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The implications of QE for equity investors
 

The implications of QE for equity investors

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Morgan Stanley Research

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    The implications of QE for equity investors The implications of QE for equity investors Presentation Transcript

    • September 17, 2012 MORGAN STANLEY RESEARCHEuropean Equity Strategy Europe Morgan Stanley & Co. International plc+The implications of QE for equity investors European Equity Strategy Graham Secker graham.secker@morganstanley.com +44 (0)207 425 6188We look at prior periods of monetary Commodities have been the bestpolicy intervention to assess the tactical performers post prior Fed interventions European Equity Strategy Teamimplications of QE3 for equity investors. Graham SeckerThe sustainability of this policy-induced rally Ronan Carr, CFAdepends on the economic outlook improving Utilities Matthew Garman, CFAin the next month or two. While prior Fed Telecomms Krupa Patelintervention has often been followed by an Health Care Hanyi Limuptick in economic indicators the evidence is Financialsfar from conclusive. Cons DiscAlthough the circumstances around QE3 are ITsomewhat different to prior Fed interventions, Cons Stapwe may see similar market responses initially Industrials– namely: a higher PE; rising investorsentiment; stronger commodity prices; falling Energybond yields; rising EUR; high beta Materialsoutperformance; rotation from Defensives into -4 -2 0 2 4 6 8Commodity sectors. Median Relative Sector Performance 3M After Fed Bond Purchase / QE Announcements, % Source: MSCI, Datastream, Morgan Stanley ResearchMorgan 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 The implications of QE for equity investors September 17, 2012SummaryPolicy-induced rally is only sustainable if growth outlook improves. Equity markets have closely tracked economic growth indicators in this cycle;however, over the last few months this relationship has started to break down as equities have rallied substantially despite continued weak macro data.Much of this divergence is likely due to investors’ hopes for monetary policy intervention, which has duly been delivered by the Fed and ECB. While thelatter provides scope for a tactical rally, its sustainability depends on an improving economic growth outlook. Prior periods of monetary policyintervention have usually occurred against a backdrop of rising growth indicators – the one time this did not occur (2Q11) saw equity prices fall.The timing of QE3 does not fit the historical precedent... Traditionally the Fed has increased monetary stimulus when equities have been falling,inflation expectations are low and financial conditions are tight. In this regard, the timing of QE3 is quite different as it has occurred after a period ofsharply rising equity prices, (relatively) high inflation expectations and loose financial conditions. For example, MSCI Europe has fallen by a medianreading of 13% in the 3m prior to previous Fed interventions but it is currently up 13% over the last 3m.… however, implications of prior monetary policy intervention could still be important. While we should acknowledge the differentcircumstances around the start of QE3, human nature dictates that investors will still look at the implications of prior periods of monetary intervention forhelp in forming investment decisions today. In this report we highlight these prior implications and the summary is as follows:#1 QE boosts PE but doesn’t impact EPS – Post the five Fed interventions we analysed we found that the median increase in the 12m PE over thenext six months was 16% for US and 28% for Europe. Over the last year we also find that ECB policy is now driving equity valuations higher too. Thereis little evidence that prior monetary intervention has an impact on consensus 12m EPS estimates.#2 QE is often followed by better macro growth data. We are generally sceptical that QE has any lasting impact on real GDP growth; however, thecharts on page 9 do suggest that prior Fed interventions have often been followed by an improvement in indicators such as PMIs, weekly initial claimsand US consumer confidence. It is hard to gauge how much of this is causal and how much is coincidence.#3 QE boosts investor sentiment. Post prior Fed interventions we have consistently seen a quick improvement in investor optimism as measured bya higher AAII index, lower put-call ratio and a lower VIX.#4 QE is bullish for commodity prices. Previous QE programs have been consistently bullish for commodity prices, although we note that gold’s bestperformance usually occurs ahead of the announcement. Brent oil has already risen to $117 – over the last five years MSCI Europe has always fallen inthe 3m and 6m post a price of $125.#5 QE is bearish for bonds, bullish for EUR. The start of previous QE programs has always prompted a sharp rise in core government bond yieldswhile the end of such programs has always been followed by a fall in the same yields. QE is generally bullish for EUR versus USD.#6 QE has few regional implications. Prior QE announcements have not given consistent signals as to the relative performance of European equitiesversus their global peers. 2
