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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

M O R G A N S T A N L E Y R E S E A R C H

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    Gitf 20130102 Gitf 20130102 Presentation Transcript

    • 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.
    • 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
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013 Markets ReviewWhat Happened Last Month
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceBund Yields Remained Low as Credit and Equity Climbed Higher Bunds, Credit 4.0 Bund 10y (%, left) 50 CDX IG (inverted bp, right) 70 3.5 iTraxx Main (inverted bp, right) 90 3.0 110 130 Bund yields stayed low while 2.5 150 credit spreads tightened… 2.0 170 190 1.5 210 1.0 230 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Source: Bloomberg, Morgan Stanley Research Bunds, Equities 4.0 Bund 10y (%, left) 115 S&P 500 (level, right) Eurostoxx (level, right) 110 3.5 105 3.0 100 95 …and equities rallied 2.5 90 2.0 85 80 1.5 75 1.0 70 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Source: Bloomberg, Morgan Stanley Research 26
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceDiminished Market, Funding, and Political Pressures Mean Spain Has Yet to Request Aid IBEX, Spain Gov’t 10y 9500 IBEX (left) 4.5 Spain 10y Govt (inverted %, right) 9000 5.0 8500 5.5 8000 6.0 Spain is rebalancing at a fast 7500 6.5 pace, but diminished market, 7000 7.0 funding, and political pressures 6500 7.5 mean a formal request for aid has yet to come 6000 8.0 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Bund 10y, iTraxx Main 2.3 Bund 10y (%, left) 90 iTraxx Main (inverted bp, right) 2.1 110 1.9 130 Bund yields are at low levels 1.7 150 while iTraxx continued to 1.5 170 trend higher 1.3 190 1.1 210 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 27
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceJapan Has Been Struggling to Recover After its EarthquakeThe BoJ expanded its asset purchase The LDP won the absolute majority in the Diet,program by ¥10tn, bringing the total fund with a policy suggestion of reaching its growthsize to ¥101tn target by raising inflation expectations, possibly through currency devaluationNikkei, JGB 10y JPY, UST-JGB 2y 87 USD/JPY (left) 0.30 87 USD/JPY (left) 0.30 85 UST-JGB 2y Spread 85 0.25 UST-JGB 2y Spread 0.25 (%, right) (%, right) 83 83 0.20 0.20 81 81 0.15 0.15 79 79 0.10 0.10 77 77 75 0.05 75 0.05 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 28
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceMarkets Reflect China Moving Away from Hard-Landing Fears Iron Import Prices ($/MT) 160 150 140 130 Iron ore recovered from its 120 earlier slump, pointing to a 110 rebound in China’s steel sector 100 90 80 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: TSI, Bloomberg, Morgan Stanley Research Shanghai SE, China 2s10s 3300 Shanghai Composite (level, left) 1.20 China 2s10s (%, right) 3100 1.00 2900 0.80 2700 0.60 After selling off for most of the 2500 0.40 year, Chinese equities came 2300 0.20 back in December as growth worries continued to subside 2100 0.00 1900 -0.20 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 29
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceUSD/CNY Reached 19-Year Lows in 2012, Boosted by Data and Positive FundamentalsUSD/CNY is trading near the floor of the The Hang Seng and A Shares diverged,PBoC’s fixing on external and domestic with the latter retail-driven and more subjectdemand improvements and capital inflows to valuation and sentiment swingsCNY, TWD Hang Seng, A Shares 6.70 31.0 25000 3800 USD/CNY (left) USD/TWD (right) 6.65 Hang Seng (left) 24000 3600 30.5 6.60 23000 A Shares (right) 3400 6.55 22000 30.0 3200 6.50 21000 3000 6.45 29.5 20000 2800 6.40 19000 29.0 2600 6.35 18000 6.30 17000 2400 28.5 6.25 16000 2200 6.20 28.0 15000 2000 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 30
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceThe Safe-Haven USD Lost Support as Risk Rallied; The EUR Recovered in 2H12 DXY, USD/EM 85 103 84 102 101 83 100 82 99 The USD sold off as sentiment 81 98 97 remained buoyed through the 80 96 second half of the year 79 DXY (left) 95 78 94 USD/EM (right) 77 93 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research EUR, Spain CDS 1.36 EUR/USD (left) 200 1.34 Spain 5y CDS (inverted bp, right) 250 300 1.32 350 1.30 400 The EUR weakened on the back 1.28 450 500 of eurozone break-up fears and 1.26 550 accommodative ECB policy, then 1.24 600 recovered as tail risks diminished 1.22 650 1.20 700 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 31
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceThe AUD Reversed Out of Weakness but USD/BRL Remains High AUD, CAD, EUR (2012=100) 108 106 104 The AUD lost strength on the back of 102 Asia’s growth slowdown and a 100 dovish RBA, but has been reversing 98 AUD/USD higher as Asia improves 96 CAD/USD 94 EUR/USD 92 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 EM FX, INR, BRL, TRY (2012=100) Source: Bloomberg, Morgan Stanley Research 120 USD/EM 115 USD/INR 110 USD/BRL USD/TRY 105 The BCB was biased towards BRL 100 weakness over the year 95 90 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 32
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceMeasures of Funding Stress Ended the Year Much Lower EM Funding Stress, Spain CDS 50 MS EM Funding Stress Index (left) 103 USD/EM Index (right) 45 101 40 99 35 97 EM funding stress was kept 30 95 subdued through year-end by 25 93 ongoing global liquidity provisions 20 91 15 89 10 87 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Source: Bloomberg, Morgan Stanley Research Spain CDS, EUR/USD 3m XCCY Basis Swap 0 -20 -40 -60 EUR/USD XCCY basis swaps -80 are far from last year’s stressed -100 3m levels, though the 3y swap -120 1y 3y showed more stress mid-year -140 -160 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 33
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceMarkets Diverged from Economic Fundamentals in 20122012 saw a divergence between policy- EM markets’ move higher might be supporteddriven markets and economic fundamentals by a China recoveryGlobal Mfg PMI, Global Equities (level) China Mfg PMI, MSCI EM 60 1400 54 China Mfg PMI (left) 51000 1300 MSCI EM (right) 49000 55 53 1200 47000 50 52 1100 45000 45 1000 51 43000 900 41000 40 Global Mfg PMI (left) 50 800 39000 35 MSCI World (right) 49 700 37000 30 600 48 35000 Jan-09 Jul-09 Feb-10 Aug-10 Mar-11 Sep-11 Apr-12 Nov-12 Jan-11 Apr-11 Jun-11 Sep- Dec- Mar- Jun-12 Sep- Dec- 11 11 12 12 12Source: JP Morgan, MSCI, Bloomberg, Morgan Stanley Research Source: CFLP, Bloomberg, Morgan Stanley Research 34
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceGold Has Been Kept on the Defensive Despite the Fed’s Extended Accommodation USD TWI, Gold 78.0 USD TWI (inverted, left) 1850 78.5 Gold ($/troy oz, right) 1800 79.0 79.5 1750 Gold has been kept defensive by fiscal 80.0 1700 cliff uncertainties and the US economic 80.5 1650 recovery… 81.0 81.5 1600 82.0 1550 82.5 83.0 1500 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Brent Crude, SPX Source: Bloomberg, Morgan Stanley Research 130 Brent Crude ($/bbl, left) 1500 125 SPX (right) 1450 120 1400 115 110 1350 …while crude has rallied on growing 105 1300 geopolitical risk, better Chinese data 100 and prospects of further US stimulus 1250 95 90 1200 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 35
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceGold Was Lifted by Fiscal Concerns and a Weak USD, but Fell Back Recently SPX, Gold 1520 SPX (left) 1850 1470 Gold ($/troy oz, right) 1800 1420 1750 1370 1700 Gold was lifted by fiscal cliff 1320 1650 concerns and a weak USD… 1270 1600 1220 1550 1170 1500 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 2y Breakeven, Gold 2.5 2y Breakeven (%, left) Gold ($/troy oz, right) 1850 2.3 1800 2.1 1750 1.9 1.7 1700 …then fell as inflation 1.5 1650 expectations rose from 1.3 1600 slumped levels in 4Q12 1.1 1550 0.9 0.7 1500 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research 36
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceFinancials Turned Around in 2012 After Substantially Lagging the Market in 2011 Equity Indices (2012=100) 130 SPX 125 DJ Transports 120 Financials Financials beat the market in 2012… 115 110 105 100 95 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Equity Indices (2011=100) Source: Bloomberg, Morgan Stanley Research 110 105 100 95 90 …after substantially lagging in 2011 85 SPX 80 DJ Transports 75 Financials 70 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, Morgan Stanley Research 37
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceEquity Trading Volumes Ended the Year Lower in Both the US and EuropeSPX volumes ended the year slightly lower Eurostoxx volumes thinned over the year asthan where they started, but higher than the sovereign debt crisis rendered the regionSeptember lows less attractiveSPX Volume, SPX Eurostoxx Volume, Eurostoxx 5.0 SPX Volume (bn shares 20d ma, left) 1000 2.0 2000 SPX (inverted, right) 1050 1.8 4.5 2200 1100 1.6 1150 4.0 2400 1200 1.4 3.5 1250 1.2 2600 1300 1.0 3.0 2800 1350 0.8 1400 3000 2.5 0.6 1450 Eurostoxx Volume (bn shares 20d ma, left) 2.0 1500 0.4 Eurostoxx (inverted, right) 3200 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Nov-10 Feb-11May-11Aug-11 Nov-11 Feb-12May-12 Aug-12 Nov-12Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 38
