Gitf 20130102

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Gitf 20130102

  1. 1. January 2, 2013GLOBAL CROSS-ASSET STRATEGY MORGAN STANLEY RESEARCHGlobal In the Flow December 2012 (%) 2012 (%) MSCI Japan 5.3   8.4  Global Cross-Asset Strategy2012 in Review MSCI EM 4.9   18.6  Group MSCI Europe 2.8   19.9 Risk markets broadly ended the year MSCI World 1.9   16.5  Morgan Stanley & Co. LLCin the green. Japanese equities rallied S&P 500 0.9  16.0  Gregory Peters in December but European and EM   +1 212 761-1488equities led over 2012. EM and US HY EUR 1.6   1.8  Jason Draho bonds also performed well over the EM 0.8  2.6  +1 212 761-7893year while the USD fell.   Brennan Leong  DXY -0.5 -0.5 +1 212 761-9729  Markets endured a year of macro Jerry Chen  Oil -0.1  3.5 ups and downs. Valuations shifted +1 212 761-8591 S&P GSCI -0.6  0.1 higher and tighter into year-end, driven Gold -2.1   7.0  Morgan Stanley Australia Ltd.+by policy-makers’ removal of tail risks.   Gerard Minack Volatility ended lower while risk +61 2 9770 1529 Bunds 2.2   6.1 sentiment is mixed at 2012’s close. Katie Hill  Gilts 0.9  7.4  +61 2 9770 9290The global economy ended the year Emerging Markets 0.7  17.6 weak. The US is gradually picking up Treasuries -0.4  2.0  Global Cross-Asset Directoryas housing improves and the labor TIPS -0.6  7.2 market heals. Europe is headed for a  deeper recession before recovery, and EUR BIG Index 1.9   11.6  Subscribe to the Global In the FlowJapan’s near-term uncertainties are US Corp HY 1.6   15.2 high but policy may ease. China’s US BIG Index -0.1  4.2 growth is on the mend while other EMeconomies are showing some Note: Total returns in USD, positive currency indicates appreciation Source: Bloomberg, The Yield Book, Morgan Stanley Researchimprovements.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 theobjectivity 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 andtrading securities held by a research analyst account.
  2. 2. MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013Table of Contents Markets Review Global Economics Review 1. Returns 5 1. Global Economy Ends Year Weak 84 Equity  Rates  Credit  FX  Commodities Global Industrial Production  Global PMIs  Global Policy Rates  Global Inflation  Global Trade 2. Performance 20 Sector Performance  Trading Volumes  Credit Comparisons 2. US Gradually Picking Up 88  Sovereign CDS, Yields  EM vs. DM  Funding, Liquidity Labor Market  Housing  Inflation  Trade  Inflation Pricing  Currencies  Commodities  Durable Goods  Consumers  Industrial Production 3. Valuation 59 3. Europe Facing a Hard Winter 93  Yield Curves  US Debt, Equity Issuance PMI  Sentiment  Industrial Production  P/Es  Earnings Revisions  Consensus Estimates  Investor Sentiment  Money  Inflation  Financial Conditions  Cross-Asset Relationships 4. Japan Waiting for Recovery 100 4. Risk Measures 71 Sentiment  Machinery Orders  Consumer Confidence Implied, Realized Volatility  Volatility Skew, Term Structure  Production  Trade  Inflation  Correlation 5. China’s Recovery Supported 105 5. Sentiment 76 Production  Trade  Inflation  Investment Put-Call  AAII  GRDI  Lending  Money  Policy 6. Positioning 77 6. EM Continues to Be Mixed 110 Dealer Holdings  Net Protection  Speculative Positioning PMI  Production  US, EM Fund Flows  Trade  Inflation  Internal Demand 2
