are the Risks
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of EUR1.5-2.5trn Deleveraging?, both published November 13, 2011.
The first channel by which the Eurozone’s problems affect APxJ/EM is trade. Exhibit 30 shows the share of each country’s exports to the Eurozone-17 and the overall EU.
Most exposed to a EU recession are Czech, Poland, Hungary, Russia and Turkey. Least exposed are Mexico, Taiwan, Malaysia, Indonesia and Thailand.
Exhibit 30 Emerging Markets Exports to Euro Area and Non-Euro Area EU Countries
0%
10%
20%
30%
40%
50%
60%
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90%
Cze
ch
Pola
nd
Hun
gary
Rus
sia
Turk
ey
Egyp
t
S. A
fric
a
Bra
zil
Peru
Chi
na
Indi
a
Chi
le
Col
ombi
a
Phili
ppin
es
Kor
ea
Thai
land
Indo
nesi
a
Mal
aysi
a
Taiw
an
Mex
ico
Exports to non Euro Area EU countries
Exports to Euro Area
Source: Haver, IMF, Morgan Stanley Research
The second, and probably more important, channel by which the EU sovereign crisis affects APxJ/EM is that of funding. Our Asia banks and credit strategy teams estimate that for Asia the exposure is manageable at 8% of total deposits (4% including China). The team believes that Asian banks could absorb European bank claims. Global trade finance may be affected by French banks looking to reduce dollar funding dependency as they represent 25% of outstandings. However, in an orderly scenario this will likely be passed to local banks and / or global players. However, some parts of APxJ/EM, most notably Central Eastern Europe (CEE) and Turkey, could be more negatively affected. The MS banks team points out that 12 of the 16 major European banks operating in CEE (accounting for 78% of banking assets) had a capital shortfall in the recent 9% test.
To explore the overall vulnerability to a sudden stop in global funding, MS’ EM fixed income strategy team has constructed a vulnerability indicator. This is calculated as the ratio of liquid foreign assets of the central bank to the total external funding
needs of the entire economy over the next 12 months. The smaller the ratio, the less well “covered” is the country.
On this basis, the seven most-exposed countries / currencies are Turkey, Poland, Hungary, Chile, Czech Republic, Colombia and India – all with EVRs below 2.5. Several of these have already seen significant downward pressure on their currencies. They account in total for only around 13% of MSCI EM market capitalization.
Exhibit 31 EM External Vulnerability Indicator
6.4%
3.4%0.7%17.1%
0.6%1.8%
0.3%2.8%4.6%15.0%7.3%7.3%0.9%0.3%1.7%0.3%1.5%1.3%
0
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TRY
PLN
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R
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THB
PEN
CN
Y
PHP
MYR
RU
B
High Vulnerability : EVR* below 2.5
Low Vulnerability : EVR* above 20Legends show Mcap Share in MSCI EM
Market Cap : 13%
Market Cap : 28%
Source: Morgan Stanley. EVR is the ratio of liquid foreign assets of the central bank to the external funding needs to the entire economy for the next 12 months. EVR = (June ’11 FX reserves + 4Q10 liquid foreign claims of local banks)/2011F C/A deficit + 4Q10 S-T ext debt + 12m forward amortization of m-t debt).
Asia-Pacific domestic bank credit continues to grow at similar rates to those before the Global Financial Crisis
The cross-border connectedness of banking systems and the divergence in domestic bank credit growth rates in recent years are highlighted in Exhibit 32, taken from a recent report of the BIS Committee on the Global Financial System, CGFS Paper No. 45, Global Liquidity – concept, measurement and policy implications, published in November 2011. The report concludes: “Aggregation across countries, finally, yields consistent aggregates of domestic and cross-border bank credit, both across regions and globally – broad measures of global liquidity from the recipient’s perspective. According to these data, worldwide, bank credit continued to expand throughout the recent crisis. While cross-border credit and, hence, internationally intermediated liquidity did contract (green line), the overall growth rate of bank credit remained positive. Across regions, however, there were significant differences. Total bank credit to non-banks in the United States and the euro area has levelled off since the start of the
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crisis, whereas bank credit to borrowers in Asia-Pacific is currently growing at rates comparable to those seen before 2007."
Indeed as the charts make clear, Asia-Pacific growth in domestic bank credit (almost doubling to around US$14trn outstanding from mid-2005 to end-2010) has substantially offset the slowdown in the US and Euroarea growth of
domestic bank credit. It is also noteworthy that Emerging Europe is not only more exposed to cross-border claims relative to its total outstanding bank credit stock than is Asia- Pacific, it also shows more similarity with the Euroarea in the slowdown in domestic bank credit growth since the 2007/08 crisis. Latin America lies between these two extremes.
Exhibit 32 Global Bank Credit Aggregates, By Borrower Region (US$trn, %)
Source: BIS report – CGFS Paper No. 45 “Global Liquidity – concept, measurement and policy implications, dated November 2011: IMF, International Financial Statistics; BIS locational banking statistics by residence; BIS calculations Morgan Stanley Research. The vertical lines represent end-Q2 2007 and end-Q3 2008. 1 The shaded areas (left hand axis) indicate total credit expressed in US dollars at constant end-2010 exchange rates, and thus exclude exchange rate valuation effects. The dotted black line shows unadjusted total credit converted into US dollars at contemporaneous exchange rates. The adjustment of the shaded areas is done using various pieces of the BIS banking statistics to get a breakdown by currency for both cross-border credit and domestic credit. 2 In trillions of US dollars. 3 In per cent.
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Key Potential Surprise #2: EU sovereign crisis abates or is resolved early in 1H 2012
Although it is outside our own area of expertise, we cannot help but venture our own view that another key Potential Surprise for early 2012 may be a sudden resolution of the EU sovereign and banking system crisis. Consensus seems to assume that it will drag on for some time. However, our colleague Arnaud Mares has referred to the next few weeks as amongst the most important in recent European history. (See his report, Sovereign Subjects: Europe in the Balance).
In essence, there are three options: (a) fiscal union driven by treaty changes; (b) ECB monetization; and (c) disintegration through sequential exit. From a global equity market perspective, Options (a) and (b) would be the preferred choice, keeping in mind that with Option (b) the payoff would be higher inflation down the line. For this reason, inter alia, we prefer adding gold mining exposure as highlighted in our key themes (see below for more details).
Option (a) appears to be the preferred option of the German political and monetary establishment. There are reports that concrete proposals will be tabled by both France and Germany as soon as the upcoming December 9 summit. Failure to do so will be problematic given the heavy maturity profile of peripheral European countries in the next few months. Our European interest rate strategy team calculates that Eurozone governments have a bunching in redemptions in the next three months amounting to €128bn in December, €151bn in January, and €119bn in February.
Our emerging markets experience suggests to us that the route of Option (c) should not be ruled out. This “super-bear scenario” is described as a fat tail risk by our economics team, but could be precipitated by a failure to agree on a big step towards fiscal integration at the next EU summit on December 9. This process could be driven by the domestic priorities of employment and income growth in the peripheral Euroarea countries overriding the external priorities of debt service. Our economics team fears that this would lead to sequential defaults on private and public obligations, which would lead to a deeper global recession than in 2008/09. In this scenario, there could be widespread bank nationalizations, a shift toward autarchy and capital controls, and a significant short-term impact on GDP growth and risk premia.
That said, the lesson from Asia’s own banking crisis and currency regime changes in the 1996/98 period is that the process need not have a significant negative impact on
growth in the medium to longer term. New exchange rate and financial arrangements would need to be made in any economies that left the Euroarea, which would price labor in these economies back into the global economic system over time.
How we model for base case of 9% USD earnings growth in 2012
For the third year running, we have undertaken a formal top- down factor model regression in an attempt to predict earnings for 2012. This factor model allows us to feed in varying assumptions for key variables that we believe drive APxJ/EM earnings using the four alternative scenarios described above.
Exhibit 33 shows last year’s prediction derived from a similar factor modeling approach for earnings growth in 2011 versus consensus expectations.
Exhibit 33 MS and Consensus EPS Estimates at the Start of 2011 vs. Actual Outturn
98.0
94.0
92.5*
89.0
90.0
91.0
92.0
93.0
94.0
95.0
96.0
97.0
98.0
99.0
2011
Consensus EstimateMS EstimateActual
Source: Company data, Morgan Stanley Research. * LTM EPS
For this year, we have tweaked our EPS factor model slightly, but the main components are similar. We have replaced the composite LEI (50/50 combination of China LEI and US ISM) with Global PMI. We proxy top-line revenues, margins, and currency translation effects using four variables:
Four explanatory variables in our earnings factor model are global PMI, real effective exchange rate, industrial production and CPI-PPI spread
1. Global PMI: We have taken the JP Morgan Global composite PMI index in our model as a proxy for
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global economic activity and hence top-line revenue growth. We have found it is best to use this variable with a lag of 10 months. The coefficient of the year-on-year change in Global PMI on lagged MSCI EM earnings growth is positive, indicating improvement in the PMI has historically led earnings growth
2. Real effective exchange rate (REER): To capture the impact of currency appreciation on earnings growth, we have taken yoy% change in JP Morgan Broad REER index for all the individual EM countries and created a composite index by using market capitalization weights. This indicator has a lag of three months and has the largest coefficient among all the variables. We use the recently updated Morgan Stanley EM FX forecasts for our REER assumptions in the model.
3. Industrial Production (IP): To capture the impact of economic growth in EM, we have used a market capitalization weighted composite of the yoy change in Industrial Production (IP). IP also has a positive coefficient and with a lag of three months to earnings growth. Again, we use MS EM GDP growth forecasts to model our assumptions for Industrial production.
4. Core CPI minus PPI: We created a GDP-weighted composite index for EM Core Consumer Price Index (CPI) minus Producer Price Index (PPI) as a proxy for margins. Core CPI excludes energy and food components in the index. Core CPI minus PPI is positively associated with earnings growth (i.e., the periods in which PPI exceeds CPI tends to lead reduction in earnings growth). This is due to the impact of rising input costs relative to end market prices on margins and hence ROE. This variable has the longest lag of 17 months.
The resultant model suggests 2012 base-case growth of 9%. The historical fits to the regressions are given in Exhibit 34. The overall explanatory power appears sound with R-squared of 68%.
Exhibit 34 Earnings Factor Model – Regression Fit (MSCI EM)
Coefficients Standard Error t StatIntercept 6.7 1.9 3.5Global PMI lagged by 10M 0.4 0.1 3.7EM REER lagged by 3M 1.5 0.4 3.5EM IP (3MMA) lagged by 3M 0.9 0.4 2.5EM Core CPI-PPI lagged by 17M 1.0 0.4 2.4Multiple R 0.83R Square 0.68 Source: Morgan Stanley Research
Exhibit 35 MSCI EM Earnings Factor Model Regression Fit (YoY%)
-60
-40
-20
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-00
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-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Actual Fitted
Source: MSCI, IBES, Morgan Stanley Research
We then explore the likely impact of the three risk scenarios using the model. The base, bull, bear and super-bear scenarios for MSCI EM US$ EPS are given in Exhibit 36
Exhibit 36 MSCI EM Earnings Factor Model Scenario Assumptions Coefficient 6.75 0.44 1.53 0.94 0.98
Factors InterceptGlobal PMI (YoY) EM REER
EM IP (3MMA)
EM Core CPI-PPI
Real Earnings Growth
US CPI - 2012
Nominal Earnings Growth
Bull 5% 4% 7% 1% 22% 2% 24%Base -8% 2% 5% -4% 7% 2% 9%Bear -20% -5% -2% -4% -15% 2% -13%Extreme Bear -35% -11% -10% -3% -37% 2% -35% Source: Morgan Stanley Research
How we model for base case 27% expansion of trailing P/E to 13.0x in 2012
For the first time this year, we have also modeled formally the likely P/E multiple delta from now to the end of 2012. Previously, we have used mean reversion to the 10-year average as our base case with various risk scenarios related informally to our macro-economic views and previous
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December 2, 2011 Asia/GEMs Strategy
historical ranges. For example, last year we highlighted the downside risks to the P/E arising from an accelerating inflation and slowing growth environment.
Our headline conclusion from this exercise is that we expect as a base case the trailing P/E to rise by 27% from its current level of 10.2x to 13.0x. This would take it from the 95th percentile of the 20-year range to the 80th percentile.