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceTreasury and Corporate Bond Volumes Picked Up Over the Year UST Volume, UST 400 ICAP UST Volume ($bn 20d ma, left) 4.3 UST 10y Yield (%, right) 3.8 350 3.3 300 US Treasury volumes ended 2.8 250 the year higher than where 2.3 they were last December 200 1.8 150 1.3 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Corporate Bond Volume, CDX IG 23 IG+HY TRACE Volumes ($bn, left) 70 CDX IG (inverted bp, right) 80 21 19 90 100 17 110 Corporate bond volumes rose 15 120 and fell over the month but are 13 130 significantly higher than last 11 140 December’s levels 9 150 7 160 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: FINRA, Bloomberg, Morgan Stanley Research 39
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceRisk Demand Rose Through the Year and the Put/Call Ratio Is Now Relatively OptimisticRisk demand plunged mid-month as Put/call ended the year on a more optimisticBernanke said the Fed’s ability to ease note than it beganfurther is not unlimitedSPX, MS GRDI SPX, Put/Call 1500 125 1500 SPX (left) 0.7 1450 1450 Put/Call (inverted 10d ma, right) 120 0.8 1400 1400 1350 115 1350 0.9 1300 1300 110 1250 1.0 1250 1200 1200 105 1.1 1150 1150 SPX (left) 100 1100 1.2 1100 MS Risk Demand Index (right) 1050 1050 95 1000 1.3 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 40
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceUS Equities Correlation with EUR Has Been Falling, While More Volatile with Gold EUR/USD, SPX 30-day Return Correlation EUR/USD and S&P 500: 30-day Return Correlation 1.00 0.80 0.60 0.40 0.20 0.00 EUR and SPX correlation has -0.20 been on a falling trend since -0.40 late 2011, suggesting less -0.60 -0.80 systemic risk -1.00 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Source: Bloomberg, Morgan Stanley Research Gold, SPX 30-day Return Correlation Gold and S&P 500: 30-day Return Correlation 1.00 0.80 0.60 0.40 0.20 0.00 The correlation between gold -0.20 and US equities has become -0.40 more volatile but generally -0.60 -0.80 remains high -1.00 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Source: Bloomberg, Morgan Stanley Research 41
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceHigher Oil Prices Would Be Negative for Growth and Thus EquitiesUST 10y and SPX correlation remains highly The correlation between oil and US equitiesnegative, suggesting a shift towards risk-on fell recently, dipping in SeptemberUST 10y, SPX 30-day Return Correlation WTI, SPX 30-day Return Correlation 1.00 UST 10y and S&P 500: 30-day Return Correlation WTI and S&P 500: 30-day Return Correlation 1.00 0.80 0.80 0.60 0.60 0.40 0.40 0.20 0.20 0.00 0.00 -0.20 -0.20 -0.40 -0.40 -0.60 -0.60 -0.80 -0.80 -1.00 -1.00 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 42
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceEquity Trading Volumes Were Low Into Year-End Total Equity Volume Traded on US Exchanges (bn shares) S&P 500 Volume on Up, Down Days (20d ma, mm shares) 18 1600 17 US Exchange Volume 20d Moving Avg 1400 16 Up Days 15 1200 Down Days 14 13 1000 12 800 11 10 600 9 8 400 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research S&P 500 Monthly Advance/Decline ETF Volume (bn shares) 1.7 0.6 Monthly Advance/Decline Benchmark 1.5 0.5 1.3 0.4 SPDR ETFs 1.1 0.3 20d ma 0.9 0.2 0.7 0.1 0.5 0.0 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 43
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceStock Markets Rose Above Various Trailing Averages, Particularly in EM and Europe Equity Index and Moving Averages: DM Equity Index and Moving Averages: EM 1450 MSCI World 51000 1400 20d ma 49000 1350 50d ma 47000 200d ma 1300 45000 1250 43000 1200 41000 MSCI EM 1150 20d ma 1100 39000 50d ma 1050 37000 200d ma 1000 35000 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research Equity Index and Moving Averages: US Equity Index and Moving Averages: Europe 1500 3300 SPX 1450 20d ma 3100 1400 50d ma 1350 2900 200d ma 1300 2700 1250 2500 1200 Eurostoxx 1150 2300 20d ma 1100 50d ma 2100 1050 200d ma 1000 1900 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 44
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceUS Financials Outperformed European Financials MSCI World, EM (2012=100) S&P 500, Euro Stoxx (2012=100) 125 140 DM 120 S&P 500 130 EM Euro Stoxx 115 120 110 110 105 100 100 90 95 90 80 85 70 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research EM Asia, Latam (2012=100) US, European Financials (2012=100) 130 140 125 EM Asia US EM Latam 130 120 Europe 115 120 110 105 110 100 100 95 90 90 85 80 80 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 45
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceDespite the SPX Falling in 4Q12, Economic Surprise Has Been Favorable Economic Surprise, Equities: DM Economic Surprise, Equities: EM 60 1400 30 48000 40 1350 20 46000 1300 10 20 44000 1250 0 0 1200 -10 42000 -20 1150 -20 40000 -40 1100 -30 EM Surprise (left) -60 38000 DM Surprise (left) 1050 -40 MSCI EM (right) -80 MSCI World (right) 1000 -50 36000 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Citigroup, Bloomberg, Morgan Stanley Research Source: Citigroup, Bloomberg, Morgan Stanley Research Economic Surprise, Equities: US Economic Surprise, Equities: Europe 100 1500 60 2700 80 1450 40 2600 60 1400 20 2500 40 1350 0 2400 20 1300 -20 2300 0 1250 -40 2200 -20 1200 -60 2100 -40 1150 -80 2000 US Surprise (left) Europe Surprise (left) -60 1100 -100 1900 SPX (right) Eurostoxx (right) -80 1050 -120 1800 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Citigroup, Bloomberg, Morgan Stanley Research Source: Citigroup, Bloomberg, Morgan Stanley Research 46
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceCyclicals Outperformed Consumers and Dividends Outperformed Defensives in 2012 Morgan Stanley Cyclical, Consumer Indices (2012=100) S&P 500 Growth, Value Total Return (2012=100) 140 125 Cyclicals 120 130 Consumer 115 120 110 105 110 100 100 95 Growth 90 90 Value 85 80 80 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research Morgan Stanley Discretionary Baskets (2012=100) Morgan Stanley Defensive, Dividend Baskets (2012=100) 135 120 Defensives 125 115 High & Stable Divs 110 115 105 105 100 95 Consumer Discretionary 95 85 90 High-Beta Discretionary 75 85 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 47
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceCredit Spreads Tightened Over 2012, More So in HY than in IG SPX, CDX IG CDX IG, HY (bp, 2012=100) 1500 70 130 1450 80 CDX IG 120 1400 90 CDX HY 110 1350 100 1300 110 100 1250 120 90 1200 130 80 1150 140 SPX (level, left) 70 1100 150 CDX IG (inverted bp, right) 1050 160 60 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research CDX HY, CMBX (price) CDX HY, ABX (price) 105 75 105 65 103 70 60 101 100 99 65 55 97 95 95 60 50 93 90 55 45 91 CDX HY (left) CDX HY (left) 89 85 50 ABX AAA 2006-2 (right) 40 87 CMBX AJ S4 (right) 85 45 80 35 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 48
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceCredit Quality Curves Bull-Flattened Slightly Over December US IG Corp Credit Quality Curve (bp) US HY Corp Credit Quality Curve (bp) 300 1500 28-Dec-12 250 30-Nov-12 1300 28-Dec-12 31-Dec-11 200 1100 30-Nov-12 31-Dec-11 150 900 100 700 50 500 0 300 AAA AA A BBB BB B CCC Source: The YieldBook, Morgan Stanley Research Source: The YieldBook, Morgan Stanley Research Europe IG Corp Credit Quality Curve (bp) US, Europe IG Corp Credit Quality Curves (bp) 400 250 350 28-Dec-12 30-Nov-12 200 300 US 31-Dec-11 250 150 Europe 200 150 100 100 50 50 0 0 AAA AA A BBB AAA AA A BBB Source: The YieldBook, Morgan Stanley Research Source: The YieldBook, Morgan Stanley Research 49
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceSovereign Credit Spreads Came in Over the Course of the Year iTraxx SovX (bp) Sovereign 5y CDS (bp) 700 400 CEEMEA 600 Italy France 350 Western Europe 500 Spain Germany 300 400 250 300 200 200 150 100 100 0 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Note: Drop in Western Europe series due to Greek default Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research Sovereign 2s5s, European Financial CDS (bp) CDS Net Notional Outstanding ($bn) Spain (left) 25 230 100 Belgium (left) 210 Italy (left) 23 iTraxx Snr Fin (right) 150 190 21 170 200 19 150 Germany France 130 17 250 Italy Spain 110 15 90 300 70 13 50 350 11 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: DTCC, Bloomberg, Morgan Stanley Research 50
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceGovernment Yields Are Sitting Low in the European Core UST 2y (%) UST 2y, Fed Funds Effective (%) 0.45 0.45 UST 2y 0.40 0.40 0.35 Fed Funds Effective 0.35 0.30 0.30 0.25 0.25 0.20 0.15 0.20 0.10 0.15 0.05 0.10 0.00 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research European 1y Government Yield (%) European 10y Government Yield (%) 9 8 Germany 8 7 7 France 6 6 Spain 5 Italy 5 Germany France 4 4 Spain Italy 3 3 2 2 1 0 1 -1 0 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 51
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceFinancials Followed the Rally, Closing the Gap Between Financial and Industrial Spreads US Financial Equity, Cash Credit Europe Financial Equity, Cash Credit 240 110 260 125 S&P Financials (level, left) 230 120 250 US Fins Credit (inverted bp, right) 175 220 130 240 210 140 225 200 230 150 190 220 275 160 180 210 170 325 170 180 200 160 Stoxx Financials (level, left) 375 150 190 190 Europe Fins Credit (inverted bp, right) 140 200 180 425 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: The Yield Book, Bloomberg, Morgan Stanley Research Source: The Yield Book, Bloomberg, Morgan Stanley Research US, Europe Financial Cash Credit (bp) US Financial, Industrial Cash Credit (bp) 880 350 60 Fins - Indus Spread (left) 780 300 (Fins - Indus) / Fins % (right) 50 US 680 250 Europe 40 580 200 480 30 150 380 20 100 280 50 10 180 80 0 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: The Yield Book, Morgan Stanley Research Source: The Yield Book, Morgan Stanley Research 52