  3. 3. MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013 Markets ReviewWhat Happened Last Month
  4. 4. MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013What Happened Last Month • Risk assets broadly rounded out the year with gains – Japanese equities rallied in December but European and EM equities 1. Returns led over 2012. In December, Chinese stocks outperformed in EM and Japanese in DM. Financials topped sector performance in DM over the year. In bonds, Bunds outperformed in December but EM and US HY returned most over 2012; Asian IG sold off the most over 4Q12. CCCs outperformed in corporate credit over the year, while financials were the best-performing sector in synthetic credit. The JPY depreciated against the USD in December while other G10 currencies rose, and most global currencies appreciated against the USD over the year. Commodities ended December roughly flat, while precious metals and agriculture outperformed other sectors over 2012. • Markets endured a year of macro ups and downs – EM caught up to DM after earlier softness, and SPX ended 2012 about 2. Performance 3% below its high while Eurostoxx ended at 2012 highs. Spanish and Italian equities fell notably from YTD highs but also rose the most from YTD lows, but outperformance still goes to the core. Financial conditions have loosened further and sovereign auctions have improved over the course of the year. Diminished market, funding, and political pressures mean Spain has yet to request aid. Meanwhile, Japan has been struggling to recover after its earthquake, with the BoJ expanding its asset purchase program in December. Markets reflect China moving away from hard-landing fears and the USD/CNY reached 19-year lows on better data and positive fundamentals. The safe-haven USD lost support as risk rallied, while the EUR recovered in 2H12. The AUD reversed out of weakness but USD/BRL remains high. Markets diverged from economic fundamentals this year, but a China recovery could boost EM. Gold has been kept on the defensive despite the Fed’s extended accommodation, but was lifted by fiscal cliff concerns and a weak USD. Financials turned around in 2012 after substantially lagging the market in 2011. • Risk valuations higher and tighter into year-end – Shiller P/Es shifted higher and tighter, with European credit spreads 3. Valuation nearing 1-year tights. Equities remain more attractive than bonds on dividend and forward earnings yields. Globally, P/Es remain below historical averages, particularly in DM. Relative to history, NTM P/E is slightly higher in EM vs. DM. Outside of the US, dividend yields are generally well above historical averages. Earnings revisions are still negative and consensus earnings trended lower over the year. US corporate debt and equity issuance surpassed that in 2011. Sovereign curves shifted down significantly in Italy and Germany in 2012. The EUR strengthened while front-end Bund yields remain below Treasury yields. • Volatility ended the year lower – Volatility trended lower across the year, particularly in FX. Interest rate volatility spiked 4. Risk Measures slightly in December as rates responded to a strong NFP and fiscal cliff resolution expectations. Corporate credit volatility has also subsided over the course of