We base our final estimate of Year-End 2012 Trailing P/E on an average of these four methodologies to achieve a balance in two areas: 1) between focusing on historical long-term and current market volatility, and 2) between using ex-ante and market-implied approaches to forecasting the likely Year-End 2012 P/E multiple. The four methods are:
1) Multi-variable regression model;
2) Three-stage Gordon growth model;
3) Autoregressive time-series model; and
4) Single-stage residual income growth model.
The specific features of each of these methods are discussed later in this note. The final step in our calculation is to blend the four estimates together. To keep it simple, we estimate the final P/E as the simple average of the four components.
Exhibit 37 shows the results for the four methodologies and the final estimate for the Year-End 2012 EM trailing P/E. The four different methodologies yield surprisingly similar results (ranging from 12.7x to 13.1x) and suggest that at least on a base-case view, we should be going for multiple expansion next year1.
1 For model I) and III), we use the mean estimate plus 1/ 0/ -1/ -2 standard deviation as our bull/base/bear/extreme bear case estimates; For model II) and IV), we derive them by changing the assumption of EM cost of equity (details are discussed later in this note).
Exhibit 37 Four Model Estimates of Year-end 2012 MSCI EM Trailing P/E
No. of Model Model Name
Extreme Bear Case Est. (or -2 SD)
Bear Case Est. (or -1 SD) Base Case Est.
Bull Case Est (or +1 SD)
IMultivariable regression model 8.9 10.9 12.9 14.9
II3-Stage Gordon growth model 9.4 11.4 13.1 15.0
IIIAutoregressive time-series model 9.7 11.4 13.1 14.8
IVSingle stage residual income growth model 9.0 10.9 12.7 15.0
Average 9.3 11.2 13.0 14.9 Source: MSCI, FactSet, Morgan Stanley Research
We here describe our four methodologies in detail and present the logic behind the blending formula.
Methodology 1: Multi-variable regression model
By running regressions, we have identified four variables following fundamental, growth, valuation, and consensus categories that have predictive power to the next 12-month % change of trailing P/E.
Exhibit 38 Variable #1: CPI-PPI (5-month lagged)
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
-0.12
-0.10
-0.08
-0.06
-0.04
-0.02 0.0
00.0
20.0
40.0
60.0
80.1
0
EM CPI-PPI (5-month lagged)
next
12
mon
th c
hang
e of
trai
ling
PE (%
)
Source: MSCI, FactSet, Morgan Stanley Research
As a proxy for margin (five-month lagged), CPI-PPI is negatively correlated with the next 12 month % change of trailing P/E.
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Exhibit 39 Variable #2: Last 12-month EPS Growth
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
-60%
-40%
-20% 0% 20
%40
%60
%80
%10
0%
Last 12 month EPS growth
next
12
mon
th c
hang
e of
trai
ling
PE (%
)
Source: MSCI, FactSet, Morgan Stanley Research
Last 12 month EPS growth is negatively correlated with the next 12 month % change of trailing P/E.
Exhibit 40 Variable #3: Market Implied EM Cost of Equity
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
7.0 8.0 9.0 10.0
11.0
12.0
13.0
14.0
15.0
16.0
Market implied cost of equity
next
12
mon
th c
hang
e of
trai
ling
PE (%
)
Source: MSCI, FactSet, Morgan Stanley Research
As a valuation measure, EM implied cost of equity2 is positively correlated with the next 12 month % change of trailing P/E.
2 We estimate the EM market implied cost of equity by using our multi-stage dividend discount model.
Exhibit 41 Variable #4: Next 12-Month Consensus EPS Growth Forecast
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
-20.0
-10.0 0.0 10
.020
.030
.040
.050
.060
.070
.0
Next 12-month consensus EPS growth forecast (%)
next
12
mon
th c
hang
e of
trai
ling
PE (%
)
Source: MSCI, FactSet, Morgan Stanley Research
Analysis shows that next 12-month consensus EPS growth forecast is negatively correlated with the next 12 month % change of trailing P/E.
Based on the above observations, we construct a four-factor linear regression model to capture the 12-month trailing P/E changes since 1998. The model demonstrates a good level of fitness of 64% adjusted R-square3.
Exhibit 42 MSCI EM Four-factor Trailing P/E Model
Source: MSCI, FactSet, Morgan Stanley Research
3 As a robustness check, we also run a regression with Newey-West standard errors to correct the heteroskedasticity and autocorrelated disturbances. The t-stats of all the 4 factors are still very significant.
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Exhibit 43 MSCI EM Four-Factor Trailing P/E Model Fit
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
next 12 month change of trailing PE (%) 4-Factor Model Prediction
Source: MSCI, Morgan Stanley Research.
The multi-factor P/E model suggests 26% of P/E expansion from 10.2x to 12.9x in 2012.
Methodology 2: Three-stage Gordon growth model
The second methodology relies on estimating a multi-stage Gordon growth model using forecasts of earnings, dividends, and cost of equity for the MSCI EM index. Our basic assumptions of three different growth stages are: 1) we use consensus forecasts for the next three years as proxies for market expectations; 2) we use 6% as the perpetuity nominal growth rate 15 years from now; and 3) to estimate earnings growth forecasts between years 4 and 15, we use a non-linear interpolation as shown below.
Exhibit 44 EM Earnings Gordon Growth Model Assumptions4
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Earnings Growth (%)
Source: MSCI, Morgan Stanley Research.
The model output is, of course, sensitive to the choice of cost of equity (COE). Given the recent market circumstance, we use the following COE assumptions as inputs for different
4 For years 1-3, we use consensus earnings forecast numbers.
market scenarios: 1) we use the recent two-year average implied COE of 11.95% as the base case scenario input; 2) we use the 20-year average implied COE of 10.2% as the bull case scenario input; 3) we use the +1 standard deviation implied COE of 11.8% as the bear case scenario input; and 4) we use the +2 standard deviation implied COE of 13.4% as the extreme bear case scenario input.
The base case of three-stage Gordon growth model yields an estimation of 13.1x trailing P/E of 2012.
Methodology 3: Auto-regressive time-series model
We did our third P/E estimation based on its auto-regressive (or generally speaking, mean-reversion) feature. Using the following AR(1) function form, we calibrate the values of parameters of long-term mean (μ) and speed of mean-reversion (γ), and then generate our time-series forecast.
ttt PEPE εμγμ +−=− − )/()/( 1
We model the time-series of E/P ratio rather than P/E since the former is relatively better behaved. Besides, given that the 20-year and 10-year average trailing P/E numbers are different (harmonic mean 14.9 vs. 13.6), we construct two AR(1) models by using different horizons of data, and take the average as the our final time-series estimate.
Exhibit 45 Time-Series of MSCI EM Trailing E/P and Forecasts
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
EM Trailing E/P Ratio TS Est (20 Yr Model) TS Est (10 Yr Model)
Source: MSCI, Morgan Stanley Research.
The time-series analysis gives us an estimation of 13.1x 2012 Year End P/E on a base-case view.
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December 2, 2011 Asia/GEMs Strategy
Methodology 4: Residual income growth model
The last methodology relies on estimating a single-stage residual income growth model using forecasts of earnings, book value, and cost of equity for the MSCI EM index. We assume a constant residual income growth rate of 6% over time, and an average ROE of 15.0% since 2007. The COE assumptions for different scenarios are identical to those in the model II, i.e., three-stage Gordon growth model. The final model generates a P/E estimation of 12.7x as base case output.
Comparing our base-case forecast with other valuation methodologies and back tests
We can also compare our base-case forecast for returns in 2012 with other, more simple valuation models and historically observed patterns that we have used in the past. For example, Exhibit 46 shows a simple regression of equity returns versus the forward P/E at the start of the year. In line with intuition, a higher forward P/E at the start of the year tends to be associated with lower returns for that year. Exhibit 46 shows that currently the market is priced as cheaply as at the start of 2003 and 2009, which were the two best years for performance in the history of the asset class. We have marked our base case return for MSCI EM on the diagram against the current forward P/E and the result fits the regression.
Exhibit 46 MSCI EM US$ Returns vs. Forward P/E at Beginning of Period
2000
2001 2002
2003
20042005
20062007
2008
2009
2010
2011
MS 2012E base case
y = -0.1349x + 1.6545R2 = 0.5871
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
8.5x 9.5x 10.5x 11.5x 12.5x 13.5x 14.5x 15.5x 16.5x 17.5x
Forward P/E at Beginning of Period
Ann
ual U
S$ M
SCI E
M R
etur
n
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
The trailing P/B multiple has recently been stabilizing around 1 S/D, cheap to its 20-year average.
Exhibit 47 MSCI EM Trailing P/Book
1.5x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Average
-1 S.D.
+1 S.D.
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011 Exhibit 48 MSCI EM 12M Consensus Fwd P/E
9.1x
4x
6x
8x
10x
12x
14x
16x
18x
20x
22x
24x
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Average 14.6x
Average 10.8x
Source: MSCI, FactSet, IBES, Morgan Stanley Research. Data as of 30 Nov, 2011
Meanwhile, the EM Shiller P/E is at the low end of the 10-year range and substantially below that of the S&P 500.
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December 2, 2011 Asia/GEMs Strategy
Exhibit 49 EM Shiller P/E versus S&P 500
16.1x
19.3x
5
10
15
20
25
30
35
40
45
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
MSCI EMS&P 500
Source: IBES, Factset, Datastream, Morgan Stanley Research. Data as of 30 Nov, 2011
Our equity risk premium model (derived from our three-stage forward-looking DDM) recorded a 99th percentile event in early October versus its 20-year history. Currently, the ex-ante risk premium remains close to 1,000bp above the yield on the 10-year US Treasury.
Exhibit 50 MSCI EM Equity Risk Premium versus UST yield
9.8
-2
0
2
4
6
8
10
12
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Major EM Equity Market Peaks
Major EM Equity Market Troughs
ERP,
%
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
We provide our backtest for the simple forward P/E, historical price to book, and equity risk premium models versus subsequent performance in Exhibit 51. The results suggest returns consistent with at least our base-case forecast 12 months out.
Exhibit 51 Back-test on Current Valuation Metrics Suggests 6-12 Month Returns of 20-80% Performance (Median)
1 month 3 month 6 month 9 month 12 monthForward PE < 9.12 4.5% 7.3% 26.1% 38.1% 49.8%Price to Book < 1.50x 1.0% 10.7% 20.0% 31.7% 41.6%ERP > 979 bps 7.0% 14.9% 46.5% 69.1% 79.9%
Hit Ratio1 month 3 month 6 month 9 month 12 month
Forward PE < 9.12 57.1% 71.4% 85.7% 90.5% 100.0%Price to Book < 1.50x 60.5% 73.7% 81.6% 84.2% 86.8%ERP > 979 bps 71.4% 85.7% 100.0% 100.0% 100.0%
Percentage of Total ObservationsForward PE < 9.12 10.2%Price to Book < 1.50x 18.1%ERP > 979 bps 4.2%
USD Total Return Performance
Percentage with Postive Returns
Source: Company data, Morgan Stanley Research. Data as of 30 Nov, 2011
Technicals, flows and analyst revisions support a positive stance
Our constructive stance on the market for 2012 is also based on our positive assessment of the technical, flows, and analyst revisions situations. In all three of these areas, we are able to score the situation as consistent with a market trough based on back-tests to 16 years of history.
Cumulative 50-day performance reached a 2 S.D event on October 5, 2011, but has stabilized recently (see Exhibit 52).
Exhibit 52 MSCI EM Cumulative 50-days Performance
2.1%
12.2%
-9.11%
22.8%
-19.76%
33.5%
-30.4%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
+1 S.D
-1 S.D
-2 S.D
+2 S.D
+3 S.D
-3 S.D
Average
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
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December 2, 2011 Asia/GEMs Strategy
Exhibit 53 Companies Trading within 5% of 52 week high
7.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Average
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
The proportion of stocks trading with 5% of the 52-week high has been depressed (see Exhibit 54).