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceThe Front End of Treasury and Bund Curves Flattened Over the Year US Spread Curve (bp) Germany Spread Curve (bp) 350 250 US 2s10s US 10s30s GE 2s10s GE 10s30s 300 200 250 200 150 150 100 100 50 50 0 0 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research US Butterfly Spread (bp) Germany Butterfly Spread (bp) 250 200 5s10s30s 2s5s10s 2s10s30s 5s10s30s 2s5s10s 2s10s30s 200 150 150 100 100 50 50 0 0 -50 -50 -100 -100 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 53
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceIn the US, Real Rates Remain Negative While Breakevens Are Higher Over 2012 US Nominal Rate (%) US Real Rate (%) 6 4 5Y 10Y 30Y 5Y 10Y 30Y 5 3 4 2 3 1 2 0 1 -1 0 -2 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research US 10y Breakeven, Real Rate (%) US Breakeven Spread (%) 1.5 3.0 1.6 2.8 1.4 1.0 2.6 1.2 5s10s 10s30s 2.4 0.5 1.0 2.2 0.8 0.0 2.0 0.6 1.8 -0.5 0.4 1.6 Real (left) 1.4 0.2 -1.0 Breakeven (right) 1.2 0.0 -1.5 1.0 -0.2 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 54
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceThe JPY Depreciated Significantly and May Increasingly Be Seen as a Funding Currency FX Index and Moving Averages: USD FX Cross and Moving Averages: EUR/USD 86 1.50 DXY 20d ma 84 1.45 50d ma 200d ma 82 1.40 80 1.35 78 1.30 76 1.25 EUR/USD 20d ma 74 1.20 50d ma 200d ma 72 1.15 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research FX Cross and Moving Averages: CHF FX Cross and Moving Averages: JPY 1.10 91 USD/CHF 20d ma 1.05 89 USD/JPY 20d ma 50d ma 200d ma 1.00 87 50d ma 200d ma 0.95 85 0.90 83 0.85 81 0.80 79 0.75 77 0.70 75 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 55
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceThe EUR Weakened and Recovered Over the Year While the SPX Moved Up DXY, SPX EUR, SPX 85 1500 1.40 1500 84 1.38 EUR/USD (left) 1450 1450 83 1.36 SPX (right) 1400 1400 82 1.34 81 1350 1.32 1350 80 1300 1.30 1300 79 1250 1.28 1250 78 1.26 DXY (left) 1200 1200 77 1.24 SPX (right) 1150 1150 76 1.22 75 1100 1.20 1100 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research Asian Currencies, DXY (level) EM Currencies, Volatility (level) 95 76 103 16 USD/AxJ Currencies USD/EM (left) EM FX Volatility (right) (inverted, left) 77 102 15 96 DXY (inverted, right) 101 14 78 97 13 100 79 98 12 99 80 11 99 98 81 10 97 100 9 82 96 8 101 83 95 7 102 84 94 6 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: JP Morgan, Bloomberg, Morgan Stanley Research 56
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceCommodities Ended 2012 Flat; Agriculture Spiked Mid-Year on Tight Fundamentals Brent, Commodity Index Gold, Real Rates 160 700 2000 -1.5 Brent ($/bbl) 140 -1.0 600 1800 CRB Index (level, right) 120 -0.5 500 1600 100 0.0 80 400 1400 0.5 60 300 1200 1.0 40 200 1000 Gold ($/oz, left) 20 1.5 10y TIPS (inverted %, right) 0 100 800 2.0 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: CRB, Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research GSCI, SPX GSCI Indices (2012=100) 5650 1530 140 Agriculture 5450 1480 Energy 130 1430 Industrial Metals 5250 Precious Metals 1380 120 5050 1330 4850 110 1280 4650 1230 100 4450 GSCI (left) 1180 90 4250 SPX (right) 1130 4050 1080 80 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 57
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. PerformanceLiquidity and Funding Conditions Are Accommodative MS Financial Conditions Index, SPX Citi Liquidity Index, St. Louis Fed Stress Index 5.0 700 2.5 6 MS Financial Conditions 4.0 Index (left) 800 Citi Liquidity Index (left; 2.0 5 900 + = less liquidity) 3.0 SPX (inverted, right) 4 1000 1.5 St. Louis Fed Financial 2.0 Stress Index (right) 1100 3 1.0 1.0 1200 2 0.0 1300 0.5 1 -1.0 1400 0.0 0 -2.0 1500 -3.0 1600 -0.5 -1 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Citigroup, St. Louis Federal Reserve, Bloomberg, Morgan Stanley Research MS EM Funding Stress Index Funding Markets, European Financial Credit Spreads (bp) 80 400 70 350 Libor-OIS EMFSI 60 300 EUR Basis Swap 1m 20d ma iTraxx Snr Fin 50 250 50d ma 40 200 30 150 20 100 10 50 0 0 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 58
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationRisk Valuations Moved Higher and Tighter Into Year-End Global Shiller P/Es (Low, Spot, High) European Credit (Low, Spot, High) 21.1 € Financials 159 159 356 S&P 500 20.5 22.4 (bps) € Non-Fins 119 114 189 13.2 (bps) FTSE All-Share 12.1 13.7 117 Main (bps) 109 184 12.6 MSCI Europe 11.0 12.5 479 XOver (bps) 444 761 Note: 1-year range Note: 1-year range Source: S&P, Shiller, MSCI, NBER, Bloomberg, Morgan Stanley Research Source: iBoxx, Bloomberg, Morgan Stanley Research US Credit (Low, Spot, High) US and European Rates (Low, Spot, High) US Financials 136 10y Treasuries 1.71 117 182 1.39 2.38 (bps) (%) US Industrials 153 1.31 148 345 10y Bunds (%) 1.17 2.06 (bps) 95 253 CDX IG (bps) 83 127 Italy 2s10s (bps) 142 332 494 Spain 2s10s 241 CDX HY (bps) 444 709 99 353 (bps) Note: 1-year range Note: 1-year range Source: YieldBook, Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 59
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationEquities Are More Attractive than Bonds on Yields S&P 500 Dividend Yield, UST 10y Yield (%) 18 16 Spread 14 UST 10Y Yield 12 S&P 500 Dividend Yield 10 8 Equity dividend yields are 6 greater than nominal 4 Treasury yields 2 0 -2 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Federal Reserve, Haver Analytics, Datastream, Morgan Stanley Research S&P 500 Forward Earnings Yield, Corp BBB Real Bond Yield (%) 12 Spread (right) 6 Corp BBB Real Bond Yield 10 S&P 500 Forward Earnings Yield 4 8 2 Forward earnings yield 6 0 remains above real 4 -2 corporate bond yields 2 -4 0 -6 1986 1991 1996 2001 2006 2011 Source: BLS, Haver Analytics, IBES, Datastream, The Yield Book, Morgan Stanley 60 Research
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationGlobal P/Es Remain Below Historical Averages, Particularly in DM Trailing P/E: DM vs. EM Trailing P/E: US vs. Europe 45 40 DM USA 40 35 EM Europe 35 30 30 25 25 20 20 15 15 10 10 5 5 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research NTM P/E: DM vs. EM NTM P/E: US vs. Europe 30 30 DM USA 25 25 EM Europe 20 20 15 15 10 10 5 5 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research 61
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationTrailing P/E Multiples Are Around One Standard Deviation Below Historical Averages Trailing P/E: DM Trailing P/E: EM 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research Trailing P/E: US Trailing P/E: Europe 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research 62
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationNTM P/E Is Slightly Higher in EM than in DM, Compared to Each Region’s History NTM P/E: DM NTM P/E: EM 30 30 25 25 20 20 15 15 10 10 5 5 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research NTM P/E: US NTM P/E: Europe 30 25 23 25 21 19 20 17 15 15 13 11 10 9 7 5 5 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research 63
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationOutside of the US, Dividend Yields Are Generally Well Above Historical Averages Dividend Yield: DM Dividend Yield: EM 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research Dividend Yield: US Dividend Yield: Europe 6 7 5 6 4 5 3 4 2 3 1 2 0 1 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Source: MSCI, Datastream, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research 64
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationEarnings Revisions Ended the Year Negative DM NTM Earnings Revisions Ratio (%) EM NTM Earnings Revisions Ratio (%) 60 60 DM 3m ma EM 3m ma 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 -80 -80 -100 -100 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research US NTM Earnings Revisions Ratio (%) Europe NTM Earnings Revisions Ratio (%) 60 60 US 3m ma Europe 3m ma 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 -80 -80 -100 -100 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research 65
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationConsensus Earnings for 2012 and 2013 Have Trended Lower Over the Year DM FY Consensus EPS EM FY Consensus EPS 40 2002 2003 150 2002 2003 2004 2005 2004 2005 35 130 2006 2007 2006 2007 2008 2009 2008 2009 30 110 2010 2011 2010 2011 25 2012 2013 90 2012 2013 20 70 15 50 10 30 5 10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research US FY Consensus EPS Europe FY Consensus EPS 130 2002 2003 230 2002 2003 120 2004 2005 210 2004 2005 2006 2007 2006 2007 110 190 2008 2009 2008 2009 100 2010 2011 170 2010 2011 90 2012 2013 150 2012 2013 80 130 70 110 60 90 50 70 40 50 30 30 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IBES, MSCI, Datastream, Morgan Stanley Research Source: IBES, MSCI, Datastream, Morgan Stanley Research 66