the year, with European credit easing further in December. Equity volatility is at highly subdued levels compared to 2010 and 2011. • Risk sentiment is mixed at the year’s close – Equity put/call has pushed back up in the US and especially in Europe. Risk 5. Sentiment demand has similarly faltered, but the AAII Bulls-Bears measure is favoring the bulls. • Positioning ultimately favored risk assets in 2012 – Fixed income saw strong fund flows throughout the year, in contrast to 6. Positioning equity. Primary dealers have increased their US Treasury holdings in the last few weeks of the year. Net speculative positions in the S&P 500 have risen over 2012, and similarly, speculative positioning in the EUR has been reversing away from lows. 4
  5. 5. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn USD Total Returns, European Equities Led in 4Q12 and 2012; EM Was a Close Second 4Q12 (%) 2012 (%) MSCI Europe 7.1   19.9  MSCI Japan 5.8   8.4  MSCI EM 5.6   18.6  MSCI World 2.6   16.5  S&P 500 -0.4  16.0    EUR 2.6   1.8  EM 0.7  2.6  DXY -0.2  -0.5    Oil -1.1   3.5  S&P GSCI -3.3   0.1  Gold -5.4   7.0    Bunds 3.6   6.1  Emerging Markets 3.2   17.6  TIPS 0.6  7.2  Gilts 0.2  7.4  Treasuries -0.1  2.0    EUR BIG Index 4.4   11.6  US Corp HY 3.1   15.2  US BIG Index 0.2  4.2  Note: Total returns in USD, positive currency indicates appreciation Source: Bloomberg, The Yield Book, Morgan Stanley Research 5
  6. 6. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn December, Chinese Stocks Outperformed in EM and Japanese in DM December 2012 (%) 2012 (%) USD Local USD Local World MSCI EM 4.8  3.8  15.1  13.9  Euro Stoxx 3.8  2.4  15.6  13.8  MSCI AC World 2.1  2.0  13.4  13.2  MSCI World 1.7  1.8  13.2  13.1  S&P 500 0.7  0.7  13.4  13.4      Developed Markets     Japan Nikkei 225 5.0  10.0  9.4  22.9  Italy FTSE MIB 4.4  2.9  9.5  7.8  Spain IBEX 35 4.3  2.9  -3.2  -4.7  Germany DAX 4.2  2.8  31.1  29.1  France CAC 40 3.8  2.4  17.0  15.2  Netherlands AEX 3.2  1.8  11.4  9.7  Singapore FTSE 3.1  3.2  27.0  19.7  Hong Kong Hang Seng 2.8  2.8  23.2  22.9  Australia ASX All Ordinaries 2.7  3.2  14.9  13.5  UK FTSE 100 2.0  0.5  10.7  5.8  Canada S&P/TSX Composite 1.3  1.6  6.4  4.0  Switzerland SMI 1.2  0.0  17.4  14.9      Emerging Markets     China Shanghai SE Composite 14.5  14.6  4.2  3.1  Brazil Bovespa 9.2  6.1  -2.2  7.4  South Africa JSE 7.8  3.0  16.8  22.7  Turkey ISE National 100 7.1  7.0  61.4  52.6  Russia RTS 6.3  6.3  10.5  10.5  Thailand SET 100 5.5  5.2  37.5  33.3  Korea KOSPI Composite 4.5  3.3  18.4  9.4  Mexico IPC 4.0  4.5  26.7  17.9  Taiwan TAIEX 1.6  1.6  13.5  8.9  Indonesia SE Composite 0.4  0.9  6.2  12.9  India SENSEX -0.3  0.4  21.8  25.7  Note: Price return Source: Datastream, Morgan Stanley Research 6
  7. 7. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsEquities in Europe Climbed the Most in DM Over 4Q12 While Turkey Is Ahead Over 2012 4Q12 (%) 2012 (%) USD Local USD Local World Euro Stoxx 10.1  7.4  15.6  13.8  MSCI EM 5.2  5.0  15.1  13.9  MSCI AC World 2.5  2.8  13.4  13.2  MSCI World 2.1  2.5  13.2  13.1  S&P 500 -1.0  -1.0  13.4  13.4      Developed Markets     France CAC 40 11.2  8.5  17.0  15.2  Italy FTSE MIB 10.5  7.8  9.5  7.8  Hong Kong Hang Seng 8.7  8.7  23.2  22.9  Netherlands AEX 8.7  6.0  11.4  9.7  Spain IBEX 35 