Exhibit 54 MSCI EM vs # of Outflows in Past 10 weeks: 6/10 Currently
0
1
2
3
4
5
6
7
8
9
10
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
5.5
5.7
5.9
6.1
6.3
6.5
6.7
6.9
7.1
7.3
Cumulative Number of Outflow Weeks in Last 10 Weeks (LHS)MSCI EM Index (log terms, RHS)
Source: EPFR, Morgan Stanley Research. Data as of 22 Nov, 2011
There has also been a period of significant recent outflows from dedicated Asia/EM equity funds. On a rolling 10-week basis, we recorded 10/10 outflow weeks in the week of October 5, for the first time since the end of the 2001/02 bear market (see Exhibit 54).
Exhibit 55 MSCI EM FY2 Earnings Revisions (3MMA)
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Jan-
97
Oct
-97
Jul-9
8
Apr
-99
Jan-
00
Oct
-00
Jul-0
1
Apr
-02
Jan-
03
Oct
-03
Jul-0
4
Apr
-05
Jan-
06
Oct
-06
Jul-0
7
Apr
-08
Jan-
09
Oct
-09
Jul-1
0
Apr
-11
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%MSCI EM-FY2 Earnings Revision (3MMA)
MSCI EM-YoY Change (Right)
Source: IBES, MSCI, FactSet, Morgan Stanley Research. Data as of 29 Nov, 2011
Bottom-up analysts EPS revisions breadth has been substantially negative, as shown in Exhibit 55. Extremes of analyst upgrades (downgrades) have been associated with market peaks (troughs) in the past.
Our formal back-test of the technical, flows and revisions indicators that we monitor suggests significant upside potential similar to our base-case forecast.
Exhibit 56 Back-test on Current Technical/Flows/Revisions Levels Suggest Significant Upside Potential Performance (Median)
1M 3M 6M 9M 12MCumulative 50 days Performance <2.1%* 1.0% 2.5% 3.9% 13.8% 16.6%VIX 28** 1.7% 8.7% 25.8% 32.5% 43.4%CBOE Equity Put call ratio >0.55** 1.5% 6.3% 14.5% 25.7% 31.1%4 weeks cumulative flows as % of AUM <-0.5%** 2.5% 5.3% 11.3% 20.9% 22.7%Cos. Trading with 5% of 52W high <7.5%*** 0.0% -0.2% 5.2% 5.6% 8.4%FY2 Earnings Revisions, 3MMA <-8.9%*** -0.4% 13.2% 45.1% 65.2% 77.3%
Hit Ratio1M 3M 6M 9M 12M
Cumulative 50 days Performance <2.1%* 56.9% 58.0% 57.7% 67.5% 68.8%VIX 28** 58.7% 73.2% 74.6% 82.6% 88.4%CBOE Equity Put call ratio >0.55** 59.7% 65.6% 64.4% 67.8% 69.5%4 weeks cumulative flows as % of AUM <-0.5%** 63.1% 64.1% 65.8% 70.0% 71.1%Cos. Trading with 5% of 52W high <7.5%*** 48.2% 49.4% 56.5% 60.0% 63.5%FY2 Earnings Revisions, 3MMA <-8.9%*** 50.0% 62.5% 87.5% 87.5% 100.0%
Percentage of total observations (%)
Cumulative 50 days Performance <2.1%* 50.1%VIX 28** 17.5%CBOE Equity Put call ratio >0.55** 16.1%4 weeks cumulative flows as % of AUM <-0.5%** 51.5%Cos. Trading with 5% of 52W high <7.5%*** 43.3%FY2 Earnings Revisions, 3MMA <-8.9%*** 3.9%
USD Total Return Performance
Percentage with Positive Returns
Source: MSCI, Factset, Datastream, Morgan Stanley Research. Data as of 30 Nov, 2011
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December 2, 2011 Asia/GEMs Strategy
Key themes for 2012
1) EM outperformance versus DM to resume: EM equities underperformed DM equities (MXEF / MXWO) by 16% from October 17, 2010 to October 4, 2011. We are cautiously optimistic that the performance relative low for this cycle has now been set and that outperformance is likely to resume in 1H12.
Exhibit 57 MSCI EM Performance Relative to MSCI World
0
50
100
150
200
250
300
350
400
Dec
-98
Aug
-99
Apr
-00
Dec
-00
Aug
-01
Apr
-02
Dec
-02
Aug
-03
Apr
-04
Dec
-04
Aug
-05
Apr
-06
Dec
-06
Aug
-07
Apr
-08
Dec
-08
Aug
-09
Apr
-10
Dec
-10
Aug
-11
MSCI World*MSCI EM Relative to MSCI World*
Outperformance to World in 13 years = 215%
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
Consensus tends to see EM’s performance to DM as highly cycle dependent, with EM outperforming during global economic upturns and underperforming during downturns. It is true, as shown in Exhibit 58, that the forward-looking Global PMI is positively correlated with the relative performance of EM / DM. However, it is the relative equity market performance that seems to lead the macro data rather than the other way around. That is, the recent underperformance of EM / DM suggests further downside risk to Global PMIs in the next few months rather than vice versa.
Exhibit 58 Global PMI vs. MSCI EM Performance Relative to MSCI World
-70%
-50%
-30%
-10%
10%
30%
50%
Jul-9
8Ja
n-99
Jul-9
9Ja
n-00
Jul-0
0Ja
n-01
Jul-0
1Ja
n-02
Jul-0
2Ja
n-03
Jul-0
3Ja
n-04
Jul-0
4Ja
n-05
Jul-0
5Ja
n-06
Jul-0
6Ja
n-07
Jul-0
7Ja
n-08
Jul-0
8Ja
n-09
Jul-0
9Ja
n-10
Jul-1
0Ja
n-11
Jul-1
1
35
40
45
50
55
60
65
MSCI EM Relative to MSCI World (YoY%)Global PMI (Right)
Source: MSCI, FactSet, Haver, Morgan Stanley Research. Data as of 30 Nov, 2011
Our calculations show that since the end of the Asian crisis in early 1998, MSCI EM has shown a beta of 1.3 to MSCI World. However, it also has an alpha of 81bp per month excess return, which is statistically significant at the 99% level. This alpha is driven, in our view, by EM’s superior ROE over the cycle. Over time, and particularly in any stabilizing global macro-environment, the alpha effect should outweigh the beta impact.
Exhibit 59 MSCI EM ROE vs. MSCI World ROE – EM ROE Is Structurally Higher
-5%
0%
5%
10%
15%
20%
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
EM/World Diff 24 Month MA World EM
Global Financial Crisis Began
Source: MSCI, FactSet, Morgan Stanley Research
Exhibit 59 shows that EM’s ROE superiority versus DM is actually greater post the global financial crisis than previously at a stable 3-4% ROE premium versus 1.0% premium in the six years prior to 2007. The gap is particularly big versus Europe and Japan and much less so versus the US (though EM also has higher ROE than SPX). We expect at least this size of ROE premium versus DM in 2012 if not an expansion given our base-case forecast of 14.7% EM ROE in 2012 and the views of our DM colleagues.
24
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 60 MSCI EM 12M Forward P/E vs. DM Regions – EM Is the Second Cheapest
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EM US EU JP
Global Financial Crisis Began
Source: MSCI, FactSet, Morgan Stanley Research
There has been a convergence of major regional forward P/Es since the global financial crisis in 2008 after EM’s steadily re-rating from 2001 to 2007. Yet currently, as shown in Exhibit 60, EM’s forward P/E is the second lowest of the major equity regions and low to history (i.e., the market seems to be making the bet that there is a major ROE decline coming in EM on both an absolute and, to a lesser extent, a relative basis). Overall MSCI EM is trading on a forward P/E discount of 16% to DM.
2) Prefer mega caps to the rest of the market: We expect the recent reversal in performance relative of mega caps versus the rest of the market to continue. We first highlighted this on August 15.
Exhibit 61 Performance of Top 25 Mcap Stocks in MSCI EM Relative to Lower Mcap Stocks ($US- Total Return)
90
92
94
96
98
100
102
104
106
108
110
31-D
ec-1
0
14-J
an-1
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28-J
an-1
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11-F
eb-1
1
25-F
eb-1
1
11-M
ar-1
1
25-M
ar-1
1
8-A
pr-1
1
22-A
pr-1
1
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ay-1
1
20-M
ay-1
1
3-Ju
n-11
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ul-1
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ug-1
1
26-A
ug-1
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9-Se
p-11
23-S
ep-1
1
7-O
ct-1
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21-O
ct-1
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4-N
ov-1
1
18-N
ov-1
1
Trade Idea Published on 15th Aug, 2011
Source: Factset, Morgan Stanley Research. Data as of 30 Nov, 2011
The opportunity arises because the ROE relative to mega caps to the rest of the market has been expanding. It is currently at a 55% premium. Yet, the P/B relative remains at depressed levels to history, at only a 15% premium.
Exhibit 62 MSCI EM Mega Caps at Deep Discounts Compared to History
Top 25 Mcap Stocks Relative to Lower Mcap Stocks
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
Dec
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PBV Relative (Equal Weighted)
ROE Relative
Source: Factset, Morgan Stanley Research. Data as of 30 Nov, 2011
Moreover, the largest market cap stocks have been outperforming their peers in both sales and net profit terms relative to consensus expectations, as highlighted in our recently launched quarterly earnings review product. See Exhibit 63.
Exhibit 63 3Q11 Results Suggests Further Improvement in ROE for Mega Caps
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
<2 bn 2-5 bn 5-15 bn >15 bnMarket Cap (USD Bn)
Net ProfitSales
Source: Bloomberg, Thomson Financials, Factset, IBES, Morgan Stanley Research. Data as of 22 Nov, 2011
25
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 64 MSCI EM Mega Cap Stocks – Top 25 Stocks Company GICS Country MS Mcap Latest Price Upside Morgan StanleyName Ticker Sector Rating US$ Bn Curr Price Target to PT 2012E 2013E 2012E 2013E 2012E 2013E AnalystBanco Bradesco BBD.N Financials Brazil EW 63.1 USD 17 22 33.3% 8.6 7.7 1.7 1.6 4.1% 4.5% Kuri, JorgeBank of China Limited 3988.HK Financials China EW 95.6 HKD 3 3 17.7% 5.7 5.1 0.8 0.7 8.7% 9.8% Liu, MinyanChina Construction Bank 0939.HK Financials China OW 179.0 HKD 6 7 30.6% 7.7 6.8 1.2 1.1 6.6% 7.3% Liu, MinyanChina Life Insurance 2628.HK Financials China EW 76.4 HKD 21 22 4.8% 19.6 16.3 2.2 2.0 1.9% 2.2% Lin, BenChina Mobile Limited 0941.HK Telecom China EW 200.6 HKD 76 85 11.8% 13.0 14.0 1.8 1.7 4.6% 4.6% Killa, NavinCNOOC 0883.HK Energy China OW 87.5 HKD 15 23 46.7% 10.3 10.9 1.9 1.6 4.2% 3.9% Tan, Wee-KiatGazprom GAZPq.L Energy Russia EW 132.0 USD 12 14 21.7% 3.2 3.4 0.4 0.4 6.0% 5.6% Thomas, MatthewHon Hai Precision 2317.TW IT Taiwan EW 26.2 TWD 83 70 -15.5% 11.0 10.1 1.2 1.0 1.1% 1.2% Lu, JasmineHyundai Mobis 012330.KS Cons Disc Korea OW 26.8 KRW 313500 485000 54.7% 9.4 8.4 1.9 1.6 0.6% 0.7% Park, SangkyooHyundai Motor 005380.KS Cons Disc Korea OW 40.7 KRW 221500 306000 38.1% 6.9 6.5 1.2 1.0 0.9% 1.0% Park, SangkyooICBC 1398.HK Financials China OW 205.1 HKD 5 6 26.8% 7.7 6.8 1.3 1.1 6.4% 7.3% Liu, MinyanInfosys Limited INFY.BO IT India OW 28.6 INR 2608 3630 39.2% 15.2 12.6 3.8 3.1 1.6% 2.1% Khare, VipinItau Unibanco ITUB.N Financials Brazil EW 81.4 USD 18 24 34.8% 8.8 7.7 1.7 1.6 3.4% 3.9% Kuri, JorgeLUKOIL LKOH.RTS Energy Russia OW 42.8 USD 55 80 46.0% 4.5 6.0 0.6 0.5 4.0% 3.1% Thomas, MatthewMTN Group MTNJ.J Telecom S. Africa EW 33.7 ZAc 14538 14100 -3.0% 12.2 11.6 3.1 3.0 6.5% 6.9% Hill-Wood, EdwardPetrobras PBR.N Energy Brazil OW 176.0 USD 27 42 55.6% 8.3 8.4 0.8 0.8 3.6% 3.7% Daripa, SubhojitPetroChina 0857.HK Energy China EW 238.0 HKD 10 11 8.9% 11.6 13.0 1.4 1.3 4.7% 4.2% Tan, Wee-KiatPOSCO 005490.KS Materials Korea EW 26.7 KRW 394500 400000 1.4% 10.4 8.5 0.8 0.7 2.5% 2.5% Spencer, CharlesReliance Industries RELI.BO Energy India EW 48.9 INR 779 921 18.3% 10.7 9.7 1.4 1.2 1.0% 1.1% Jaising, VinaySamsung Electronics 005930.KS IT Korea OW 138.8 KRW 1074000 1220000 13.6% 9.9 9.0 1.4 1.2 1.1% 1.5% Han, KeonSberbank SBER.RTS Financials Russia OW 60.9 USD 3 3 6.4% 7.4 7.0 1.3 1.1 2.7% 2.9% Stoklosa, MagdalenaTaiwan Semiconductor 2330.TW IT Taiwan OW 63.6 TWD 75 88 18.0% 12.2 10.3 2.7 2.4 4.0% 4.0% Lu, BillTencent Holdings Ltd. 0700.HK IT China OW 37.4 HKD 156 210 34.4% 23.8 20.1 5.5 4.2 0.4% 0.9% Ji, RichardTSMC 2330.TW IT Taiwan OW 63.6 TWD 75 88 18.0% 12.2 10.3 2.7 2.4 4.0% 4.0% Lu, BillVale VALE.N Materials Brazil EW 118.8 USD 23 29 24.7% 5.6 4.7 1.2 1.1 5.4% 6.3% De Alba, Carlos
P/E P/B Div Yld
For valuation methodology and risks associated with any price targets above, please email [email protected] with a request for valuation methodology and risks on a particular stock. e = Morgan Stanley Research estimates Source: Morgan Stanley Research. Data as of 30 Nov, 2011
3) Emphasize dividend yield and dividend growth: Over a five- to 20-year horizon, dividends have accounted for between 20% and 69% of the total returns from EM Equities (see Exhibit 65). We therefore continue to emphasize the importance of dividend yield and dividend growth through the cycle.