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationUS Corporate Debt and Equity Issuance Amounts Surpassed That in 2011 US IG Corporate Debt Issuance ($bn) US HY Corporate Debt Issuance ($bn) 160 60 2012 2012 140 2011 50 2011 120 40 100 80 30 60 20 40 10 20 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research US Equity IPO ($bn) US Equity IPO (# issues) 45 100 2012 40 90 2011 2012 80 35 2011 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 67
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationSovereign Curves Bull-Flattened in Germany, Italy and Spain; Bear-Steepened in the US US Yield Curve (%) Germany Yield Curve (%) 3.5 2.5 3.0 2.0 2.5 1.5 2.0 1.0 Current 1.5 1 Month Prior Current 0.5 1.0 1 Month Prior 0.0 0.5 0.0 -0.5 3M 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y 10Y 15Y 20Y 25Y 30Y 1Y 3Y 5Y 7Y 3M Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research Italy Yield Curve (%) Spain Yield Curve (%) 6 7 5 6 5 4 4 3 Current 3 Current 2 1 Month Prior 2 1 Month Prior 1 1 0 0 3M 1Y 3Y 5Y 7Y 3M 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y 10Y 15Y 20Y 25Y 30Y Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 68
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationOver 2012, Curves Shifted Down Substantially in Italy and Germany US Yield Curve (%) Germany Yield Curve (%) 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 Current 1.5 1.0 1 Year Prior Current 1.0 0.5 1 Year Prior 0.5 0.0 0.0 -0.5 3M 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y 10Y 15Y 20Y 25Y 30Y 1Y 3Y 5Y 7Y 3M Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research Italy Yield Curve (%) Spain Yield Curve (%) 8 7 7 6 6 5 5 4 4 Current 3 Current 3 1 Year Prior 2 1 Year Prior 2 1 1 0 0 3M 3M 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 69
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. ValuationThe EUR Strengthened While Front-End Bund Yields Remain Below Treasury Yields EUR, 2y Yield Differential EUR, Economic Surprise 1.36 EUR/USD (left) 0.3 1.36 EUR/USD (left) -150 Citi Surprise: US (inverted, right) 1.34 Bund 2y - UST 2y (%, right) 0.2 1.34 Citi Surprise: Europe (inverted, right) -100 1.32 1.32 0.1 -50 1.30 1.30 0.0 1.28 1.28 0 -0.1 1.26 1.26 50 -0.2 1.24 1.24 -0.3 100 1.22 1.22 1.20 -0.4 1.20 150 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Citigroup, Bloomberg, Morgan Stanley Research EUR, SPX EUR, Commodities 1.36 1000 1.36 520 EUR/USD (left) EUR/USD (left) 1.34 1050 1.34 SPX (inverted, right) CRB Commodity Index (right) 510 1100 1.32 1.32 1150 500 1.30 1200 1.30 1.28 1250 1.28 490 1.26 1300 1.26 480 1350 1.24 1.24 1400 470 1.22 1450 1.22 1.20 1500 1.20 460 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: CRB, Bloomberg, Morgan Stanley Research 70
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Risk MeasuresVolatility Ended the Year Lower, Particularly FX; 3m Skew Jumped in December Volatility (indexed) 3m Implied, Realized Volatility 40% 3m Imp Vol - 3m Rlzd Vol 20% 110 Equity Rates 3m Rlzd Vol 15% 100 FX Credit 35% 3m Imp Vol 10% Commodity 90 30% 5% 0% 80 25% -5% 70 20% -10% 60 15% -15% 50 -20% 10% -25% 40 5% -30% Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Note: Indexed 3m ATM implied volatility. Equity includes S&P, EuroStoxx, Nikkei, Kospi, Bovespa, Source: Bloomberg, Morgan Stanley Research, Quantitative & Derivative Strategies Hang Seng. Commodity includes gold, oil. FX includes EURUSD, JPYUSD, USDKRW, AUDUSD. Rates includes USD Libor, Euribor, JPY Libor. Credit includes CDX IG, iTraxx Main. Source: Bloomberg, Market1, Morgan Stanley Research Skew (90-110) by Maturity Realized vs. Implied Equity Volatility 15% 35% 3m 6m 9m Imp Vol 10D Rlzd 14% 30% 1m Rlzd 3m Rlzd 13% 1y 2y 12% 25% 6m Rlzd 11% 10% 20% 9% 8% 15% 7% 6% 10% 5% 4% 5% 3% 0% Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Source: Bloomberg, Morgan Stanley Research, Quantitative & Derivative Strategies Source: Bloomberg, Morgan Stanley Research, Quantitative & Derivative Strategies 71
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Risk MeasuresFX and Interest Rate Volatility Are Both Around 5-Year LowsG7 FX volatility came off 5-year lows as Interest rate volatility spiked slightly ininvestors look towards next year December as rates responded to a strong NFP and fiscal cliff resolution expectationsFX Volatility (%) Rate Volatility, VIX 110 Treasury 1m Implied Vol 35 31 (normalized bp, left) 100 VIX (right) 30 26 G7 EM 90 25 21 80 16 20 70 11 15 60 6 50 10 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12Source: JP Morgan, Bloomberg, Morgan Stanley Research Source: BofA Merrill Lynch, Bloomberg, Morgan Stanley Research 72
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Risk MeasuresCorporate Credit Volatility Has Also Subsided Over the Course of the Year IG Credit Volatility (%) 100 CDX IG 90 iTraxx Main 80 70 In December, IG credit volatility 60 rose in the US but continued to 50 ease in Europe… 40 30 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Source: Morgan Stanley Research HY Credit Volatility (%) 90 80 CDX HY iTraxx Xover 70 …and similarly in high yield 60 50 40 30 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Source: Morgan Stanley Research 73
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Risk MeasuresStock Volatility is At Highly Subdued Levels Compared to 2010 and 2011 SPX, Volatility Euro Stoxx, Volatility 60 800 60 Volatility (left) 1500 Volatility (left) 55 55 Euro Stoxx (inverted, right) 1700 SPX (inverted, right) 900 50 50 1900 45 1000 45 2100 40 1100 40 2300 35 35 1200 2500 30 30 2700 25 1300 25 20 20 2900 1400 15 15 3100 10 1500 10 3300 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research DXY, SPX VIX, EUR/USD 90 600 60 1.10 88 700 55 VIX (left) EUR/USD (inverted, right) 1.15 DXY (level, left) 86 800 50 1.20 SPX (inverted, right) 45 84 900 1.25 40 82 1000 1.30 35 80 1100 1.35 30 78 1200 1.40 25 76 1300 20 1.45 74 1400 15 1.50 72 1500 10 1.55 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 74
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Risk MeasuresThe Spread Between Implied Volatility in EEM and SPY Has Narrowed Over the Year S&P 500 Implied Correlation European Banks Relative Performance, Peripheral CDS 100 105 Banks Relative Performance vs. 0 MSCI Europe (left) 100 90 95 Peripheral Sovereign Avg 5y 200 CDS (inverted bp, right) 80 85 300 400 70 75 500 2013 65 600 60 2012 700 50 55 2014 800 40 45 900 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: CBOE, Bloomberg, Morgan Stanley Research Note: Peripheral Sovereign Avg includes Ireland, Italy, Portugal, Spain Source: MSCI, Bloomberg, Morgan Stanley Research MSCI EM, S&P 500 ETF Implied Volatility MSCI Germany, EAFE ETF Implied Volatility 100 80 90 70 Spread MSCI Germany MSCI EAFE 80 60 Spread EEM SPY 70 50 60 40 50 30 40 20 30 20 10 10 0 0 -10 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research 75
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20135. SentimentAAII Bulls-Bears Is Optimistic but Put/Call and Risk Demand Suggest the Opposite US Equity Put/Call Ratio Europe Equity Put/Call Ratio 1.5 Put/Call Composite 2.5 Put/Call 20D ma 1.4 20D ma 2.3 1.3 2.1 1.9 1.2 1.7 1.1 1.5 1.0 1.3 0.9 1.1 0.8 0.9 0.7 0.7 0.6 0.5 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: CBOE, Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research AAII Bulls-Bears Morgan Stanley Standardized Global Risk Demand Index 60 4 50 3 40 2 30 1 20 0 10 -1 0 -2 -10 -20 -3 -30 -4 -40 -5 -50 -6 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: AAII, Bloomberg, Morgan Stanley Research Note: Global Risk Demand Index – US Pat. No. 7,617,143 Source: Bloomberg, Morgan Stanley Research 76
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. PositioningFixed Income Saw Strong Fund Flows Throughout the Year, in Contrast to Equity US Fixed Income Fund Flows, Weekly ($bn) US Equity Fund Flows, Weekly ($bn) 15 10 5 10 0 -5 5 -10 -15 0 -20 -5 -25 -30 -10 -35 Jan-10 Apr-10 Aug-10 Dec-10 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Oct-12 Jan-10 Apr-10 Aug-10 Dec-10 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Oct-12 Source: ICI, Morgan Stanley Research Source: ICI, Morgan Stanley Research US Hybrid Fund Flows, Weekly ($bn) US Money Market Fund Flows, Weekly ($bn) 4 60 3 2 40 1 20 0 -1 0 -2 -3 -20 -4 -40 -5 -6 -60 -7 -8 -80 Jan-10 Apr-10 Aug-10 Dec-10 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Oct-12 Jan-10 Apr-10 Aug-10 Dec-10 Mar-11 Jul-11 Nov-11 Feb-12 Jun-12 Oct-12 Source: ICI, Morgan Stanley Research Source: ICI, Morgan Stanley Research 77
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. PositioningCumulative Flows Continue to Favor Bond Over Equity, Long-Term Over Money Market Cumulative US Fixed Income and Equity Fund Flows ($bn) Cumulative Money Market and Long-Term Fund Flows ($bn) 900 600 Equity 700 400 Bond 500 200 0 300 -200 Total Long-Term 100 Total Money Market -400 -100 -600 -300 -800 Jan-10 May-10 Sep-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Jan-10 May-10 Sep-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Source: ICI, Morgan Stanley Research Source: ICI, Morgan Stanley Research Cumulative US Equity Fund Flows ($bn) 200 100 0 -100 -200 Equity Domestic Equity -300 Foreign Equity -400 Jan-10 May-10 Sep-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Source: ICI, Fund Flows Database, Morgan Stanley Research 78