8.6  6.0  -3.2  -4.7  Germany DAX 8.1  5.5  31.1  29.1  Switzerland SMI 7.8  5.0  17.4  14.9  Australia ASX All Ordinaries 5.7  5.9  14.9  13.5  Japan Nikkei 225 5.4  17.2  9.4  22.9  Singapore FTSE 3.9  3.5  27.0  19.7  UK FTSE 100 3.4  2.7  10.7  5.8  Canada S&P/TSX Composite -0.2  0.9  6.4  4.0      Emerging Markets     Turkey ISE National 100 18.5  17.8  61.4  52.6  China Shanghai SE Composite 9.7  8.8  4.2  3.1  Thailand SET 100 8.0  7.3  37.5  33.3  South Africa JSE 6.7  9.8  16.8  22.7  Mexico IPC 5.9  6.9  26.7  17.9  Korea KOSPI Composite 3.9  0.0  18.4  9.4  Russia RTS 3.5  3.5  10.5  10.5  Brazil Bovespa 2.1  3.0  -2.2  7.4  Taiwan TAIEX 0.7  -0.2  13.5  8.9  Indonesia SE Composite 0.7  1.3  6.2  12.9  India SENSEX -0.3  3.5  21.8  25.7  Note: Price return Source: Datastream, Morgan Stanley Research 7
  8. 8. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn December as Well as Over 2012, Financials Topped Sector Performance in DM MSCI World December 2012 (%) 2012 (%) MSCI USA December 2012 (%) 2012 (%) Financials 4.5 30.1 Financials 4.5 28.1 Materials 4.4 11.8 Materials 3.2 15.3 Industrials 3.3 16.7 Industrials 2.6 16.0 Cons Disc 2.6 24.9 MSCI USA 1.0 16.1 MSCI World 1.9 16.5 Cons Disc 0.9 24.7 Utilities 1.4 2.9 Energy 0.8 3.9 Energy 0.8 2.5 Utilities 0.1 1.7 Tech 0.6 13.8 Tech 0.0 14.8 Health Care 0.4 18.4 Health Care -0.2 18.5 Telecom -0.3 7.6 Telecom -0.7 18.9 Cons Staples -1.2 14.2 Cons Staples -2.2 11.0 MSCI Europe December 2012 (%) 2012 (%) MSCI EM December 2012 (%) 2012 (%) Materials 6.3 19.5 Materials 8.2 10.4 Financials 4.0 34.1 Financials 6.2 25.9 Cons Disc 3.9 35.6 Industrials 5.9 17.2 Industrials 3.6 24.7 Energy 5.3 6.4 Tech 3.5 28.6 Health Care 5.0 33.5 Utilities 3.3 7.8 MSCI EM 4.9 18.6 MSCI Europe 2.8 19.9 Utilities 4.1 6.8 Health Care 2.5 20.7 Cons Disc 3.5 16.5 Energy 0.8 0.8 Telecom 3.4 14.5 Telecom 0.4 -2.8 Cons Staples 3.1 25.6 Cons Staples 0.1 19.3 Tech 2.0 29.0 Note: Total return in USD Source: MSCI, Datastream, Morgan Stanley Research 8
  9. 9. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsFinancials and Other Cyclicals Generally Dominated in 4Q12 and Over 2012 MSCI World 4Q12 (%) 2012 (%) MSCI USA 4Q12 (%) 2012 (%) Financials 8.5 30.1 Financials 5.5 28.1 Cons Disc 6.5 24.9 Industrials 3.9 16.0 Industrials 6.1 16.7 Materials 2.9 15.3 Materials 5.0 11.8 Cons Disc 2.7 24.7 MSCI World 2.6 16.5 Health Care 0.0 18.5 Health Care 0.9 18.4 MSCI USA -0.2 16.1 Cons Staples 0.7 14.2 Cons Staples -1.6 11.0 Utilities -0.6 2.9 Utilities -2.7 1.7 Energy -2.1 2.5 Energy -2.8 3.9 Tech -3.2 13.8 Tech -5.4 14.8 Telecom -4.7 7.6 Telecom -5.7 18.9 MSCI Europe 4Q12 (%) 2012 (%) MSCI EM 4Q12 (%) 2012 (%) Tech 14.5 28.6 Financials 10.1 25.9 Cons Disc 14.1 35.6 Cons Staples 7.6 25.6 Financials 13.7 34.1 Materials 6.0 10.4 Industrials 10.1 24.7 MSCI EM 5.6 18.6 Materials 9.1 19.5 Tech 5.4 29.0 MSCI Europe 7.1 19.9 Industrials 5.3 17.2 Cons Staples 4.7 19.3 Health Care 5.0 33.5 Health Care 3.9 20.7 Cons Disc 4.0 16.5 Utilities 0.6 7.8 Utilities 1.6 6.8 Energy -0.8 0.8 Energy 1.0 6.4 Telecom -4.4 -2.8 Telecom 0.7 14.5 Note: Total return in USD Source: MSCI, Datastream, Morgan Stanley Research 9