Exhibit 65 High Dividend Contribution to Total Return
1.2%
12.2%
6.6%2.7%
3.0%
2.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
5 Year 10 Year 20 Year
Price Return DividendContribution of Dividends to Total Returns
69%
20%
28%
Source: Factset, MSCI, Morgan Stanley Research. Data as of 30 Nov, 2011
Exhibit 66 Buying Stocks with Above-average Dividend Yields Has Been a Winning Strategy Over Time
0
50
100
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Jul-0
3
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1
Bottom Quintile with LowestDividend Yield stocks
Top Quintile with HighestDividend Yield stocks
MSCI EM
Source: MSCI, Factset, Morgan Stanley Research
At a stock level, the highest-quintile stocks based on dividend yield have significantly outperformed the bottom quintile, including the broad benchmark (see Exhibit 66). To play this theme, we had highlighted an equal-weighted list of high and rising dividend yield stocks with above-average balance sheet strength in the APxJ and EM regions in our August 30, 2011 report, Revisiting the Dividend Theme in APxJ / EM. The list has outperformed the MSCI EM benchmark by 220bp since publication. We would continue to recommend these stocks for 2012.
26
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Morgan Stanley Research has created a basket of the stocks that we believe are most leveraged to these themes. The basket is an equal weighting of the stocks shown in Exhibit 67 and can be viewed on Bloomberg under the symbol MSNJADIV. Type MSxx <Go> to access the Morgan Stanley Equity Baskets / Indices homepage and select Strategy / Research (MSxx).
The information contained herein has been prepared solely for informational purposes and is not a solicitation of any offer
to buy or sell any security or other financial instrument or to participate in any trading strategy. Products and trades of this type may not be appropriate for every investor. Please consult with your legal and tax advisors before making any investment decision.
Please contact your Morgan Stanley sales representative for more details.
Exhibit 67 High and Rising Dividend Yield Plus Balance Sheet Strength* - Bloomberg Ticker: “MSNJADIV Index”
Company GICS MS Mcap Latest Price Upside Morgan StanleyName Ticker Country Sector Rating US$ Bn Curr Price Target to PT 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E AnalystCaltex Australia Ltd CTX.AX Australia Energy EW 3.8 AUD 13.56 11.0 -18.9% 15.2 12.4 1.1 1.1 3.0% 4.0% 45% 50% Baker, StuartCNOOC 0883.HK China Energy OW 87.5 HKD 15.34 22.5 46.7% 8.8 8.4 2.2 1.9 4.0% 4.2% 35% 35% Tan, Wee-KiatGuangshen Railway 0525.HK China Industrials OW 2.6 HKD 2.8 4.0 42.9% 9.0 9.4 0.6 0.6 5.0% 5.3% 45% 50% Xu, EdwardHaitian International Holdings Ltd 1882.HK China Industrials OW 1.4 HKD 6.64 11.0 65.7% 7.4 6.6 1.8 1.6 5.4% 6.1% 40% 40% Luo, KevinShougang Fushan Resources Gr. Ltd 0639.HK China Materials OW 2.2 HKD 3.19 6.0 88.1% 8.3 7.6 0.9 0.9 4.8% 5.3% 40% 40% Chan, SaraGuangdong Investment Ltd 0270.HK China Utilities OW 4.1 HKD 5 5.2 4.0% 12.3 11.6 1.5 1.4 3.3% 3.9% 40% 45% Wen, HelenYue Yuen Industrial 0551.HK Hong Kong Cons Disc OW 5.3 HKD 23.2 31.3 34.9% 9.1 8.1 1.3 1.2 4.3% 4.8% 39% 39% Lin, RobertAneka Tambang ANTM.JK Indonesia Materials OW 1.8 IDR 1680 2100 25.0% 8.5 8.9 1.5 1.4 4.2% 5.9% 36% 53% Spencer, CharlesPT Telekomunikasi TLKM.JK Indonesia Telecom OW 16.2 IDR 7300 9800.0 34.2% 11.4 10.1 2.5 2.2 4.0% 4.8% 46% 49% Killa, NavinS-Oil 010950.KS S. Korea Energy OW 11.5 KRW 116500 141000 21.0% 9.9 7.4 2.4 2.0 4.3% 5.2% 42% 38% Hwang, HarrisonHyundai Mipo Dockyard 010620.KS S. Korea Industrials OW 2.0 KRW 118500 242000 104.2% 9.8 10.6 0.5 0.5 3.9% 4.7% 21% 27% Park, SangkyooThai Oil Public Company TOP.BK Thailand Energy OW 4.0 THB 61.25 96.0 56.7% 8.9 8.4 1.6 1.4 4.5% 4.7% 40% 40% Maheshwari, MayankPTT Global Chemicals PTTGC.BK Thailand Materials OW 9.6 THB 65.5 76.0 16.0% 8.9 7.3 1.2 1.1 4.5% 5.5% 40% 40% Maheshwari, MayankPTT Public Company PTT.BK Thailand Energy OW 28.4 THB 306 362.0 18.3% 8.4 8.0 1.6 1.4 3.8% 4.4% 32% 35% Maheshwari, MayankSiam Cement SCC.BK Thailand Materials EW 12.2 THB 315 305.0 -3.2% 14.1 10.6 2.6 2.3 4.3% 3.9% 61% 41% Spencer, CharlesGTBank GUARq.L Nigeria Financials OW 2.6 USD 4.5 7.4 65.3% 6.0 4.8 1.5 1.3 7.5% 9.7% 45% 47% de Belle, HadrienPGE Polska Grupa Energetyczna S.A. PGEP.WA Poland Utilities OW 11.6 PLN 20.3 24.5 20.7% 10.3 8.2 0.9 0.8 7.1% 5.7% 73% 47% Kuzmin, IgorSeverstal CHMFq.L Russia Materials OW 13.6 USD 13.51 14.5 7.3% 5.7 4.6 1.4 1.2 2.7% 5.7% 16% 26% Kolomytsyn, DmitriyFirstrand FSRJ.J S. Africa Financials OW 13.9 ZAc 2005 2217 10.6% 11.2 9.8 1.9 1.8 4.0% 4.9% 45% 48% Saffy, GregBidvest Group Ltd BVTJ.J S. Africa Industrials OW 6.0 ZAc 15744 17500 11.2% 12.0 10.3 2.5 2.2 3.5% 4.2% 42% 44% de la Cour, AnthonyTelkom SA TKGJ.J S. Africa Telecom OW 1.8 ZAc 2900 3600.0 24.1% 8.0 7.5 0.5 0.5 5.4% 5.9% 43% 44% Takaendesa, PeterEtihad Etisalat 7020.SE S. Arabia Telecom OW 9.3 SAR 50 78.0 56.0% 7.1 6.2 1.9 1.6 6.5% 9.5% 46% 59% Singh, MadhvendraBanrisul BRSR6.SA Brazil Financials OW 4.4 BRL 19.29 26.0 34.8% 8.8 7.6 1.8 1.6 4.6% 5.3% 40% 40% Kuri, JorgeSul America SULA11.SA Brazil Financials EW 2.1 BRL 13.2 21.0 59.1% 7.8 7.1 1.2 1.1 4.4% 7.1% 35% 50% Martinez de Olcoz Cerdan, JavierVale VALE.N Brazil Materials EW 118.8 USD 23.25 29.0 24.7% 5.2 5.6 1.5 1.2 2.5% 5.4% 13% 30% De Alba, CarlosLa
tam
EMEA
APx
J
Div PayoutDiv YldP/BP/E
Source: Morgan Stanley Research. The screen had the following six components: 1) Market Cap greater than US$1.5 bn 2) Morgan Stanley forecast 2012E dividend yield greater than 2011E dividend yield. 3) Average Morgan Stanley 2011E and 2012E dividend yield greater than 4.25%. 4) Average Morgan Stanley forecast 2011E and 2012E dividend payout less than 50% of earnings. 5) Average Morgan Stanley forecast 2011E and 2012E net debt/market cap less than 30%. 6) Average Morgan Stanley forecast 2011E and 2012E FCF yield greater than 5%. For financial stocks, we replaced the criteria #5 and #6 with Morgan Stanley forecast average 2011E and 2012E return on assets greater than 1.5%. For important disclosures regarding companies that are the subject of this screen, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures.
4) Highest-quality stocks – Best Business Models (BBM v2): We continue to favor high-quality stocks in APxJ and EM. Our revised list of Best Business Models (BBM v2), which we last published on October 28, 2011, identifies 29 stocks from each of the industry groups. BBM v2 stocks passed the following criteria: 1) high profitability (return on net operating assets) over the business cycle within their industries; 2) low variance of RNOA; 3) balance sheet strength; 4) positive assessment by MS analysts of the medium to long-term strength of the business model; 5) market capitalization and daily volume greater than US$2bn and US$5mn, respectively. For financial stocks, we use ROA instead of RNOA for profitability.
Our previous BBM v1, published on October 28, 2009, outperformed the MSCI EM benchmark by 1,460bp cumulatively through the launch of the updated BBMv2 list.
In our original note (Asia/GEMs Strategy: Asia Insight: Best Business Models v2 – Identifying Highest Quality stocks in APxJ/EM, dated October 28, 2011), we created an equal-weighted basket of the 29 BBM v2 stocks with Bloomberg Ticker MSMSBBMG Index. We created a separate Basket with 20 APxJ names from the BBMv2 list with Bloomberg Ticker MSNJBBMA Index.