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. PositioningPrimary Dealers Have Increased Their US Treasury Holdings UST Investor Sentiment, 10y Yield Primary Dealer Positions in Corporate Securities ($bn) 30 4.0 300 Treasury Sentiment (left) 10Y UST Yield (%, right) <1y >1y 20 3.5 250 10 3.0 200 0 2.5 150 -10 2.0 100 -20 1.5 50 -30 1.0 0 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Source: JP Morgan, Bloomberg, Morgan Stanley Research Source: Federal Reserve, Bloomberg, Morgan Stanley Research Primary Dealer Positions ($bn) Primary Dealer Positions in US Treasuries ($bn) 600 Corp MBS Govt Agency Net 200 Bills <3y 3-6y 6-11y >11y TIPS Net 500 400 150 300 100 200 100 50 0 -100 0 -200 -300 -50 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Source: Federal Reserve, Bloomberg, Morgan Stanley Research Source: Federal Reserve, Bloomberg, Morgan Stanley Research 79
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. PositioningNet Speculative Positions in the S&P 500 Have Risen Over the Year Net Speculative Positions in S&P 500 (k contracts) Speculative Positions in S&P 500 (k contracts) 100 Net Speculative Positions on S&P 500 200 Open Long +2 σ Open Short 50 150 0 Average 100 50 -50 0 -100 -2 σ -50 -150 -100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: CFTC, Haver Analytics, Morgan Stanley Research Source: CFTC, Haver Analytics, Morgan Stanley Research Net Speculative Positions in Gold (k contracts) Net Speculative Positions in WTI (k contracts) 300 350 160 Net Speculative Positions in WTI (left) +2 σ 300 WTI front-end contract (right) 140 250 250 120 200 200 100 150 Average 150 80 100 100 60 50 50 0 40 -2 σ 0 -50 20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CFTC, Haver Analytics, Morgan Stanley Research Source: CFTC, Haver Analytics, Morgan Stanley Research 80
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. PositioningSpeculative Positioning in the EUR Has Been Reversing Away from Lows Net Speculative Positions in USD (bn contracts) Net Speculative Positioning in EUR (bn contracts) 50 150 +2 σ 40 100 30 +2 σ 50 20 10 0 Average 0 -50 -10 -100 -20 Average -2 σ -150 -30 -40 -200 -2 σ -50 -250 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note: Morgan Stanley’s FX strategy team combines IMM positioning on the AUD, CAD, Source: CFTC, Haver Analytics, Morgan Stanley Research CHF, EUR, GBP, JPY, MXN and NZD to calculate an aggregate USD index to measure overall net positioning. Source: CFTC, Haver Analytics, Morgan Stanley Research Net Speculative Positions in AUD, NZD (k contracts) Speculative Positions in CHF (k contracts) 120 AUD (left) 30 60 100 NZD (right) 25 40 +2 σ 80 20 20 60 0 15 -20 Average 40 10 20 -40 5 -60 -2 σ 0 -20 0 -80 -40 -5 -100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -60 -10 2007 2008 2009 2010 2011 2012 Net Speculative Positions in CHF (left) Source: CFTC, Haver Analytics, Morgan Stanley Research Source: CFTC, Haver Analytics, Morgan Stanley Research 81
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013Global Economics Review What Happened Last Month
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013What Happened Last Month Global growth remains stuck in the ‘Twilight Zone’ – Our economists believe global growth won’t change much 1. Global Economy Ends Year Weak during 2013, but the US and European periphery could accelerate over the year. Global PMIs suggest a manufacturing recovery is under way in EM, though not so much in DM. A handful of EM central banks cut rates in December, but fewer in DM. Inflation pressures receded around the world, particularly in DM. On the whole, global trade is still fragile as the year comes to a close; DM import growth continues to follow a lackluster trend. The US economy is gradually picking up, but uncertainties remain – In the bull case, structural improvements 2. US Gradually Picking Up could help growth start to normalize in 2014: household deleveraging is continuing and corporations could unlock cash from balance sheets with greater policy clarity. The housing market is improving on low mortgage rates and a gradually healing labor market. Key drivers of core inflation have steadied, but other categories may drag the measure lower. Meanwhile, manufacturing is still challenged by weak global trade and sluggish demand. Europe is headed for a deeper recession before recovery – Europe faces many risks and policy challenges, but 3. Europe Facing a Hard Winter restructuring benefits in the periphery offer hope. Peripheral labor costs are falling and exports are higher than pre- crisis in parts of the periphery. The Bundesbank slashed its 2013 growth projections and sees recession this winter, in line with our economists, as Germany’s industrial production slumped. Forward-looking business sentiment improved in Germany, but near-term worries are still present. Inflation pressures eased further on lower spending. Japan’s near-term uncertainties are high but policy may ease – Corporates were positively affected by yen 4. Japan Waiting for Recovery weakness and the recent stock rally, but sentiment remains tough and sustainability is still in question. Industrial production faltered on weak exports and orders edged up but regained little ground on sub-par domestic private sector demand. The Cabinet Office downgraded its orders assessment and firms may hold off on capex. Retail sales ticked up but consumer confidence is still lackluster, while the struggle against deflation continues. China’s growth is on the mend, helped by accommodative policy – Manufacturing data suggest growth 5. China’s Recovery Supported momentum has bottomed and is rebounding. Industrial production continues to improve, driven by strengthening domestic demand and inventory restocking; fixed asset investment stayed flat and should be steady, bolstered by new urbanization initiatives and accelerating project launches. Domestic consumption gained traction, supported by wage growth, but external demand is not yet firm. CPI inflation bottomed and the PBoC will maintain liquidity. EM economics showed improvements in some areas – PMIs continue to print higher in various EM countries, 6. EM Continues to Be Mixed including Korea, India, Brazil and Mexico. Industrial production may be turning around, as Korea posted upside surprise on better export sales that offset weaker domestic consumption. Korea’s trade surplus hit a 5-month high but Taiwan’s were below expectations. Hong Kong’s trade activity picked up while India’s deficit remains high. Price pressures remain subdued, giving policy-makers room to act. Domestic demand is not yet in stable recovery. 83
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. Global Economy Ends Year WeakGlobal Growth Stuck in ‘Twilight Zone’ but Key Markets Should See UptrendOverall global growth likely won’t change …but the US and European periphery couldmuch during 2013… accelerate over the yearGDP (YoY %) GDP (YoY %) Real GDP, QoQ, SAAR, % 4.5 4 Real GDP (QoQ %, SAAR) 4.0 3 3.5 2 3.0 1 2.5 0 2.0 -1 1.5 -2 US 1.0 0.5 -3 Spain & Italy Avg 0.0 -4 4Q12E 1Q12E 2Q12E 3Q12E 4Q12E 1Q13 2Q13E 3Q13E 4Q13E 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14Source: Morgan Stanley Research forecasts Source: Morgan Stanley Research forecasts 84
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. Global Economy Ends Year WeakGlobal PMIs Suggest Manufacturing Recovery Is Under Way in EM but Not So in DM PMI (level) 60 55 50 Global PMIs diverged further as 45 EM continued to recover while 40 DM EM DM sank deeper into contraction territory 35 30 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Source: IMF, Markit, national sources, Haver Analytics, Morgan Stanley Research Policy Rate (%) 9 8 7 6 DM EM 5 A handful of EM central banks 4 cut rates, but fewer in DM 3 2 1 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: IMF, national sources, Haver Analytics, Morgan Stanley Research 85
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. Global Economy Ends Year WeakInflation Pressures Receded Around the World, Particularly in DMInflation slowed in various DM countries, Metal price depreciation is slowing while globalincluding the US industrial production is struggling to improveCPI (YoY %) Metal Prices, Industrial Production (YoY %) 10 DM EM 150 15 8 100 10 6 50 5 4 0 0 2 -50 -5 Metal Prices (left) 0 -100 -10 Global IP (right) -2 -150 -15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11Source: IMF, national sources, Haver Analytics, Morgan Stanley Research Note: IMF base metals export prices, data reported with a lag Source: IMF, CPB, Morgan Stanley Research 86
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20131. Global Economy Ends Year WeakOn the Whole, Global Trade Is Still Fragile as the Year Comes to a Close EM Exports (YoY %) 60 50 40 30 20 10 EM export growth faltered in 0 AxJ countries overall -10 -20 AxJ -30 Latam -40 CEEMEA -50 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Source: Various national sources, Haver Analytics, Morgan Stanley Research DM Imports (YoY %) 40 30 20 10 DM import growth continues 0 to follow a lackluster trend -10 US -20 Europe -30 -40 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Source: Various national sources, Haver Analytics, Morgan Stanley Research 87