  10. 10. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn December and Over 2012, Small Caps Beat Large Caps in DM MSCI World December 2012 (%) 2012 (%) MSCI USA December 2012 (%) 2012 (%) Growth Growth Small Cap 2.4  16.3  Mid Cap 2.7  16.4  Mid Cap 2.2  15.7  Small Cap 2.3  16.7  Large Cap 0.8  16.9  Large Cap -0.7  17.5  Value   Value   Mid Cap 4.2  18.8  Small Cap 3.2  19.8  Small Cap 4.1  20.0  Mid Cap 2.9  17.3  Large Cap 2.6  16.1  Large Cap 1.8  14.7      Small Cap 3.2  18.1  Small Cap 2.8  18.2  Large Cap 1.7  16.5  Large Cap 0.6  16.0  MSCI Europe December 2012 (%) 2012 (%) MSCI EM December 2012 (%) 2012 (%) Growth Growth Small Cap 4.0  29.2  Mid Cap 4.5  19.6  Large Cap 2.0  20.1  Small Cap 4.3  22.2  Mid Cap 1.9  21.1  Large Cap 4.2  21.1  Value   Value   Small Cap 6.2  29.6  Mid Cap 6.3  22.9  Mid Cap 5.1  25.7  Large Cap 5.5  15.4  Large Cap 3.5  18.5  Small Cap 5.3  22.9      Small Cap 5.1  29.5  Large Cap 4.8  18.2  Large Cap 2.8  19.3  Small Cap 4.8  22.6  Note: Total return in USD Source: MSCI, Datastream, Morgan Stanley Research 10
  11. 11. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsSmall Cap Value Stocks Did Best in DM Over 4Q12 and 2012 MSCI World 4Q12 (%) 2012 (%) MSCI USA 4Q12 (%) 2012 (%) Growth Growth Mid Cap 2.7  15.7  Mid Cap 2.3  16.4  Small Cap 2.2  16.3  Small Cap 1.9  16.7  Large Cap 1.4  16.9  Large Cap -2.0  17.5  Value   Value   Mid Cap 6.5  18.8  Mid Cap 3.8  17.3  Small Cap 5.3  20.0  Small Cap 3.8  19.8  Large Cap 3.2  16.1  Large Cap 0.3  14.7      Small Cap 3.7  18.1  Small Cap 2.8  18.2  Large Cap 2.3  16.5  Large Cap -0.8  16.0  MSCI Europe 4Q12 (%) 2012 (%) MSCI EM 4Q12 (%) 2012 (%) Growth Growth Large Cap 6.4  20.1  Large Cap 6.7  21.1  Small Cap 5.9  29.2  Mid Cap 5.2  19.6  Mid Cap 5.8  21.1  Small Cap 4.8  22.2  Value   Value   Mid Cap 10.6  25.7  Mid Cap 6.1  22.9  Small Cap 10.2  29.6  Small Cap 5.5  22.9  Large Cap 7.5  18.5  Large Cap 4.5  15.4      Small Cap 8.1  29.5  Large Cap 5.6  18.2  Large Cap 7.0  19.3  Small Cap 5.1  22.6  Note: Total return in USD Source: MSCI, Datastream, Morgan Stanley Research 11
  12. 12. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsBunds Outperformed in December but EM and US HY Bonds Returned Most Over 2012 Total Returns December 2012 (%) 2012 (%) USD Local USD Local Bunds 2.2   0.8  6.1  4.5   Europe BIG Index 1.9   0.6  11.6  9.5   High Yield 1.6   1.6   15.2  15.2   Gilts 0.9   -0.5  7.4  2.7   Emerging Markets 0.7   0.7  17.6  17.6   Mortgages 0.2   0.2  2.6  2.6   Corporates 0.1  0.1  10.0  10.0   Sov. & Prov. 0.1  0.1  9.5  9.5   Supranationals 0.0  0.0  3.7  3.7   US BIG Index -0.1   -0.1  4.2  4.2   ABS -0.2   -0.2  3.5  3.5   Agencies -0.2   -0.2  2.5  2.5   World BIG Index -0.2   0.1  4.1  5.6   Treasuries -0.4   -0.4  2.0  2.0   TIPS -0.6   -0.6  7.2  7.2   Asia BIG Index -4.5   -0.3  -8.1   2.2   Duration-Adjusted Returns December 2012 (%) 2012 (%) USD Local USD Local Bunds 2.7   1.3  3.9  2.2   Europe BIG Index 2.3   1.0  9.5  7.5   High Yield 1.9   1.9   13.7  13.7   Gilts 1.6   0.2  4.0  -0.7  Emerging Markets 1.2   1.2  15.2  15.2   Corporates 0.6   0.6  7.7  7.7   Sov. & Prov. 0.5   0.5  7.5  7.5   Mortgages 0.3   0.3  1.9  1.9   US BIG Index 0.3   0.3  2.6  2.6   Supranationals 0.2   0.2  2.6  2.6   World BIG Index 0.2   0.6  2.1  3.6   ABS 0.1   0.1  2.3  2.3   Agencies 0.1   0.1  1.2  1.2  TIPS -0.2   -0.2  5.4  5.4   Asia BIG Index -3.9   0.3  -10.7   -0.5  12 Source: The Yield Book, Morgan Stanley Research