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M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 68 BBM v2 List with Valuation, MS Rating and Price Target – Bloomberg Ticker: MSMSBBMG Index and APxJ stocks Ticker: MSNJBBMA Index Company MS Mcap Average Upside Morgan StanleyName Ticker Country Sector Industry Groups Rating US$ Bn RNOA to PT 2011E 2012E 2011E 2012E 2011E 2012E AnalystHyundai MOBIS 012330.KS S. Korea Cons Disc Automobiles & Components OW 26.8 26.7% 54.7% 10.4 9.4 2.4 1.9 22.6% 20.2% Park, SangkyooTitan Industries Ltd TITN.BO India Cons Disc Consumer Durables & Apparel OW 3.0 21.3% 29.9% 28.5 22.7 12.2 9.4 42.9% 41.4% Shah, NillaiCtrip.com CTRP.O China Cons Disc Consumer Services OW 4.1 154.0% 65.1% 24.5 20.7 3.5 2.8 14.1% 13.6% Ji, RichardTencent Holdings Ltd. 0700.HK China Cons Disc Media OW 37.4 37.6% 34.4% 23.9 19.6 7.6 5.5 31.6% 28.0% Ji, RichardMr Price Group MPCJ.J S. Africa Cons Disc Retailing OW 2.6 49.3% -6.3% 18.3 15.0 8.3 7.5 45.2% 50.0% Moolman, NatashaAmBev ABV.N Brazil Cons Stap Beverages EW 106.7 18.4% NA 19.9 18.0 6.0 5.8 30.3% 32.5% Serra, LoreBIM BIMAS.IS Turkey Cons Stap Food & Staples Retailing OW 4.3 76.3% 24.7% 26.0 20.9 12.7 10.4 48.7% 49.8% Can Altuntas, SayraWant Want China Hldgs 0151.HK China Cons Stap Food Products OW 13.5 31.3% -10.2% 32.9 26.2 11.4 9.3 34.5% 35.3% Lou, LillianHindustan Unilever HLL.BO India Cons Stap Household & Personal Products UW 16.4 88.2% -33.1% 36.0 32.3 27.5 22.8 76.4% 70.7% Shah, NillaiITC Ltd. ITC.BO India Cons Stap Tobacco OW 30.0 33.4% 12.6% 27.0 23.2 9.1 8.4 33.9% 36.1% Shah, NillaiChina Shenhua Energy 1088.HK China Energy Coal OW 88.7 18.4% 38.5% 13.1 11.7 2.4 2.1 18.6% 18.0% Tan, Wee-KiatCNOOC 0883.HK China Energy Oil & Gas Exploration & Production OW 87.5 37.6% 46.7% 8.8 8.4 2.2 1.9 24.7% 22.1% Tan, Wee-KiatTupras TUPRS.IS Turkey Energy Oil & Gas Refining & Marketing OW 5.7 33.3% 19.5% 10.4 6.3 2.5 2.1 24.3% 33.1% Danis, ErolHDFC Bank HDBK.BO India Financials Banks OW 19.7 19.7% 20.1% 21.3 16.3 3.6 3.1 17.0% 19.0% Agarwal, AnilSun Pharmaceutical SUN.BO India Health Care Pharmaceuticals OW 10.4 22.9% -4.1% 26.1 22.6 5.0 4.3 19.3% 18.9% Baisiwala, SameerCopa Holdings CPA.N USA Industrials Airline OW 2.8 16.8% 41.0% 9.9 8.6 2.1 1.8 21.3% 20.4% Sebrell, NicolaiHyundai Heavy Industries 009540.KS S. Korea Industrials Capital Goods OW 15.4 26.8% 103.1% 4.2 4.6 1.0 0.9 24.5% 18.7% Park, SangkyooLocaliza Rent A Car SA RENT3.SA Brazil Industrials Transportation OW 3.1 16.7% 35.0% 17.9 13.6 4.7 3.7 26.3% 27.0% Sebrell, NicolaiCCR CCRO3.SA Brazil Industrials Transportation UW 11.3 20.7% NA 23.0 18.1 6.0 5.5 26.3% 30.3% Sebrell, NicolaiTSMC 2330.TW Taiwan IT Semiconductors & Semiconductor Equip OW 63.6 20.6% 18.0% 14.3 12.2 3.1 2.7 21.4% 22.3% Lu, BillInfosys Limited INFY.BO India IT Software & Services OW 28.6 48.6% 39.2% 18.6 15.2 4.7 3.8 25.1% 24.9% Khare, VipinLargan Precision 3008.TW Taiwan IT Technology Hardware & Equipment OW 2.3 26.5% 60.9% 12.8 10.8 3.5 3.0 27.5% 27.3% Lu, JasmineLG Chem 051910.KS S. Korea Materials Chemicals OW 20.1 16.3% 24.1% 9.9 7.9 2.4 1.9 24.7% 24.3% Hwang, HarrisonPT Indocement Tunggal INTP.JK Indonesia Materials Construction Materials OW 6.1 13.8% 20.0% 15.7 12.4 3.5 2.9 22.5% 23.3% Spencer, CharlesBHP Billiton Plc BHP.AX Australia Materials Diversified Metals & Mining OW 199.8 19.8% 26.5% 9.4 8.3 NA NA NA NA Fitzpatrick, BrendanNovolipetsk Steel NLMKq.L Russia Materials Steel OW 14.5 27.3% 7.7% 7.3 6.7 1.2 1.0 16.4% 15.7% Kolomytsyn, DmitriyPT Telekomunikasi TLKM.JK Indonesia Telecom Diversified Telecom Services OW 16.2 25.5% 34.2% 11.4 10.1 2.5 2.2 21.5% 21.6% Killa, NavinAdvanced Info Service ADVA.BK Thailand Telecom Wireless Telecom Services EW 13.5 27.9% -26.2% 21.3 19.6 7.7 11.3 36.3% 57.7% Yu, GaryCPFL ENERGIA CPFE3.SA Brazil Utilities Utilities UW 12.2 14.9% -1.7% 13.5 14.4 3.6 3.6 26.8% 24.8% Feldman, Tatiana
P/E P/B ROE
e = Morgan Stanley Research estimates Source: Morgan Stanley Research. Data as of 30 Nov, 2011 For important disclosures regarding companies that are the subject of this screen, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures.
5) EM Asia to Outperform EMEA: In previous years, we have tended not to make regional calls. As our regular readers know, we rely on a monthly assessment from our country quantitative model (discussed) below to make calls in the country space. However, given the divergent growth outlooks and impact of EU bank deleveraging on the major EM regions, we feel that this year is likely to be characterized by outperformance of EM Asia relative to EMEA. This relative preference for EM Asia chimes well with the caution of our EMEA equity strategist Marianna Kozinsteva on her coverage universe. See EMEA 2012: The Big Picture”.
Exhibit 69 shows that in recent years, Asia’s long-run underperformance versus EMEA and LatAm has turned around. In fact, since January 2006, EM Asia has been a consistent outperformer of EMEA. Since then, cumulative outperformance has been 22%. The performance relative trend is far less established versus LatAm where MS strategist Gui Paiva forecast returns similar to our scenario weighted forecast for MSCI EM overall. See Latam Equity Strategy report, 2012: A Painful Start, dated November 29, 2011.
Exhibit 69 MSCI EM Asia Relative to MSCI EMEA and LatAm
30
40
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60
70
80
90
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110
120
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08
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11
MSCI EM Asia Relative to EMEA
MSCI EM Asia Relative to LatAm
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
28
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 70 EM Asia ROE Relative to LatAm & EMEA
ROE: EM Asia Relative to
0.40x
0.50x
0.60x
0.70x
0.80x
0.90x
1.00x
1.10x
1.20x
1.30x
1.40x
Dec
-99
Dec
-00
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-01
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-02
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-03
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-04
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-05
Dec
-06
Dec
-07
Dec
-08
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-09
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-10
Dec
-11
Dec
-12
LatamEMEA
2012E
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
Consensus expects the ROE relative to improve significantly versus EMEA and, to a lesser extent, versus LatAm. We think this may understate the ROE superiority of Asia, particularly versus EMEA.
Exhibit 71 EM Asia, LatAm & EMEA 2012 Equity Weighted GDP
2012 - Equity Weighted GDP
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
EM Asia Latam EMEA
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
Exhibit 72 EM Asia Forward P/E Relative to EMEA and LatAm
12m Forward PE: EM Asia Relative to
0.8x
1.0x
1.2x
1.4x
1.6x
1.8x
2.0x
Dec
-99
Jun-
00
Dec
-00
Jun-
01
Dec
-01
Jun-
02
Dec
-02
Jun-
03
Dec
-03
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
LatamEMEA
Source: MSCI, FactSet, Morgan Stanley Research. Data as of 30 Nov, 2011
EM Asia trades at a 30% premium to EMEA and almost at par to LatAm on a forward P/E basis. We expect this can expand in 2012 given Asia’s superior macro-economic growth and funding risk characteristics. See Exhibit 72 and the previous discussion on funding.
6) Recommend EM gold equities: An environment characterized by significant tail risks, including monetization of DM sovereign deb,t tends to favour gold. Recently we have been adding back exposure to our APxJ and GEM focus lists. Over a 15-year horizon, EM gold equities have tended to outperform the MSCI EM. Even during gold’s recent selloff, EM gold equities have continued their outperformance to MSCI EM (see Exhibit 73).
Exhibit 73 EM Gold Equities Relative to MSCI EM
-60%
-10%
40%
90%
140%
190%
May
-96
May
-97
May
-98
May
-99
May
-00
May
-01
May
-02
May
-03
May
-04
May
-05
May
-06
May
-07
May
-08
May
-09
May
-10
May
-11
0
400
800
1200
1600
2000EM Gold Cos. Relative to MSCI EM Gold Spot $/OZ (RHS)
Source: Factset, MSCI, Morgan Stanley Research. Data as of 29 Nov, 2011
29
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 74 NYSE Gold Index Trailing PE- Premium/Discount to MSCI EM
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Source: MSCI, FactSet, Bloomberg, Morgan Stanley Research
The NYSE Gold Index’s trailing P/E stands at a 83% premium to the MSCI EM Trailing P/E, much lower than its long-run average levels (see Exhibit 74). We therefore believe that the EM gold equities should be able to continue their outperformance of the MSCI EM.
Our Metals and Mining analysts across the Asia/EM region maintain Overweight ratings on EM gold names like AngloGold Ashanti, Gold Fields and Buenaventura based on the expectation that over long term, excessive monetary stimulus will cause further weakening of the US dollar, thereby enhancing the status of gold as a preferred asset class. EM gold companies stand to benefit from such a scenario.
Key OW Countries: Prefer China, Russia, South Africa, Korea and Brazil.
Based on the latest update of Country Model (published on November 4, 2011), our overweight countries are China, Russia, South Africa, Korea and Brazil; Our underweight countries are Mexico, India, Taiwan, Chile, Colombia, Czech and Hungary.
Our Country quant model ranks countries across 16 factors including valuation, earnings, technicals, macro, political risk and sector skew.
Exhibit 75 shows current model rankings together with the scores for the individual variables within the model.
Exhibit 75 GEMs Strategy Country Model – Overall Rankings and Scores
VALUATIONS 32% EARNINGS AND TECHNICALS 24% MACRO 18% POLITICAL RISK & OTHER 20% SECTOR 6%Trail Div Trail Trail Yield Earnings Revisions PM Currency Business Political Supply / Sector Final
MSCI EM P/B Yield P/E ROE Ratio Growth Breadth Technical Beta Weights Cycle Risk Demand Governance SkewCountry Weight 8% 6% 4% 6% 8% 6% 6% 4% 4% 4% 10% 8% 8% 6% 6% 6% 100% RankRussia 6.42% 1 9 1 8 1 18 9 5 3 4 10 1 13 13 20 1 7.48 1South Africa 7.34% 11 7 7 4 12 2 1 10 5 3 17 16 3 8 1 6 7.80 2China 17.09% 6 6 4 10 2 16 19 6 6 5 2 2 11 15 15 9 8.12 3Brazil 15.02% 3 3 5 17 7 20 7 7 2 8 16 13 8 9 8 7 9.22 4Korea 15.32% 9 19 9 14 4 11 10 14 4 16 9 7 4 2 11 15 9.46 5Malaysia 3.35% 15 8 18 12 16 14 6 15 18 15 3 4 5 1 2 16 9.68 6Poland 1.51% 5 2 2 9 5 19 18 2 1 19 15 20 7 10 10 5 9.80 7Indonesia 2.82% 20 16 15 2 20 4 2 18 16 11 7 3 9 7 7 11 10.20 8Egypt 0.34% 4 4 8 20 3 3 11 9 20 6 8 10 20 20 18 12 10.76 9Thailand 1.83% 13 12 11 3 9 7 13 13 14 18 5 14 19 16 9 4 10.98 10Philippines 0.66% 19 14 19 6 8 6 12 20 17 10 1 8 18 3 13 14 11.06 11Peru 0.59% 17 18 12 1 15 1 5 19 8 9 13 9 17 17 12 2 11.22 12Turkey 1.29% 8 10 10 15 11 5 4 3 11 12 14 19 15 12 14 10 11.28 13Czech 0.34% 7 1 6 11 10 13 14 4 15 14 20 18 6 11 5 20 11.34 14Colombia 0.91% 18 15 17 7 19 8 15 16 19 7 11 5 12 6 6 3 11.38 15Hungary 0.30% 2 11 3 19 6 15 16 1 12 13 12 17 10 19 16 8 11.40 16Taiwan 11.13% 12 5 16 16 13 10 17 8 13 1 19 12 2 14 3 17 11.46 17India 7.28% 10 13 13 13 17 9 8 11 9 20 4 11 16 5 17 13 11.52 18Mexico 4.56% 14 20 20 18 18 12 3 12 7 2 6 6 14 18 19 18 12.88 19Chile 1.75% 16 17 14 5 14 17 20 17 10 17 18 15 1 4 4 19 12.96 20 Source: Morgan Stanley Research
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December 2, 2011 Asia/GEMs Strategy
Key Industry-Groups: Prefer Energy, Capital Goods, Real Estate, Materials, Semiconductors and Automobiles
Based on the latest update of our newly launched Asia/GEMs industry selection quantitative model (published on November 4, 2011), we overweight Energy, Capital Goods, Real Estate, Materials, Semiconductors and Automobiles; we underweight Media, Tech Hardware & Equipment, Household & Personal Products, Health Care Equip & Services, Food & Staples Retailing, and Transportations.