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. US Gradually Picking UpEconomic Dashboard: US 6-mo 6-mo Trend Prev. Latest Trend Prev. Latest Leading Indicators Labor Market OECD Leading Indicator (index) (Oct) N 100.8  100.9 Initial Jobless Claims (weekly k) (Dec) N 371  350 Conf. Board Leading Indicator (YoY %) (Nov) N 2.3  1.8 Initial Claims 4w ma (k) (Dec) N 408  357 Continuing Claims (weekly k) (Dec) N 3213  3206 Business Conditions ISM Mfg PMI (index) (Nov) N 51.7  49.5 Non-Farm Payrolls (MoM k) (Nov) N 138  146 ISM Non-Mfg PMI (index) (Nov) N 54.2  54.7 Avg Weekly Hours, Private (Nov) N 34.4 34.4 Chicago Fed Natl Activity (index, 3m avg) (Nov) N -0.6  -0.2 Challenger Job Cuts (YoY %) (Nov) N 11.6  34.4 Philly Fed Bus. Conditions (index) (Dec) N -10.7  8.1 ADP Employment (MoM k) (Nov) N 157  118 Empire Mfg Bus. Conditions (index) (Dec) N -5.2  -8.1 Avg Hourly Earnings (YoY %) (Nov) N 1.6  1.7 Richmond Fed Mfg Conditions (index) (Dec) N 9.0  5.0 Chicago PMI (index) (Dec) N 50.4  51.6 Personal Income (YoY %) (Nov) N 3.2  4.1 Personal Savings Rate (%) (Nov) N 3.4  3.6 Economic Activity Industrial Production (YoY %) (Nov) N 1.6  2.5 Consumer Confidence Conference Board (index) (Dec) N 71.5  65.1 Capacity Utilization (%) (Nov) N 77.7  78.4 University of Michigan (index) (Dec) N 82.7  72.9 Factory Orders (MoM %) (Oct) N 4.5  0.8 Retail Sector Durable Goods Orders (YoY %) (Nov) N 5.9  0.5 Retail Sales (YoY %) (Nov) N 3.7 3.7 Durable Goods Inventories (YoY %) (Nov) N 5.2  4.8 ICSC Chain Stores Sales (YoY %) (Nov) N 2.3  -0.1 Auto Sales (m) (Nov) N 14.2  15.5 Trade Personal Expenditure (YoY %) (Nov) N 3.3  3.5 Exports (YoY %) (Oct) N 3.7  1.0 Imports (YoY %) (Oct) N 1.1  -0.8 Housing Market Housing Starts (SAAR k) (Nov) N 888  861 Prices New Home Sales (SAAR k) (Nov) N 361  377 CPI (YoY %) (Nov) N 2.2  1.8 CPI ex Food & Energy (YoY %) (Nov) N 2.0  1.9 Existing Home Sales (SAAR m) (Nov) N 4.8  5.0 PPI (YoY %) (Nov) N 2.3  1.5 S&P/Case-Shiller 20-City Index (YoY %) (Oct) N 3.0  4.3 PPI ex Food & Energy (YoY %) (Nov) N 2.1  2.2 MBA Mortgage Applications (weekly %) (Dec) N 4.5  -12.3 Core PCE (YoY %) (Nov) N 1.6  1.5Source: National sources, Bloomberg, Haver Analytics, Morgan Stanley Research 88
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. US Gradually Picking UpIn the Bull Case, Structural Improvements Could Help Growth Start to Normalize in 2014Household deleveraging is continuing Corporations could unlock cash from balance sheets with greater policy clarityHousehold Debt to Disposable Income (%) Cash Balances (Top 1,500 Stocks, ex-Fin, $tn) 140 1.8 130 1.6 120 1.4 110 1.2 100 1.0 90 0.8 80 0.6 70 0.4 60 0.2 50 0.0 Mar-80 Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009Source: PLACEHOLDER Source: FactSet, Morgan Stanley Research 89
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. US Gradually Picking UpHousing Market Improving on Low Mortgage Rates and Gradually Healing Labor MarketThe jobs report was mixed, with a good deal of Housing starts fell but are still strong, whilemonthly volatility from unusual weather permits rose to a four-year highconditions and other factorsNon-Farm Payrolls, Unemployment Rate Housing Starts, Permits (SAAR k) 600 11 1000 Starts 400 10 900 200 Permits 9 800 0 -200 8 700 -400 Non-Farm Payrolls (k, left) 7 600 -600 Unemployment Rate (%, right) 6 500 -800 -1000 5 400 Nov-08 Aug-09 May-10 Feb-11 Nov-11 Aug-12 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12Source: BLS, Bloomberg, Morgan Stanley Research Source: Census Bureau, Bloomberg, Morgan Stanley Research 90
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. US Gradually Picking UpKey Drivers of Core Inflation Have Steadied but Other Categories May Drag LowerHeadline CPI inflation was dragged down PPI inflation similarly fell from a big drop inby a plunge in gasoline prices, while the energy costscore only gained slightlyCPI (YoY %) PPI (YoY %) 5 8 4 6 3 4 2 2 1 0 0 -2 Headline -1 Headline -4 -2 -6 Core Core -3 -8 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12Source: BLS, Bloomberg, Morgan Stanley Research Source: BLS, Bloomberg, Morgan Stanley Research 91
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20132. US Gradually Picking UpManufacturing Still Challenged by Weak Global Trade and Sluggish Domestic Demand Industrial Production, Capacity Utilization 10 85 5 80 0 75 Industrial production was much -5 70 stronger than expected, largely -10 due to recoveries in industries Industrial Production (YoY %, left) -15 65 impacted by Hurricane Sandy Capacity Utilization (%, right) -20 60 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Source: Federal Reserve, Bloomberg, Morgan Stanley Research Retail Sales (MoM %) 3 2 1 0 Retail sales beat expectations, with -1 upside in sectors including clothing -2 Headline and electronics & appliances offsetting hurricane disruptions -3 Ex Auto -4 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Source: Census Bureau, Bloomberg, Morgan Stanley Research 92
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard WinterEconomic Dashboard: Europe DATE(RIGHT(HLOOKUP($B5,$A 6-mo 6-mo Trend Prev. Latest Trend Prev. LatestPMI Mfg Inflation (YoY %)¹ Eurozone (Nov) N 45.5  46.2 Eurozone (Nov): CPI N 2.5  2.2 Germany (Nov) N 46.0  46.8 France (Nov) N 43.7  44.5 Germany (Nov): HICP N 2.1  1.9 Italy (Nov) N 45.5  45.1 France (Nov): HICP N 2.1  1.6 Spain (Nov) N 43.5  45.4 Italy (Nov): HICP N 2.8  2.6 Greece (Nov) N 41.0  41.8 Spain (Nov): HICP N 3.5  3.0 U.K. (Nov) N 47.3  49.1 Greece (Nov): HICP N 0.9  0.4  Industrial Production (YoY %)  Business Confidence  Eurozone (Oct) N -2.8  -3.6 Belgium: NBB Bus. Confidence (Aug) N -11.3  -11.8 Germany (Oct) N -0.8  -3.7 France: INSEE Bus. Confidence (Dec) N 88  89 France (Oct) N -2.5  -3.6 Italy: ISAE Bus. Confidence (Dec) N 89  89 Italy (Oct) N -5.0  -6.2 Germany: Ifo Business Survey (Dec) N 101  102 Spain (Oct) N -12.1  0.6 Greece (Oct) N -7.2  1.8 Economic Sentiment U.K. (Oct) N -3.2  -3.0 Eurozone: ZEW Econ. Sentiment (Dec) N -2.6  7.6  Greece: Economic Sentiment (Nov) N 75.8  79.0Imports (YoY %)  Germany: ZEW Econ. Sentiment (Dec) N -15.7  6.9 Eurozone (Oct) N -4.5  6.9 Germany (Oct) N -0.6  2.7 Retail Sales (YoY %)  France (Oct) N -0.2  0.6 Eurozone (Oct) N -1.6  -3.6 Italy (Oct) N -6.2  -3.7 Germany (Oct) N -3.4  -0.8 Spain (Oct) N -7.4  -2.0 France (Oct) N 0.8  0.7 Greece (Oct) N 1.9  7.7 Italy (Oct) N -1.6  -3.8 U.K. (Oct) N -3.4  -1.1 Spain (Nov) N -8.4  -7.8  U.K. (Nov) N 1.4  2.0Exports (YoY %)   Eurozone (Oct) N 1.3  14.3 Orders (YoY %)²  Germany (Oct) N 1.4  5.3 Germany: Manufacturing Orders N -3.9  -2.4 France (Oct) N 5.0  4.9 Italy (Oct) N 2.7  5.5 Lending and Money Supply (YoY %)³   Spain (Oct) N 0.5  8.7 Eurozone: M3 (Oct) N 2.6  3.9 Greece (Oct) N -16.9  -9.2 Eurozone: Lending to Priv. Sector (Oct) N 0.5  0.5 U.K. (Oct) N -1.0  -6.1¹Harmonized inflation (HICP) is shown for member countries ²Orders are working day adjusted³Eurozone M3 growth rates no longer account for portfolio shiftsSource: National sources, Bloomberg, Haver Analytics, Morgan Stanley Research 93
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard WinterEurope Faces Many Risks and Policy Challenges…Fiscal tightening should ease for most of Sovereign bond issuance is also likely toEurope in 2013 fall significantly% GDP (€bn) FI AT DE NL FR BE IE EA17 PT ES GR IT 140 0.0 120 -0.1 -0.2 -0.1 -0.5 -0.3 100 -0.6 -0.6 -0.7 80 -1.0 -0.9 -0.8 -1.1 -1.2 -1.1 60 -1.5 -1.2 -1.5 -1.5 -1.5 40 -1.6 -2.0 20 -2 -2.5 -2.3 0 -2.6 -2.7 -20 -3.0 -2.8 Fiscal Tightening 2012 -40 -3.1 -3.5 Fiscal Tightening 2013 Germany France Italy Spain Portugal Ireland Greece -3.6 -4.0 2009 2010 2011 2012E 2013ESource: Morgan Stanley Research Source: Morgan Stanley Research forecasts 94
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard Winter…but Restructuring Benefits in the Periphery Offer Hope Relative Unit Labor Costs (Jan 99 = 100) 130 120 110 Labor costs are falling in the 100 eurozone periphery 90 80 1999 2001 2003 2005 2007 2009 2011 Germany Spain France Italy Ireland Greece Portugal Netherlands Belgium Source: ECB, Haver, Morgan Stanley Research Exports of Goods & Services (1Q 2000 = 100) 200 Exports of Goods & Services (1Q 2000 = 100) DE FR 180 IT ES 160 IE GR PT Exports are higher than pre- 140 crisis in parts of the periphery 120 100 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Eurostat, Morgan Stanley Research 95
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard WinterThe Bundesbank Slashed its 2013 Growth Projections and Sees Recession This Winter Germany Industrial Production, Output Plans 25 50 20 40 15 30 10 20 5 10 Germany’s industrial production 0 0 -5 -10 was much weaker than -10 -20 expected, driven by a slump in Industrial Production (YoY %, left) -15 -30 capital goods -20 IFO Mfg ex Food Output Plans (right) -40 -25 -50 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Source: Deutsche Bundesbank, Ifo Institute, Bloomberg, Morgan Stanley Research France Industrial Production (YoY %) 15 10 5 0 France’s industrial production -5 also fell, as demand remains -10 Industrial Production feeble -15 3m ma -20 -25 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 Source: INSEE, Bloomberg, Morgan Stanley Research 96
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard WinterGermany’s Orders Rebounded Due to Improved Demand from AbroadGermany’s orders jumped to erase prior Sweden’s PMI rose marginally as forward-falls, though data may be volatile looking production and new orders improved, though employment droppedGermany Manufacturing Orders (YoY %) Sweden PMI Mfg 40 80 30 70 20 10 60 0 50 -10 -20 Manufacturing Orders 40 Headline -30 Domestic New Orders 30 Production -40 Foreign -50 20 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12Source: Deutsche Bundesbank, Bloomberg, Morgan Stanley Research Source: Swedbank, Bloomberg, Morgan Stanley Research 97