  13. 13. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn 4Q12, Asian IG Bonds Sold Off the Most While European IG and Bunds Gained Total Returns 4Q12 (%) 2012 (%) USD Local USD Local Europe BIG Index 4.4 2.3 11.6 9.5 Bunds 3.6 1.1 6.1 4.5 Emerging Markets 3.2 3.2 17.6 17.6 High Yield 3.1 3.1 15.2 15.2 Sov. & Prov. 1.2 1.2 9.5 9.5 Corporates 1.1 1.1 10.0 10.0 TIPS 0.6 0.6 7.2 7.2 Supranationals 0.3 0.3 3.7 3.7 Gilts 0.2 -0.4 7.4 2.7 US BIG Index 0.2 0.2 4.2 4.2 Agencies 0.1 0.1 2.5 2.5 ABS 0.1 0.1 3.5 3.5 Treasuries -0.1 -0.1 2.0 2.0 Mortgages -0.2 -0.2 2.6 2.6 World BIG Index -0.3 0.9 4.1 5.6 Asia BIG Index -9.2 0.0 -8.1 2.2 Duration-Adjusted Returns 4Q12 (%) 2012 (%) USD Local USD Local Europe BIG Index 4.5   2.4   9.5  7.5   Bunds 3.7   1.2  3.9  2.2   Emerging Markets 3.3   3.3   15.2  15.2   High Yield 3.1   3.1   13.7  13.7   Sov. & Prov. 1.3   1.3  7.5  7.5   Corporates 1.2   1.2  7.7  7.7   TIPS 0.7   0.7  5.4  5.4   Gilts 0.4   -0.3  4.0  -0.7  Supranationals 0.3   0.3  2.6  2.6   US BIG Index 0.3   0.3  2.6  2.6   Agencies 0.2   0.2  1.2  1.2  ABS 0.2   0.2  2.3  2.3   Mortgages -0.2  -0.2  1.9  1.9   World BIG Index -0.2  1.0  2.1  3.6   Asia BIG Index -9.1   0.1  -10.7   -0.5  13 Source: The Yield Book, Morgan Stanley Research
  14. 14. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn Corporate Credit, CCCs Outperformed in December, 4Q12, and 2012 Dec 2012 (%) 2012 (%) 4Q12 (%) 2012 (%) US BBB 0.4  10.9  US BBB 1.5  10.9  US IG 0.1  10.0  US IG 1.1  10.0  US A 0.0  10.0  US A 1.0  10.0  US AAA/AA -0.2  6.7  US AAA/AA 0.5  6.7      US CCC 2.7  20.1  US CCC 3.5  20.1  US HY 1.6  15.2  US B 3.4  15.9  US B 1.6  15.9  US HY 3.1  15.2  US BB 1.2  12.8  US BB 2.5  12.8      EUR BBB 1.1  14.7  EUR BBB 3.8  14.7  EUR IG 0.8  12.5  EUR IG 2.7  12.5  EUR A 0.7  12.1  EUR A 2.2  12.1  EUR AAA/AA 0.5  10.1  EUR AAA/AA 1.8  10.1  Source: The Yield Book, Morgan Stanley Research 14
  15. 15. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsIn Synthetic Credit, Financials Were the Best-Performing Sector Over the Month and Year December 2012 (%) 2012 (%) iTraxx Sub Fin 16.0  54.0  iTraxx Sr Fin 11.8  49.3 ABX AAA (price) 9.8  53.0 iTraxx Main 4.7  32.1 iTraxx Japan 3.8  14.2 CMBX AJ (price) 3.5  18.7 CDX IG 3.2  20.5 iTraxx XOver 2.9  36.1 CDX HY 1.9  27.8 CMBX AAA (price) 0.8  6.0 iTraxx AxJ -1.8  44.8 4Q12 (%) 2012 (%) iTraxx Sub Fin 31.3  54.0  iTraxx Sr Fin 30.6  49.3 iTraxx Japan 29.7  14.2 iTraxx AxJ 16.2  44.8 iTraxx XOver 15.1  36.1 iTraxx Main 13.7  32.1 ABX AAA (price) 13.7  53.0 CMBX AJ (price) 7.0  18.7 CDX IG 3.8  20.5 CDX HY 2.7  27.8 CMBX AAA (price) 2.1  6.0 Source: Bloomberg, Morgan Stanley Research Note: Spread returns, positive indicates spread tightening. 15
  16. 16. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsThe JPY Depreciated Against the USD in December and 2012; Other G10 Currencies Rose December 2012 (%) 2012 (%) December 2012 (%) 2012 (%) Per USD Per USD G10 LATAM SEK 2.4  5.9  BRL 4.2  -9.1  NOK 1.9  7.3  COP 2.8  9.7  EUR 1.6  1.8  MXN 0.9  8.5  GBP 1.5  4.6  CLP 0.5  8.5  CHF 1.4  2.6  ARS -1.6  -12.4  NZD 1.0  6.6    CAD 0.2  3.0  Per EUR  AUD -0.3  1.8  SEK 0.8  4.0  JPY -4.9  -11.3  NOK 0.4  5.5  ASIA   DKK -0.1  -0.4  KRW 1.7  9.1  GBP -0.1  2.8  THB 0.5  3.2  CHF -0.2  0.7  TWD 0.1  4.3  ISK -3.3  -5.9  HKD 0.0  0.2  JPY -6.4  -12.9  CNY -0.1  1.1  SGD -0.1  6.2  IDR -0.3  -5.5  MYR -0.7  3.6  PHP -0.7  6.8  INR -0.8  -3.1  CEEMEA   ZAR 5.1  -4.5  PLN 2.3  11.5  CZK 2.2  3.9  ILS 2.1  2.0  RUB 1.1  5.3  TRY 0.2  6.0  HUF -1.9  10.2  Source: Thomson Reuters, Morgan Stanley Research 16