Exhibit 76 APxJ/EM Industry Group Rankings
12
34
56
78
911
12
1718
1921
2223
24
12
64
35
10
7
16
13
20
2322
24
10
1315
1416
20
15
8
1214
1819
21
911
17
Ener
gy
Cap
ital G
oods
Rea
l Est
ate
Mat
eria
ls
Sem
icon
duct
ors
Aut
o
Con
s Sr
vcs
Ban
ks
Con
s D
urab
les
Phar
ma
Insu
ranc
e
Food
Bev
Tob
aSo
ftwar
e &
Svcs
Div
ersi
fied
Fin
Util
ities
Ret
ailin
g
Tele
com
Com
m S
rvcs
Tran
spor
tatio
n
Food
Ret
ailin
gH
ealth
Car
eEq
ptPe
rson
alPr
oduc
tsTe
ch H
ardw
are
Med
iaIndustry rankings: the lower the ranking, the better the score in the model
Current Ranking
Prior Ranking
Biggest Movers
OVERWEIGHT EQUAL-WEIGHT UNDERWEIGHT Source: MSCI, FactSet, Morgan Stanley Research, Data as of October 31, 2011.
Our quantitative model ranks industries across 10 factors including valuation, profitability and earnings, technicals, marco economic indicators, and Morgan Stanley bottom-up aggregated analysts’ view. We report this model’s recommendations on a regular monthly basis and use it as the primary tool in marking APxJ/EM industry allocation recommendations.
Exhibit 77 Industry Model Framework – Weights of Metrics
Macro 10%
Technicals20%
MSView15%
Profitability & Earnings
35%
Valuations20%
Trailing P/B 10%Trailing P/E Z-Score 10%
Trailing ROE 15%Earnings Growth Forecast 3MMA 8%Earnings Revision Breadth 3MMA 12%
Country Model Skew 5%Aggregated MS Analysts' view 10%
1M Price Momentum 8%Fund Flow 3MMA 12%
Business Cycle Composite 10%
Source: Morgan Stanley Research.
31
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
APPENDIX
Exhibit 78 considers shifts in the ranks of sector performance dating back to 1995. The key defensives of Consumer Staples & Telecoms have been the key outperformers in 2011. For Telecoms in particular this marks a sharp turn around in performance from being ranked worst in performance in 2009 and third worst in 2010. Healthcare, Financials and Industrials ranked worst in performance ytd 2011.
For Financials, the 9 of 10 performance is its lowest rank since the inception of the sector-level data for MSCI EM in 1995.
Interestingly, in other years when Financials have underperformed (1997 & 2003) the subsequent year saw strong outperformance.
Over the whole period since 1995, Energy has been a top 3 large industry performer 12 times and Consumer Discretionary 8 times.
Exhibit 78 Sector Performances Ranks 1 2 3 4 5 6 7 8 9 101995 IT Telecom Financials Cons. Stap Health Care Industrials Energy Utilities Cons. Disc. Materials1996 Energy Telecom Utilities Cons. Stap Health Care Financials Cons. Disc. Industrials Materials IT1997 Energy IT Health Care Telecom Cons. Stap Utilities Materials Financials Cons. Disc. Industrials1998 IT Health Care Cons. Stap Financials Materials Telecom Cons. Disc. Industrials Utilities Energy1999 IT Cons. Disc. Energy Health Care Materials Telecom Financials Cons. Stap Utilities Industrials2000 Health Care Cons. Stap Financials Energy Utilities Materials Telecom Industrials Cons. Disc. IT2001 Energy Materials Cons. Disc. IT Financials Utilities Cons. Stap Industrials Health Care Telecom2002 Materials Health Care Cons. Disc. Energy Industrials Cons. Stap Financials Utilities Telecom IT2003 Energy Utilities Cons. Disc. Industrials Materials Health Care IT Financials Telecom Cons. Stap2004 Financials Telecom Industrials Cons. Disc. Cons. Stap Energy Materials Utilities IT Health Care2005 Energy Cons. Stap Health Care Utilities Cons. Disc. Financials IT Materials Telecom Industrials2006 Utilities Materials Energy Telecom Financials Industrials Cons. Stap Cons. Disc. IT Health Care2007 Industrials Materials Energy Telecom Utilities Financials Health Care Cons. Stap Cons. Disc. IT2008 Health Care Cons. Stap Utilities Telecom IT Cons. Disc. Financials Materials Energy Industrials2009 Cons. Disc. IT Materials Energy Financials Cons. Stap Industrials Utilities Health Care Telecom2010 Cons. Disc. Cons. Stap Industrials Health Care Materials Financials IT Telecom Energy UtilitiesYTD 2011 Cons. Stap Telecom Cons. Disc. Energy IT Utilities Materials Health Care Financials Industrials
Source: MSCI, FactSet, Morgan Stanley Research
At the country level, Asean markets have outperformed ytd in 2011 (Indonesia, Philippines, Malaysia, and Thailand) along with Czech Republic, Korea and Russia amongst the larger markets. The larger market underperformers have been India, Brazil and China. Other smaller markets that have underperformed include Turkey, Egypt, Hungary, Poland, Peru and Chile.
32
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 79 Country Performance Ranks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 211995 Peru S. Africa Morocco Egypt Indonesia Malaysia Chile Poland Turkey Korea Thailand Philippines Hungary Brazil Czech Mexico China Colombia Russia Taiwan India1996 Russia Hungary Egypt Poland Brazil Taiwan China Turkey Morocco Czech Indonesia Malaysia Mexico Philippines Colombia Peru India Chile S. Africa Thailand Korea1997 Turkey Russia Hungary Mexico Colombia Morocco Egypt Brazil Peru India Chile Taiwan S. Africa Poland Czech China Philippines Korea Malaysia Thailand Indonesia1998 Korea Morocco Philippines Thailand Czech Poland Hungary Taiwan India Egypt S. Africa Chile Malaysia Indonesia Mexico Brazil Peru Colombia China Turkey Russia1999 Turkey Russia Malaysia Indonesia Korea Egypt India Mexico Brazil S. Africa Taiwan Thailand Chile Poland Peru China Hungary Czech Philippines Morocco Colombia2000 Czech Poland Brazil Chile Malaysia S. Africa Mexico Morocco India Peru Hungary Russia China Colombia Egypt Taiwan Philippines Turkey Korea Thailand Indonesia2001 Russia Korea Colombia Peru Mexico Taiwan Thailand Malaysia Czech Chile Indonesia Hungary Morocco Brazil S. Africa Philippines India China Poland Turkey Egypt2002 Czech Indonesia Hungary Peru S. Africa Thailand Colombia Russia Korea India Egypt Poland Malaysia Morocco Mexico China Chile Taiwan Philippines Brazil Turkey2003 Thailand Turkey Brazil Peru Egypt China Chile India Indonesia Russia Colombia Czech Morocco S. Africa Philippines Taiwan Korea Poland Mexico Hungary Malaysia2004 Colombia Egypt Hungary Czech Poland Indonesia Mexico S. Africa Turkey Brazil Chile Philippines Korea Morocco India Malaysia Taiwan Russia Peru China Thailand2005 Egypt Colombia Russia Korea Brazil Turkey Mexico Czech India Peru S. Africa Poland Philippines Chile China Hungary Indonesia Morocco Thailand Taiwan Malaysia2006 China Indonesia Morocco Peru Philippines Russia India Brazil Mexico Poland Malaysia Czech Hungary Chile Taiwan S. Africa Egypt Colombia Korea Thailand Turkey2007 Peru Brazil Turkey India China Egypt Czech Indonesia Morocco Thailand Malaysia Philippines Korea Poland Russia Chile S. Africa Hungary Colombia Mexico Taiwan2008 Morocco Colombia Chile S. Africa Peru Malaysia Czech Mexico Taiwan Thailand China Philippines Egypt Poland Korea Brazil Indonesia Hungary Turkey India Russia2009 Brazil Indonesia Russia India Turkey Chile Colombia Taiwan Hungary Thailand Korea Peru Philippines China S. Africa Mexico Malaysia Poland Egypt Czech Morocco2010 Thailand Peru Chile Colombia Malaysia Philippines Indonesia S. Africa Mexico Korea Taiwan Turkey India Russia Poland Morocco Egypt Brazil China Czech HungaryYTD, 2011 Indonesia Philippines Czech Malaysia S. Africa Russia Korea Thailand Morocco Mexico Colombia Taiwan Brazil Poland Peru Chile Hungary China India Turkey Egypt Source: MSCI, FactSet, Morgan Stanley Research
33
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 80 Morgan Stanley Macro Forecasts: GDP Growth & Inflation
Region / Country 2009 2010 2011E 2012E 2013E 2009 2010 2011E 2012E 2013EGlobal Economy -0.9 5.2 3.9 3.5 3.9 5.3 3.4 4.3 3.2 3.0Developed Markets -3.9 2.7 1.4 1.2 1.4 3.3 1.5 2.7 1.7 1.4Developing World 2.5 7.9 6.4 5.7 6.2 7.8 5.5 6.1 4.8 4.6US -3.5 3.0 1.8 2.2 1.8 3.8 1.6 3.2 2.1 1.8Euro Area -4.1 1.8 1.6 -0.2 0.9 3.3 1.6 2.7 1.5 1.3
Germany -5.1 3.7 2.9 0.1 1.5 2.8 1.1 2.2 1.5 1.3France -2.6 1.4 1.6 0.3 1.3 3.2 1.5 2.1 1.8 1.6
Japan -6.3 4.1 -0.4 1.1 0.5 1.5 -0.7 -0.2 -0.7 -0.5UK -4.4 1.8 0.9 0.6 1.8 3.6 3.3 4.5 2.9 2.0Asia ex-JP 6.3 9.3 7.5 6.9 7.5 6.4 5.1 5.8 4.0 4.0
China 9.2 10.3 9.0 8.4 8.7 5.9 3.3 5.3 3.4 3.6India 6.8 8.9 7.3 6.9 7.5 8.3 12.1 9.0 6.5 5.9Korea 0.3 6.2 3.4 3.2 4.0 4.7 3.0 4.3 2.7 3.2Taiwan -1.9 10.9 4.2 3.1 4.0 3.5 1.0 2.0 1.0 1.8Indonesia 4.6 6.1 6.4 5.6 6.5 9.8 5.1 5.4 5.0 5.5Malaysia -1.6 7.2 4.6 3.0 4.7 5.4 1.8 3.2 2.4 2.2Thailand -2.4 7.8 2.4 4.5 4.5 5.5 3.3 4.0 4.5 3.2
CEEMEA -4.4 4.7 4.7 3.6 3.9 11.6 6.3 6.7 6.0 5.0Russia -7.8 4.0 4.5 5.0 4.0 14.1 6.9 8.6 6.4 5.4Poland 1.6 4.2 4.2 2.5 3.3 4.3 4.2 4.2 3.2 2.4Czech Republic -4.0 2.2 1.9 0.5 2.9 6.4 1.5 1.9 3.0 1.9Hungary -6.7 1.2 1.4 0.0 2.0 6.1 4.9 4.2 4.6 3.7Turkey -4.8 9.0 7.2 2.7 4.2 10.4 8.6 6.2 7.7 5.9
Latin America -2.0 6.3 4.4 3.5 3.7 7.7 6.3 6.6 6.1 6.1Brazil -0.6 7.5 3.1 3.5 4.0 5.7 5.0 6.6 5.6 5.7Mexico -6.2 5.4 3.7 3.2 3.3 5.1 4.2 3.1 3.4 3.4Chile -1.7 5.2 6.4 4.1 4.5 8.7 1.4 3.3 3.3 3.1Peru 0.9 8.8 5.9 4.9 5.4 5.8 1.5 3.3 3.5 2.5Colombia 1.5 4.4 5.3 4.1 5.1 7.0 2.3 3.4 3.2 3.1
Real GDP Growth (%) CPI Headline Inflation (%)
Source: Global Forecast Snapshots published on Nov 28, 2011, Morgan Stanley Research
34
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 81 Monetary Policy Rate Forecasts
Region / Country 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E
GLOBAL 3.1 3.3 3.3 3.2 3.2 3.1 3.1 3.1 3.2 3.3 3.3 3.4G10 0.6 0.7 0.7 0.6 0.4 0.4 0.4 0.5 0.5 0.5 0.7 0.7
United States 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125Euro Area 1.00 1.25 1.50 1.00 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25Japan 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05United Kingdom 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00Canada 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.50 1.75 2.00 2.00Switzerland 0.25 0.25 0.00 0.00 0.00 0.00 0.25 0.50 0.50 0.50 0.50 0.50Sweden 1.50 1.75 2.00 2.00 1.75 1.50 1.50 1.50 1.50 1.75 2.00 2.25Norway 2.00 2.25 2.25 2.25 2.25 2.25 2.50 2.50 2.75 2.75 3.00 3.25Australia 4.75 4.75 4.75 4.50 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.25New Zealand 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50 4.00 4.00