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard WinterForward-Looking Business Sentiment Improved, but Near-Term Risks Are Present Germany Business Expectations 100 115 80 110 60 105 40 100 20 Germany’s ZEW improved 95 0 substantially and Ifo climbed, But 90 -20 ZEW (left) near-term risks still exist -40 85 Ifo (right) 80 -60 -80 75 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Source: ZEW, Ifo Institute, Bloomberg, Morgan Stanley Research France Business Expectations 120 Current Sentiment (left 40 Production Expectations (right) 110 20 100 0 France’s INSEE improved 90 -20 modestly but remains at a very 80 -40 low level; forward-looking 70 -60 components still deteriorating 60 -80 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Source: INSEE, Bloomberg, Morgan Stanley Research 98
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20133. Europe Facing a Hard WinterInflation Pressures Ease Further as Consumers Spend LessGermany’s headline CPI eased down, France’s headline CPI was similarly pulledpartly driven by lower energy prices, while down by energycore CPI remained flatGermany CPI (YoY %) France CPI (YoY %) 3.5 4.0 Headline Headline 3.0 3.5 Core Core 2.5 3.0 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 -1.0 -1.0 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12Source: Destatis, Eurostat, Bloomberg, Morgan Stanley Research Source: INSEE, Eurostat, Bloomberg, Morgan Stanley Research 99
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Japan Waiting for RecoveryEconomic Dashboard: Japan 6-mo 6-mo Trend Prev. Latest Trend Prev. LatestIndicators Prices Leading Indicator (Oct) N 91.8  92.8 CGPI (YoY %) (Nov) N -1.0  -0.9 Coincident Indicator (Oct) N 91.3  90.7 CPI (YoY %) (Nov) N -0.4  -0.2  Core CPI (YoY %) (Dec) N -0.9  -1.0Business Conditions   Eco Watchers: Current (Nov) N 39.0  40.0 Labor Market  Eco Watchers: Outlook (Nov) N 41.7  41.9 Jobless Rate (%) (Nov) N 4.2  4.1  Job-to-Applicant Ratio (Nov) N 0.8 0.8 Tankan Mfg: Current (Dec) N -19.0  -18.0  Tankan Non-Mfg: Current (Dec) N 1.0  5.0 Consumer  Tankan Mfg: Outlook (Dec) N -17.0  -16.0 Consumer Confidence (Nov) N 39.7  39.4 Tankan Non-Mfg: Outlook (Dec) N 3.0  4.0 Household Spending (YoY %) (Nov) N -0.1  0.2   All Industry Index (Oct) N -0.4  0.2 Retail  Small Business Confidence (Dec) N 43.3  43.8 Vehicle Sales (YoY %) (Nov) N -9.0  -3.3 PMI (Dec) N 46.5  45.0 Deptartment Store Sales (YoY %) (Nov) N -2.4  2.2  Convenience Store Sales (YoY %) (Nov) N -2.1  -2.5Economic Activity   Industrial Production (MoM %) (Nov) N 1.6  -1.7 Housing  Industrial Production (YoY %) (Nov) N -4.5  -5.8 Tokyo Condo Sales (YoY %) (Nov) N -14.4  -15.1 Vehicle Production (YoY %) (Nov) N -12.4  -8.4 Construction Orders (YoY %) (Nov) N -13.8  -2.1  Housing Starts (YoY %) (Nov) N 25.2  10.3 Machinery Orders (YoY %) (Oct) N -7.8  1.2 Tokyo Avg Office Vacancies (%) (Nov) N 8.7  8.8 Machine Tool Orders (YoY %) (Nov) N -6.7  -21.3  Capacity Utilization (MoM %) (Oct) N -5.5  1.6 Financial   Bank Lending ex-Trusts (YoY %) (Nov) N 1.1  1.3Trade  M2 (YoY %) (Nov) N 2.3  2.1 Current Account Balance (¥bn) (Oct) N 503.6  377 Target Rate (%) (Dec) N 0.1 0.1  Merch Trade Balance (¥bn) (Nov) N -554.6  -955 Merch Trade Imports (YoY %) (Nov) N -1.5  0.9 Merch Trade Exports (YoY %) (Nov) N -6.5  -4.1Source: National sources, Bloomberg, Haver Analytics, Morgan Stanley Research 100
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Japan Waiting for RecoveryCorporates Were Positively Affected by Yen Weakness and the Recent Stock RallyEco Watchers’ recovery is slow and The manufacturing Tankan is up slightly;sustainability still in question; households sentiment remains tough but is helped bywere supported by seasonal demand recent yen weakness and the stock rallyEconomy Watchers Survey (level) Reuters Tankan (level) 55 20 50 15 45 10 40 5 35 0 30 -5 25 -10 20 -15 Manufacturing Household Non-Manufacturing 15 Corporate -20 Manufacturing Outlook 10 -25 Non-Manufacturing Outlook Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12Source: ESRI, Bloomberg, Morgan Stanley Research Source: Reuters, Datastream, Morgan Stanley Research 101
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Japan Waiting for RecoveryCabinet Office Downgraded Orders Assessment; Expect Firms to Hold Off on Capex Industrial Production, Inventory/Shipment 40 160 30 150 20 140 10 130 0 Industrial production faltered, 120 -10 dragged down by weak exports 110 -20 -30 100 Industrial Production (YoY %, left) -40 90 Inventory/Shipment Ratio (right) -50 80 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Source: METI, Bloomberg, Morgan Stanley Research Machinery Orders (MoM %) 80 70 60 Core Machinery Orders 50 Overseas 40 Orders edged up for the first time 30 in three months but regained little 20 10 ground on sub-par domestic 0 private-sector demand -10 -20 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Source: ESRI, Bloomberg, Morgan Stanley Research 102
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Japan Waiting for RecoveryRetail Sales Ticked Up but Consumer Confidence Is Still LacklusterRetail sales were up, in a recovery from Consumer confidence worsened marginally,the prior month’s tumble with the income component flat but others fallingHousehold Spending, Retail Sales (YoY %) Consumer Confidence (level) 15 45 Retail Sales 40 10 Real Household Spending 35 5 30 0 25 Consumer Confidence Employment -5 20 Income Growth 15 -10 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12Source: MIC, METI, Bloomberg, Morgan Stanley Research Source: ESRI, Bloomberg, Morgan Stanley Research 103
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20134. Japan Waiting for RecoveryA Continuing Struggle Against Deflation While Exports Still Lack Strength Core CPI (YoY %) 1.0 0.5 0.0 -0.5 Japan’s core inflation slid -1.0 further; the incoming coalition is -1.5 pushing for the BoJ to adopt a -2.0 Tokyo Nationwide higher inflation target -2.5 -3.0 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Source: MIC, Bloomberg, Morgan Stanley Research Merchandise Trade 80 Trade Balance (¥bn, right) 1000 Exports to US (YoY %, left) 800 60 Exports to EU (YoY %, left) 600 40 Exports to Asia (YoY %, left) 400 20 200 Exports still lack strength, 0 0 widening the deficit yet again -20 -200 -400 -40 -600 -60 -800 -80 -1000 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Source: MOF, Bloomberg, Morgan Stanley Research 104
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20135. China’s Recovery SupportedEconomic Dashboard: China 6-mo 6-mo Trend Prev. Latest Trend Prev. LatestIndicators Prices Leading Indicator (Oct) N 100.4  100.4 CPI (YoY %) (Nov) N 1.7  2.0 Coincident Indicator (Oct) N 97.2  97.7 PPI (YoY %) (Nov) N -2.8  -2.2  Business Conditions  Consumer  CFLP PMI Mfg (Nov) N 50.2  50.6 Consumer Confidence (Nov) N 106.1  105.1 CFLP PMI Non-Mfg (Nov) N 55.5  55.6  HSBC PMI Mfg (Nov) N 49.5  50.5 Retail  HSBC PMI Services (Nov) N 53.5  52.1 Retail Sales (YoY %) (Nov) N 14.5  14.9  Passenger Car Sales (YoY %) (Nov) N 6.4  8.8Economic Activity   Val-Added of Industry (YoY %) (Nov) N 9.6  10.1 Housing  FAI ex-Rural (YTD YoY %) (Nov) N 20.7 20.7 70-City Property Price Index Avg (Oct) N 103.3  103.4  Trade  Financial  Trade Balance ($bn) (Nov) N 32.1  19.6 M2 (YoY %) (Nov) N 14.1  13.9 Imports (YoY %) (Nov) N 2.3  0.0 New Loans (RMB bn) (Nov) N 505.2  522.9 Exports (YoY %) (Nov) N 11.6  2.9 Total Loan Growth (YoY %) (Nov) N 15.9  15.7   FDI (YoY %) (Nov) N -0.2  -5.4 Policy Rate (%) (Dec) N 6.0 6.0 RRR (%) (Dec) N 20.0 20.0Source: National sources, Bloomberg, Haver Analytics, Morgan Stanley Research 105
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20135. China’s Recovery SupportedManufacturing Data Suggests Growth Momentum Has Bottomed and Is ReboundingIndustrial production continued to improve, Fixed asset investment stayed flat and shoulddriven by strengthening domestic demand stay steady, underpinned by new urbanizationand inventory restocking initiatives and accelerating project launchesIndustrial Production (YoY %) Fixed Asset Investment (YoY %) 25 Industrial Production 160 Light Industry FAI: Tertiary 140 Heavy Industry FAI: Secondary 20 120 FAI: Primary 15 100 80 10 60 40 5 20 0 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12Source: NBS, Haver Analytics, Morgan Stanley Research Source: NBS, Haver Analytics, Morgan Stanley Research 106
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20135. China’s Recovery SupportedDomestic Consumption Gained Traction but External Demand Not Yet on Firm Footing Retail Sales (YoY %) 26 24 22 20 18 Retail sales were higher than 16 expected as discretionary 14 consumption gained traction and 12 should pick up ahead of holidays, 10 supported by wage growth 8 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: NBS, Haver Analytics, Morgan Stanley Research Trade Balance 50 100 40 80 30 60 20 40 10 20 Export growth fell short of 0 0 expectations by a wide -10 -20 margin while imports Trade Balance ($bn, left) -20 -40 registered zero YoY growth Imports (YoY %, right) -30 -60 Exports (YoY %, right) -40 -80 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: CEInet, Bloomberg, Morgan Stanley Research 107
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20135. China’s Recovery SupportedCPI Inflation Bottomed; Recovering Domestic Demand May Gradually Lift Non-FoodCPI inflation remains well-anchored but PPI inflation found further relief due to a lowsaw an uptick mainly due to gains in food baseprices, while non-food edged downCPI (YoY %) PPI, Input Prices 16 10 80 14 Headline 70 12 5 Non-Food 10 60 8 Food 0 6 50 4 -5 40 2 PPI (YoY %, left) 0 -10 PMI Input Prices (level, right) 30 -2 -4 -15 20 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12Source: CEInet, Bloomberg, Morgan Stanley Research Source: CEInet, CFLP, Bloomberg, Morgan Stanley Research 108