  17. 17. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsMost Global Currencies Appreciated Against the USD Over the Year 4Q12 (%) 2012 (%) 4Q12 (%) 2012 (%) Per USD Per USD G10 LATAM NOK 2.9  7.3  COP 1.9  9.7  CHF 2.7  2.6  MXN 0.0  8.5  EUR 2.6  1.8  CLP -0.8  8.5  SEK 1.0  5.9  BRL -1.1  -9.1  GBP 0.5  4.6  ARS -4.4  -12.4  AUD 0.2  1.8    NZD -0.2  6.6  Per EUR  CAD -0.8  3.0  NOK 0.3  5.5  JPY -10.1  -11.3  CHF 0.1  0.7  ASIA   DKK -0.1  -0.4  KRW 4.6  9.1  SEK -1.6  4.0  PHP 1.5  6.8  GBP -2.0  2.8  TWD 0.9  4.3  ISK -5.4  -5.9  CNY 0.9  1.1  JPY -12.4  -12.9  THB 0.9  3.2  SGD 0.5  6.2  HKD 0.1  0.2  MYR 0.0  3.6  IDR -0.5  -5.5  INR -3.6  -3.1  CEEMEA   ILS 5.0  2.0  PLN 3.7  11.5  CZK 2.8  3.9  RUB 2.1  5.3  TRY 0.8  6.0  HUF 0.4  10.2  ZAR -1.9  -4.5  Source: Thomson Reuters, Morgan Stanley Research 17
  18. 18. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsCommodities Ended December Roughly Flat, with Energy in the Lead December 2012 (%) 2012 (%) S&P GSCI Energy 0.6 -1.4 S&P GSCI -0.6 0.1 Industrial Metals -1.0 1.4 Precious Metals -3.2 6.2 Agriculture -5.7 6.5 Commodity Cotton 3.4 -18.1 Live Cattle 2.5 5.7 Coffee 1.2 -36.6 Sugar 0.9 -16.3 Heating Oil 0.1 3.8 Brent Crude -0.1 3.5 Copper -0.8 4.4 Aluminum -1.0 2.6 CRB Futures Index -1.3 -3.4 Soybeans -1.4 18.4 Gold -2.1 7.0 DJ AIG Commodity Index -2.6 -0.9 Platinum -4.1 9.9 Coal -5.9 -16.8 Natural Gas -5.9 12.1 Corn -6.7 8.0 Silver -9.1 8.2 Cocoa -11.9 6.0 Source: Bloomberg, Morgan Stanley Research 18
  19. 19. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. ReturnsPrecious Metals and Agriculture Outperformed Other Commodity Sectors Over 2012 4Q12 (%) 2012 (%) S&P GSCI Energy -1.9 -1.4 S&P GSCI -3.3 0.1 Industrial Metals -3.4 1.4 Precious Metals -6.7 6.2 Agriculture -10.1 6.5 Commodity Cotton 8.7 -18.1 Coal 6.7 -16.8 Live Cattle 6.4 5.7 Natural Gas 0.9 12.1 Sugar -0.4 -16.3 Brent Crude -1.1 3.5 Aluminum -1.8 2.6 Copper -3.3 4.4 Heating Oil -3.9 3.8 CRB Futures Index -4.6 -3.4 Gold -5.4 7.0 DJ AIG Commodity Index -6.4 -0.9 Platinum -7.6 9.9 Corn -7.7 8.0 Cocoa -11.1 6.0 Soybeans -11.4 18.4 Silver -12.7 8.2 Coffee -17.1 -36.6 Source: Bloomberg, Morgan Stanley Research 19
  20. 20. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceSPX Ended 2012 About 3% Below its High While Eurostoxx Ended at 2012 HighsExpectations of a fiscal cliff resolution gave The Eurostoxx recovered from sovereign debtUS stocks upside momentum in December concerns as Greece received additional aid, but eurozone recovery may not yet be sustainableS&P 500 Sector Returns (%) SPX, Eurostoxx 2011 Dec 2012 1480 2700 20 15 2600 10 1440 5 2500 0 1400 2400 -5 -10 1360 2300 -15 -20 2200 1320 -25 2100 SPX (left) Energy Discretionary Technology Healthcare Industrials Materials Utilities Staples Financials Telecom 1280 Eurostoxx (right) 2000 1240 1900 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 20