Emerging Markets 5.9 6.2 6.3 6.2 6.1 6.0 6.0 6.0 6.1 6.1 6.1 6.1CEEMEA 4.9 5.2 5.0 5.0 5.0 5.1 5.0 5.1 5.3 5.4 5.4 5.5
Russia 5.25 5.50 5.25 5.25 5.25 5.50 5.50 5.75 5.75 5.75 5.75 5.75Poland 3.75 4.50 4.50 4.50 4.50 4.25 4.00 4.00 4.00 4.00 4.00 4.00Czech Republic 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 1.00 1.25 1.50 1.75Hungary 6.00 6.00 6.00 6.50 7.25 7.25 6.75 6.00 5.75 5.50 5.50 5.50Kazakhstan 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50Turkey 6.25 6.25 5.75 5.75 5.75 5.75 5.75 5.75 6.00 6.25 6.25 6.25Israel 2.50 3.25 3.25 2.75 2.50 2.50 2.50 2.50 2.75 3.00 3.00 3.00South Africa 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 6.50 7.00 7.50 7.50Nigeria 7.50 8.00 9.25 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00
Asia ex Japan 5.7 6.0 6.2 6.2 6.2 6.1 6.0 6.0 6.1 6.1 6.1 6.1China 6.06 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56India 7.25 7.50 8.25 8.50 8.50 8.00 7.75 7.75 7.75 7.75 7.75 7.75Hong Kong 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50Korea 3.00 3.25 3.25 3.25 3.25 3.25 3.00 3.00 3.00 3.00 3.00 3.00Taiwan 1.75 1.88 1.88 1.88 1.88 1.88 1.88 1.88 1.88 1.88 1.88 1.88Singapore 0.44 0.44 0.25 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50Indonesia 6.75 6.75 6.75 5.75 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50Malaysia 2.75 3.00 3.00 3.00 2.50 2.50 2.50 2.75 2.75 2.75 2.75 2.75Thailand 2.50 3.00 3.50 3.25 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50
Latin America 7.7 8.1 8.0 7.6 7.1 6.9 6.9 6.9 6.9 6.9 6.9 6.9Brazil 11.75 12.25 12.00 11.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00Mexico 4.50 4.50 4.50 4.50 4.50 4.00 4.00 4.00 4.00 4.00 4.00 4.00Chile 4.00 5.25 5.25 5.25 5.00 4.25 4.25 4.25 4.25 4.25 4.25 4.25Peru 3.75 4.25 4.25 4.25 4.25 4.50 5.00 5.00 5.00 5.00 5.00 5.00Colombia 3.50 4.25 4.50 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
2011 2012 2013
Source: Global Forecast Snapshots published on Nov 28, 2011, Morgan Stanley Research
35
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 82 Morgan Stanley EM Currency Forecasts
EM 2011Currencies 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
USD/CNY 6.28 6.25 6.17 6.09 5.99 5.91 5.83 5.76 5.66 USD/HKD 7.79 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 USD/IDR 9,150 9,350 9,550 9,200 8,850 8,500 8,500 8,500 8,500 USD/INR 52.6 53.5 54.8 52.5 50 48 47.7 47.3 47 USD/KRW 1,155 1,170 1,190 1,145 1,100 1,050 1,043 1,037 1,030 USD/MYR 3.2 3.24 3.3 3.18 3.05 2.93 2.9 2.88 2.85 USD/PHP 43.5 43.7 44 43.3 42.7 42 41.6 41.2 40.8 USD/SGD 1.31 1.33 1.35 1.29 1.23 1.17 1.16 1.16 1.15 USD/TWD 30.5 30.7 31 30.2 29.3 28.5 28.3 28.2 28 USD/THB 31.4 31.6 32 31.3 30.7 30 29.9 29.7 29.6 MS AXJ Index 108.9 107.9 106.8 110 113.6 114.9 118.1 118.9 119.8 USD/BRL 1.8 1.85 1.8 1.75 1.7 1.67 1.67 1.66 1.65 USD/MXN 13.7 14 13.5 12.9 12.8 12.7 12.6 12.5 12.4 USD/ARS 4.3 4.46 4.63 4.79 4.95 5.14 5.33 5.51 5.7 USD/VEF 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 USD/CLP 500 520 500 490 490 486 483 479 475 USD/COP 1,925 1,950 1,925 1,900 1,875 1,856 1,838 1,819 1,800 USD/PEN 2.82 2.85 2.82 2.8 2.8 2.78 2.75 2.73 2.7 USD/ZAR 8.4 8.65 8.5 8.45 8.3 8.25 8.2 8.1 8 USD/TRY 1.85 1.9 1.85 1.8 1.8 1.77 1.77 1.75 1.75 USD/ILS 3.75 3.8 3.75 3.7 3.7 3.67 3.65 3.62 3.6 USD/RUB 31.45 32.09 31.45 31.06 30.73 30.03 30.08 30.26 30.32 RUB basket 35.7 35.7 34.7 34 33.5 33 33.33 33.66 34 EUR/PLN 4.5 4.6 4.65 4.55 4.4 4.35 4.25 4.2 4.05 EUR/CZK 26 26.5 26.5 26.3 26 25.8 25.6 25.3 25 EUR/HUF 315 320 320 315 305 300 295 290 285 EUR/RON 4.4 4.45 4.45 4.4 4.3 4.2 4.1 4 4
2012 2013
Source: FX Outlook published on Nov 28, 2011, Morgan Stanley Research
36
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
Exhibit 83 Morgan Stanley EM Commodity Price Forecasts
Energy 2011 2012Crude Oil (Brent) US$/bbl 100 * 100
forward curve 104Bull case 115Bear case 75
Natural Gas US$/mmBtu 4.20 3.85forward curve 4.06 3.93
Base Metals 2011 2012
Aluminum US$/tonne 2,500 2,300forward curve 2,402 2,029
Copper US$/tonne 9,200 8,400forward curve 8,799 7,247
Nickel US$/tonne 23,700 22,000forward curve 22,782 16,970
Zinc US$/tonne 2,300 2,100forward curve 2,198 1,940
Precious Metals 2011 2012
Gold US$/oz 1,612 2,200forward curve 1,574 1,696
Silver US$/oz 38 50forward curve 35 31
Platinum US$/oz 1,784 1,829forward curve 1,729 1,541
Softs ** 2011/12 2012/13
Cotton US¢/lb 100 80forward curve 94 89
Sugar US¢/lb 22 19forward curve 23 22
Coffee US¢/lb N.A. N.A.forward curve 234 238
Grains ** 2011/12 2012/13
Corn US$/bu 7.25 6.00forward curve 6.03 5.49
Soybean US$/bu 14.25 13.50forward curve 11.52 11.34
Wheat US$/bu 7.50 7.00forward curve 6.31 6.58
Livestock 2011 2012Live Cattle US¢/lb N.A. N.A.
forward curve 115 125Feeder Cattle US¢/lb N.A. N.A.forward curve 134 149
Lean Hogs US¢/lb N.A. N.A.forward curve 91 91
Source: Commodities Outlook published on Nov 29, 2011, Morgan Stanley Research
37
M O R G A N S T A N L E Y R E S E A R C H
December 2, 2011 Asia/GEMs Strategy
GEMs Equity Strategy: Focus List (Alphabetical Order) Exhibit 84 Data as of: 30-Nov-11Company GICS Mkt Cap Date Total US$ Return 12m Total Latest Target Target Price DY, % Morgan Stanley P/EName Ticker Rating Country Sector USD bn Added Since Added Return Price Price Currency Upside, % 2011E 2011E 2012E Analyst
Agile Property 3383.HK OW China Cons. Stap 2.8 12/01/11 0.0% -14.6% 5.91 10.00 HKD 69.2% 7.2% 5.0x 4.3x Leung, Brian
BHP Billiton Plc BILJ.J Not Rated South Africa Materials 164.4 11/03/11 -3.0% -10.4% X 24923.00 NA ZAc NA 2.8% 9.0x 6.8x Gabriel, Alain
Cairn India Ltd. CAIL.BO OW India Energy 11.0 08/25/09 8.8% -16.0% 301.15 359.00 INR 19.2% 2.3% 7.7x 6.7x Jaising, Vinay
China Shenhua Energy 1088.HK OW China Energy 83.6 08/02/10 8.3% 2.3% X 32.65 48.00 HKD 47.0% 2.8% 12.4x 11.0x Tan, Wee-Kiat
CNOOC 0883.HK OW China Energy 80.0 08/25/09 41.9% -14.2% X 14.02 22.50 HKD 60.5% 4.4% 8.0x 7.7x Tan, Wee-Kiat
Compania de Minas Buenaventura S.A. BVN.N OW Peru Materials 10.0 11/10/11 -8.6% -21.7% 39.15 57.00 USD 45.6% 0.9% 11.4x 7.2x De Alba, Carlos
Ctrip.com CTRP.O OW China Consumer Discretionary 4.1 11/16/11 1.0% -37.9% X 27.20 44.90 USD 65.1% 0.0% 3.8x 3.2x Ji, Richard
Far Eastone 4904.TW OW Taiwan Telecom 6.1 04/20/11 32.9% 40.4% X 57.00 60.00 TWD 5.3% 4.3% 20.9x 16.5x Yu, Gary
HDFC Bank HDBK.BO OW India Financials 19.7 11/03/11 -13.6% -14.7% 441.45 530.00 INR 20.1% 0.9% 21.3x 16.3x Agarwal, Anil
Hyundai MOBIS 012330.KS OW S. Korea Cons. Disc. 25.9 11/03/11 -6.1% 12.6% 303500.00 485000.00 KRW 59.8% 0.6% 10.1x 9.1x Park, Sangkyoo
Industrial and Commercial Bank of China 1398.HK OW China Financials 185.3 08/16/11 -16.5% -26.1% 4.31 6.05 HKD 40.4% 6.1% 6.4x 5.7x Liu, Minyan
Mr Price Group MPCJ.J OW South Africa Cons. Disc. 2.6 11/22/10 11.9% 13.4% X 8000.00 7500.00 ZAc -6.3% 5.0% 18.3x 15.0x Moolman, Natasha
Petrobras PBR.N OW Brazil Energy 176.0 07/16/09 -27.0% -13.8% 26.99 42.00 USD 55.6% 3.7% 7.6x 8.3x Daripa, Subhojit
PT Bank Rakyat Indonesia BBRI.JK OW Indonesia Financials 17.3 06/27/11 -3.9% 24.7% X 6500.00 7400.00 IDR 13.8% 1.7% 12.0x 9.9x Lord, Nick
PTT Global Chemicals PTTGC.BK OW Thailand Materials 9.6 10/26/11 4.8% -15.3% X 65.50 76.00 THB 16.0% 4.5% 8.9x 7.3x Maheshwari, Mayank
PT Indocement Tunggal Prakarsa INTP.JK OW Indonesia Materials 6.1 11/03/11 -1.2% -9.0% X 15000.00 18000.00 IDR 20.0% 1.8% 15.7x 12.4x Spencer, Charles
Rosneft ROSNq.L OW Russia Energy 69.9 03/14/11 -18.3% 11.3% 7.28 10.70 USD 47.0% 1.5% 5.6x 5.6x Thomas, Matthew
Samsung Electronics 005930.KS OW S. Korea IT 129.7 04/15/10 15.2% 24.1% X 1004000.0 1220000.0 KRW 21.5% 1.2% 10.7x 9.3x Han, Keon
Sberbank SBER.RTS OW Russia Financials 60.9 06/10/10 22.4% -10.7% X 2.82 3.00 USD 6.4% 3.4% 5.9x 7.4x Stoklosa, Magdalena
Telefonica Brasil SA VIV.N OW Brazil Telecom 30.3 09/12/11 -4.2% 26.8% 26.97 35.00 USD 29.8% 7.7% 10.6x 9.0x Morin, Michel NA = Not available. OW = Overweight, EW = Equal-weight, UW = Underweight, V = More volatile. Source: ModelWare, Morgan Stanley Research. Data as of Nov 30, 2011. The US$ total return of the Morgan Stanley GEM Equity Strategy Focus List since inception on December 11, 2006 is 28.14% (MSCI EM index total return 19.80%). This assumes the focus list constitutes an equal-weighted portfolio, rebalanced whenever positions are added or subtracted. Results shown represent total absolute return (including dividends) and exclude brokerage commissions. These figures are not audited. Past performance is no guarantee of future results. (X) indicates stock has outperformed MSCI EM index since inclusion in the Focus List. For valuation methodology and risks associated with price targets mentioned, please refer to the latest relevant research on these stocks, which is available through your sales representative; Client Link at www.morganstanley.com; or other electronic systems. Please note that all important disclosure including personal holding disclosures and Morgan Stanley disclosure appear on the Morgan Stanley public website at www.morganstanley.com/reserachdisclosure. For non-covered stocks please refer to Important US Regulatory Disclosures on Subject Companies and Other Important Disclosures located at the back of this report. For valuation methodology and risks associated with price targets mentioned, please refer to the latest relevant research on these stocks, which is available through your sales representative; Client Link at www.morganstanley.com; or other electronic systems. ++ Ratings and price targets for these companies have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time.