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20135. China’s Recovery SupportedThe PBoC Will Actively Maintain the Current Liquidity Level Lending 2000 40 New Loans (RMB 1800 bn, left) 35 1600 1400 Total Loan Growth 30 (YoY %, right) 1200 New RMB loans posted modest 1000 25 800 gains in November while total 600 20 social financing remains resilient 400 15 200 0 10 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: CEInet, Bloomberg, Morgan Stanley Research Money Supply (YoY %) 45 40 35 M1 30 M2 25 Money supply edged down 20 due to less aggressive 15 government spending 10 5 0 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: PBoC, Bloomberg, Morgan Stanley Research 109
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedEconomic Dashboard: EM 6-mo 6-mo Trend Prev. Latest Trend Prev. LatestPMI Mfg CPI (YoY %) India (Nov) N 52.9  53.7 India (WPI) (Nov) N 7.5  7.2 Korea (Nov) N 47.4  48.2 Korea (Nov) N 2.1  1.6 Taiwan (Nov) N 47.8  47.4 Taiwan (Nov) N 2.3  1.6 Brazil (Nov) N 50.2  52.2 Brazil (Nov) N 5.5  5.5 Mexico (Nov) N 52.1  52.5 Mexico (Nov) N 4.6  4.2 Turkey (Nov) N 52.6  51.6 Turkey (Nov) N 7.8  6.4 Poland (Nov) N 47.3  48.2 Poland (Nov) N 3.4  2.8  Industrial Production (YoY %)  Retail (YoY %)  India (Oct) N -0.7  8.2 India: Auto Sales (Nov) N 23.1  -8.3 Korea (Nov) N -0.8  2.9 Korea: Dept Store Sales (Nov) N -0.4  9.1 Taiwan (Nov) N 4.8  5.9 Taiwan: Comm Sales (Nov) N -0.7  1.3 Brazil (Oct) N -3.6  2.3 Brazil: Retail Sales (Oct) N 8.5  9.1 Mexico (Oct) N 2.3  3.6 Mexico: Retail Sales (Oct) N 3.8  3.5 Turkey (Oct) N 6.2  -0.9 Turkey: Auto Sales (Nov) N -13.7  11.7 Poland (Nov) N 4.6  -0.8 Poland: Retail Sales (Nov) N 3.3  2.4  Imports (YoY %)  Policy Rate (%)  India (Nov) N 7.4  6.4 India (Dec) N 7.0 7.0 Korea (Nov) N 1.6  0.9 Korea (Dec) N 2.8 2.8 Taiwan (Nov) N -1.8  0.1 Taiwan (Dec) N 1.9 1.9 Brazil (Oct) N -16.6  -2.3 Brazil (Dec) N 7.3 7.3 Mexico (Nov) N 16.4  4.7 Mexico (Dec) N 4.5 4.5 Turkey (Nov) N -5.7  12.5 Turkey (Dec) N 5.8  5.5 Poland (Oct) N -3.0  7.6 Poland (Dec) N 4.5  4.3 Exports (YoY %)  India (Nov) N -1.6  -4.2 Korea (Nov) N 1.0  3.8 Taiwan (Nov) N -1.9  0.9 Brazil (Nov) N 8.2  -54.1 Mexico (Nov) N 13.0  1.3 Turkey (Nov) N 11.0  24.8 Poland (Oct) N -0.3  15.5Source: National sources, Bloomberg, Haver Analytics, Morgan Stanley Research 110
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedPMIs Continue to Print Higher in Various EM EconomiesPMIs improved in India and Korea even PMIs also improved in Brazil, Mexico andthough Korea’s remains in contraction PolandPMI Mfg (level) PMI Mfg (level) 65 60 60 55 55 50 50 45 45 40 Brazil Mexico India Korea 40 35 Turkey Poland Singapore Taiwan 35 30 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12Source: HSBC, Markit, Bloomberg, Morgan Stanley Research Source: HSBC, Markit, Bloomberg, Morgan Stanley Research 111
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedIndustrial Production May Be Turning Around in EM Korea, Taiwan Industrial Production (YoY %) 80 60 40 Korea’s industrial production posted 20 upside surprise as better export sales offset weaker domestic consumption 0 -20 Korea -40 Taiwan -60 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 India Industrial Production (YoY %) Source: KNSO, MOEA, Bloomberg, Morgan Stanley Research 25 Industrial Production 20 3m ma 15 10 5 India’s industrial production accelerated sharply partly due to base 0 effect and pre-Diwali sales -5 -10 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Source: CSO, Bloomberg, Morgan Stanley Research 112
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedKorea’s Surplus Hit a 5-Month High but Taiwan’s Exports Were Below Expectations Taiwan Exports (YoY %) 125 105 Exports US 85 65 Europe Asia 45 Taiwan’s exports grew 25 5 significantly below -15 expectations, dragged down by -35 weak demand from DM -55 -75 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: MOEA, Bloomberg, Morgan Stanley Research Korea Exports, US ISM New Orders 50 80 40 70 30 20 60 10 Korea’s surplus is at a 5- 0 50 month high on improving AxJ -10 -20 40 demand, though import growth Korea Exports (YoY %, left) -30 is slow due to weakness in US ISM Mfg New Orders (level, right) 30 -40 consumer goods -50 20 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: MKE, ISM, Bloomberg, Morgan Stanley Research 113
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedHong Kong’s Trade Activity Picked Up While India’s Deficit Remains High Hong Kong Trade 50 0 40 -10 30 20 -20 Hong Kong’s export growth picked up, 10 but fluctuations are linked to the -30 0 continued unsteadiness in DM -10 -40 -20 Trade Balance ($bn, right) -50 -30 Imports (YoY %, left) Exports (YoY %, left) -40 -60 Nov-08 Aug-09 May-10 Feb-11 Nov-11 Aug-12 India Trade Source: C&SD, Bloomberg, Morgan Stanley Research 100 0 80 -5 60 40 -10 20 India’s export growth faltered as -15 external demand continues to be 0 Trade Balance ($bn, right) -20 challenged -20 Imports (YoY %, left) -40 Exports (YoY %, left) -25 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 Source: DGCI&S, Bloomberg, Morgan Stanley Research 114
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedPrice Pressures Remain Subdued in AxJ, Giving Policy-Makers Room to ActIndia’s WPI inflation was lower than expected CPI inflation slowed in various AxJon lower global commodity prices, lagging the countries, giving policy-makers room to actimpact of rupee appreciationIndia WPI (YoY %) Korea, Singapore, Taiwan CPI (YoY %) 25 8 WPI 20 Food 6 Non-Food Manufactured 15 (Core) 4 10 2 5 0 Korea 0 -2 Singapore -5 Taiwan -4 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12Source: MCI, Haver Analytics, Morgan Stanley Research Source: National sources, Bloomberg, Morgan Stanley Research 115
    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 20136. EM Continues to Be MixedIndia’s Car Sales Slumped While Korea’s Department Store Sales Jumped India Car Sales, Hong Kong Retail Sales (YoY %) 70 60 India Passenger Car Sales 50 Hong Kong Retail Sales 40 30 India’s car sales slumped as 20 10 the prior month’s jump failed to 0 extend, with rates and fuel -10 prices high and sentiment low -20 -30 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: SIAM, C&SD, Bloomberg, Morgan Stanley Research Korea Department Store Sales, Taiwan Retail Sales (YoY %) 30 Korea Department Store Sales 25 Taiwan Retail Sales 20 15 10 Korea department store 5 sales jumped, boosted by 0 cold weather -5 -10 -15 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: KNSO, MOEA, Bloomberg, Morgan Stanley Research 116
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    • MORGAN STANLEY RESEARCH Global In the Flow January 2, 2013Disclosure section (cont.) Coverage Universe Investment Banking Clients (IBC)Stock Rating Category Count % of Total Count % of Total IBC % of Rating CategoryOverweight/Buy 1103 37% 436 41% 40%Equal-weight/Hold 1301 44% 497 46% 38%Not-Rated/Hold 108 4% 27 3% 25%Underweight/Sell 478 16% 111 10% 23%Total 2,990 1071Data include common stock and ADRs currently assigned ratings. An investors decision to buy or sell a stock should depend on individual circumstances (such as the investors existingholdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O or Over) - The stocks total return is expected to exceed the total return of the relevant country MSCI Index or the average total return of the analysts industry (or industryteams) coverage universe, on a risk-adjusted basis over the next 12-18 months.Equal-weight (E or Equal) - The stocks total return is expected to be in line with the total return of the relevant country MSCI Index or the average total return of the analysts industry (orindustry teams) coverage universe, on a risk-adjusted basis over the next 12-18 months.Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stocks total return relative to the relevant country MSCI Index or the average total return of theanalysts industry (or industry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U or Under) - The stocks total return is expected to be below the total return of the relevant country MSCI Index or the average total return of the analysts industry (or industryteams) coverage universe, 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 ViewsAttractive (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, asindicated 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 indicatedbelow.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 indicatedbelow.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.Important Disclosures for Morgan Stanley Smith Barney LLC CustomersCiti Research publications may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to viewany available Citi Research publications in addition to Morgan Stanley research reports.Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley andCitigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures.For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures andhttps://www.citigroupgeo.com/geopublic/Disclosures/index_a.html.Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person whoreviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.Other Important DisclosuresMorgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 ofthe Dodd-Frank Wall Street Reform and Consumer Protection Act. 118
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