  21. 21. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceEM Equities Outperformed DM Equities After Earlier Softness Equity Indices (2012=100) 120 DM EM US China 115 EM equities rose above DM 110 equities by the end of the year 105 100 95 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Korean Exports, MSCI World (YoY %) Source: Bloomberg, Morgan Stanley Research 60 40 20 0 Stocks may go higher on the back of -20 an EM economic recovery -40 Korean Exports (left) MSCI World (right) -60 2000 2002 2004 2006 2008 2010 2012 Source: MKE, Bloomberg, Morgan Stanley Research 21
  22. 22. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceMeasures of Market Breadth Supported the Earlier Rally and Now Reflect More Caution NYSE Net New Highs, SPX 400 # New Highs - New Lows (10d ma, left) 1500 300 SPX (right) 1450 200 1400 100 1350 0 Net new highs rose over the year 1300 -100 and tapered off as Washington 1250 -200 failed to reach a budget deal 1200 -300 before year-end -400 1150 -500 1100 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Source: Bloomberg, Morgan Stanley Research NYSE Cumulative Advance-Decline 48000 46000 44000 42000 40000 Cumulative advance-decline 38000 ascended through most of 36000 December 34000 32000 30000 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 22
  23. 23. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceSpain and Italy Fell Notably from YTD Highs but Also Rose the Most from YTD LowsEquity markets that fell the most from YTD …but in Spain and Italy, stocks have also risenhighs include Brazil, Spain and Italy… the most from YTD lowsIndex Return (%) Index Return (%) 15 45 Chg from YTD Low (%) 10 35 20-day Chg (Dec MTD %) 5 25 0 15 -5 5 Chg from YTD High (%) -10 -5 20-day Chg (Dec MTD %) -15 -15 NKY HSI SMI AS51 CCMP IBOV CAC INDU SX5E UKX DAX AEX OMX MEXBOL SPX FTSEMIB IBEX SPTSX NKY IBOV AS51 INDU CCMP CAC SMI HSI MEXBOL SPX UKX OMX AEX DAX SX5E FTSEMIB IBEX SPTSXSource: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 23
  24. 24. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceEuropean Sovereign Yields Relaxed into Year-End; Core Outperformed the Periphery Italy, Spain 2y, 10y Sovereign Yields (%) 8 Spain 2y Italy 2y Spain 10y Italy 10y 7 6 European sovereign rates ended the year 5 near lows as tail risks diminished 4 3 2 1 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 European Equities (2012=100) Source: Bloomberg, Morgan Stanley Research 135 Germany DAX France CAC 40 125 Italy FTSE MIB Spain IBEX 35 115 105 95 The core outperformed the periphery in risk markets over 2012 85 75 65 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Source: Bloomberg, Morgan Stanley Research 24
  25. 25. MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceFinancial Conditions Have Loosened Again and European Sovereign Auctions DecentPolicy actions loosened financial conditions Peripheral sovereign auction results have improved over the course of the yearFinancial Conditions, Economic Leading Indicator Average Auction Yield (%) -3 2.0 8 MS FCI (left) Conf Board ECLI (MoM, right) Spain 3y Italy 2y 1.5 7 -2 France 2y Germany 2y 1.0 6 -1 5 0.5 4 0 0.0 3 -0.5 1 2 -1.0 tighter conditions 1 2 -1.5 0 3 -2.0 -1 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Sep-11 Dec-11 Mar-12 Jun-12 Oct-12Source: Conference Board, Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 25

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