We add Agile Property (3383.HK, HK$6.79) and remove BIM (BIMAS.IS, TRY51.50) from our GEMs Focus List
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APxJ Equity Strategy: Focus List (Alphabetical Order) Exhibit 85 Data as of: 30-Nov-11Company GICS Mkt Cap Date Total US$ Return 12m Total Latest Target Target Price DY, % Morgan Stanley P/EName Ticker Rating Country Sector USD bn Added Since Added Return Price Price Currency Upside, % 2011E 2011E 2012E Analyst
Agile Property 3383.HK OW China Cons Stap 2.8 12/01/11 0.0% -44.2% 5.91 10.00 HKD 69.2% 7.2% 5.0x 4.3x Leung, Brian
BHP Billiton Plc BHP.AX OW Australia Materials 191.9 11/03/11 -5.2% -10.4% 34.92 46.00 AUD 31.7% 2.3% 9.1x 8.0x Fitzpatrick, Brendan
Cairn India Ltd. CAIL.BO OW India Energy 11.0 08/25/09 8.8% -16.0% 301.15 359.00 INR 19.2% 2.3% 7.7x 6.7x Jaising, Vinay
China Unicom 0762.HK OW China Telecom 49.6 02/28/11 24.7% 54.5% X 16.08 19.00 HKD 18.2% 1.1% 47.1x 22.8x Killa, Navin
China Shenhua Energy 1088.HK OW China Energy 83.6 08/02/10 8.3% 2.3% X 32.65 48.00 HKD 47.0% 2.8% 12.4x 11.0x Tan, Wee-Kiat
CNOOC 0883.HK OW China Energy 80.0 07/16/09 57.6% -14.2% X 14.02 22.50 HKD 60.5% 4.4% 8.0x 7.7x Tan, Wee-Kiat
Ctrip.com CTRP.O OW China Cons Disc 4.1 11/16/11 1.0% -37.9% X 27.20 44.90 USD 65.1% 0.0% 3.8x 3.2x Ji, Richard
Dr. Reddy's Lab REDY.BO OW India Health Care 5.1 08/16/11 -8.8% -21.9% X 1574.70 1905.00 INR 21.0% 0.7% 17.8x 14.9x Baisiwala, Sameer
Far Eastone 4904.TW OW Taiwan Telecom 6.1 04/20/11 32.9% 40.4% X 57.00 60.00 TWD 5.3% 4.3% 20.9x 16.5x Yu, Gary
HDFC Bank HDBK.BO OW India Financials 19.7 11/03/11 -13.6% -14.7% 441.45 530.00 INR 20.1% 0.9% 21.3x 16.3x Agarwal, Anil
Hyundai MOBIS 012330.KS OW S. Korea Cons Disc 25.9 11/03/11 -6.1% 12.6% 303500.00 485000.00 KRW 59.8% 0.6% 10.1x 9.1x Park, Sangkyoo
Industrial and Commercial Bank of China 1398.HK OW China Financials 185.3 08/16/11 -16.5% -26.1% 4.31 6.05 HKD 40.4% 6.1% 6.4x 5.7x Liu, Minyan
Newcrest Mining NCM.AX OW Australia Materials 27.2 11/10/11 -2.8% -5.2% X 34.60 48.90 AUD 41.3% 1.6% 23.1x 12.4x Fitzpatrick, Brendan
Oil Search Ltd. OSH.AX OW Australia Energy 8.5 08/16/11 -3.8% -0.9% X 6.28 7.40 AUD 17.8% 0.6% 46.5x 52.9x Baker, Stuart
PT Bank Rakyat Indonesia BBRI.JK OW Indonesia Financials 17.3 06/27/11 -3.9% 24.7% X 6500.00 7400.00 IDR 13.8% 1.7% 12.0x 9.9x Lord, Nick
PT Indocement Tunggal Prakarsa INTP.JK OW Indonesia Materials 6.1 11/03/11 -1.2% -9.0% X 15000.00 18000.00 IDR 20.0% 1.8% 15.7x 12.4x Spencer, Charles
PT Telekomunikasi TLKM.JK OW Indonesia Telecom 16.3 09/27/11 -0.9% -4.3% 7350.00 9800.00 IDR 33.3% 4.0% 11.5x 10.2x Killa, Navin
PTT Global Chemicals PTTGC.BK OW Thailand Materials 9.6 10/26/11 4.8% -15.3% X 65.50 76.00 THB 16.0% 4.5% 8.9x 7.3x Maheshwari, Mayank
Samsung Electronics 005930.KS OW S. Korea IT 129.7 04/15/10 15.2% 24.1% X 1004000.00 1220000.00 KRW 21.5% 1.2% 10.7x 9.3x Han, Keon
Sands China Ltd. 1928.HK OW Hong Kong Cons Disc 22.5 08/16/11 -7.4% 30.1% X 21.75 24.50 HKD 12.6% 0.0% 19.4x 15.7x Choudhary, Praveen
NA = Not available. OW = Overweight, EW = Equal-weight, UW = Underweight, V = More volatile. Source: ModelWare, Morgan Stanley Research. Data as of Nov 30, 2011. The US$ total return of the Morgan Stanley APxJ Equity Strategy Focus List since inception on 23rd April 2009 is 62.71% (MSCI APxJ index total return 56.34%). This assumes the focus list constitutes an equal-weighted portfolio, rebalanced whenever positions are added or subtracted. Results shown represent total absolute return (including dividends) and exclude brokerage commissions. These figures are not audited. Past performance is no guarantee of future results. (X) indicates stock has outperformed MSCI APxJ index since inclusion in the Focus List. For valuation methodology and risks associated with price targets mentioned, please refer to the latest relevant research on these stocks, which is available through your sales representative; Client Link at www.morganstanley.com; or other electronic systems. Please note that all important disclosure including personal holding disclosures and Morgan Stanley disclosure appear on the Morgan Stanley public website at www.morganstanley.com/reserachdisclosure For non-covered stocks please refer to Important US Regulatory Disclosures on Subject Companies and Other Important Disclosures located at the back of this report. For valuation methodology and risks associated with price targets mentioned, please refer to the latest relevant research on these stocks, which is available through your sales representative; Client Link at www.morganstanley.com; or other electronic systems. ++ Ratings and price targets for these companies have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time.
We add Agile Property (3383.HK, HK$6.79) and remove Fosters (FGL.AX, A$5.39) from our APxJ Focus List
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Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email [email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Jonathan Garner. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of October 31, 2011, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Agile Property, Ctrip.com, Dr. Reddy's Lab, Foster's Group, HDFC Bank, Telefonica Brasil SA. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Agile Property, Hyundai MOBIS, Samsung Electronics. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Agile Property, AngloGold Ashanti Ltd, Foster's Group, Hyundai MOBIS, Oil Search Ltd., Petrobras, Rosneft, Samsung Electronics, Sberbank. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Agile Property, AngloGold Ashanti Ltd, BIM, Cairn India Ltd., Compania de Minas Buenaventura S.A., Ctrip.com, Dr. Reddy's Lab, Far Eastone, Foster's Group, Gold Fields Limited, HDFC Bank, Hyundai MOBIS, Industrial & Commercial Bank of China, Newcrest Mining, Oil Search Ltd., Petrobras, PT Bank Rakyat Indonesia, PT Telekomunikasi, PTT Global Chemicals, Rosneft, Samsung Electronics, Sberbank. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Agile Property, AngloGold Ashanti Ltd, BHP Billiton, China Unicom, Ctrip.com, Foster's Group, HDFC Bank, Hyundai MOBIS, Industrial & Commercial Bank of China, Petrobras, Rosneft, Sands China Ltd., Sberbank. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Agile Property, AngloGold Ashanti Ltd, BIM, Cairn India Ltd., Compania de Minas Buenaventura S.A., Ctrip.com, Dr. Reddy's Lab, Far Eastone, Foster's Group, Gold Fields Limited, HDFC Bank, Hyundai MOBIS, Industrial & Commercial Bank of China, Newcrest Mining, Oil Search Ltd., Petrobras, PT Bank Rakyat Indonesia, PT Telekomunikasi, PTT Global Chemicals, Rosneft, Samsung Electronics, Sberbank. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Agile Property, AngloGold Ashanti Ltd, BHP Billiton, China Unicom, Compania de Minas Buenaventura S.A., Ctrip.com, Foster's Group, Gold Fields Limited, HDFC Bank, Hyundai MOBIS, Industrial & Commercial Bank of China, Newcrest Mining, Petrobras, PT Bank Rakyat Indonesia, PT Telekomunikasi, Rosneft, Sands China Ltd., Sberbank. Morgan Stanley & Co. LLC makes a market in the securities of AngloGold Ashanti Ltd, BHP Billiton, China Unicom, CNOOC, Compania de Minas Buenaventura S.A., Ctrip.com, Dr. Reddy's Lab, Foster's Group, Gold Fields Limited, HDFC Bank, Newcrest Mining, Petrobras, PT Telekomunikasi. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of November 30, 2011) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
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Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count % of Total Count
% of Total IBC
% of Rating Category
Overweight/Buy 1109 39% 453 44% 41%Equal-weight/Hold 1203 42% 434 42% 36%Not-Rated/Hold 108 4% 24 2% 22%Underweight/Sell 422 15% 122 12% 29%Total 2,842 1033 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. .
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