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Summary#7 QE drives rotation into higher beta and (sometimes) value. In 4 of the 5 interventions analysed QE has driven a strong increase in the numberof high beta stocks (i.e. breadth) that outperformed subsequently. Value outperformed growth post QE1 and Operation Twist but not post QE2.#8 QE prompts commodity sectors to outperform; Defensives to underperform. Prior periods of Fed intervention have been the catalyst toprompt a sector rotation out of defensives and into commodities. While Financials outperformed strongly post QE1 in Mar-09, they have generallyunderperformed in the other periods analysed. Note that Financials were the best performers in 3m post LTRO announcement.Implications for our European Model Portfolio. Recently we have been positioning our portfolio for the prospect of a rising PE multiple but wherethere is continued downward pressure on consensus earnings expectations (see our report ‘A lower risk premium but lower EPS too, September 102012’). Consequently we believe our portfolio is already relatively well positioned for this environment as we are OW Insurance, Materials and Utilities.We are UW Consumer Staples, Industrials and Consumer Discretionary.Our European Model Portfolio Benchmark Portfolio Benchmark Portfolio Benchmark PortfolioOVERWEIGHTS Weight (%) OW / UW NEUTRALS Weight (%) OW / UW UNDERWEIGHTS Weight (%) OW / UWInsurance (SXIP) 5.1 +2.0 Banks (SX7P) 9.8 0.0 Cons Discr (Autos SXAP & Media SXMP*) 8.7 -2.0 Munich Re, Prudential, Barclays, HSBC, Swedbank, SES, IHG, Reed, Aegon, Allianz BNP Home Retail, VolkswagenMaterials (Basic Resources SXPP & Div Fin & Real Estate (SXFP & SX86P) 4.3 0.0 Cons Staples (SX3P) 14.7 -2.0Chemicals SX4P) 9.5 +2.0 ING, Unibail Rodamco, UBS Imperial Tobacco, BAT, ABI, Nestle Rio Tinto, Akzo Nobel, Lanxess, African Barrick Gold Energy (SXEP) 11.5 0.0 Industrials (SXNP) 10.9 -2.0 BG, Tullow Oil, Saipem, RD Shell Schneider, AtlantiaUtilities (SX6P) 4.5 +2.0 Ryanair*, AP Moller-Maersk Iberdrola, RWE, Terna Healthcare (SXDP) 12.1 0.0 Sanofi, Roche, Novartis, UCB Technology (SX8P) 2.9 0.0 Dassault Systems, SAP Telecoms (SXKP) 6.1 0.0 BT, Vodafone, Deutsche TelekomNote: *Although the shares of this company remain in the model portfolio, Morgan Stanley & Co. International plc policy precludes the exercise of investment management discretion or the rendering of investmentadvice on the shares at this time by the strategist and/or the Morgan Stanley analyst who follows the shares.**Please note that EADS is not currently included in the Model Portfolio due to applicable Morgan Stanley restrictions.Source: Morgan Stanley Research 3
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Policy hopes have trumped growth concerns in recent monthsEquity prices have closely tracked economic growth MSCI Europe is pricing in a strong ISM reboundindicators in this cycle. However, over the last few months 1250 62this relationship has started to break down as equities haverallied substantially despite continued weak macro data. 1200 60 1150 MSCI Europe 58Much of this divergence is likely due to investors’ hopes for MSCI Europecentral bank policy intervention which has duly been ISM 1100 56delivered by both the Fed and the ECB. However, for therally to be sustainable we need to see these economic 1050 54indicators start to improve over the next 1-2 months. 1000 52 950 ISM (RHS) 50 900 48 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: ISM, Datastream, Morgan Stanley ResearchUS consumer confidence has fallen to 2012 lows – Eurozone economic climate continues to deteriorate – 120 SPX normally tracks this indicator closely 1600 this series tends to correlate with equities and GDP 120 1700 110 1400 1600 EC Economic Sentiment Indicator for Eurozone 100 110 Eurozone Economic Climate 1500 90 1200US Consumer Confidence 1400 80 100 1000 S&P 500 1300 70 90 1200 800 60 1100 50 80 600 1000 40 MSCI Europe - rhs 900 US Consumer Confidence 400 70 30 S&P 500 (RHS) 800 20 200 60 700 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source: S&P, Conference Board, Morgan Stanley Research Source: MSCI, Bloomberg, Morgan Stanley Research 4
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012In medium-term, growth is more important for equity price performance than policyThe starting and stopping of previous QE programs has consistently coincided with troughs and peaks in the growth outlook (asmeasured by the ISM) – hence it is debatable as to whether equities went up during these periods because of QE or because thegrowth outlook was improving. Interestingly there has only been one occasion of note (2Q11) where the ISM started to decline whilea QE program was ongoing – over that period MSCI Europe fell 7%. While central bank policy intervention boosts equity valuations, we believe equity price performance is more closely correlated to growth expectations Fed announces Fed announces $600bn purchase in QE2 Flagged further purchase of agency MBS at Jackson QE2 Operation Twist $850bn agency QE1 ends QE2 ends Hole Starts starts 64 MBS and $300bn 1300 USTs (QE1) 60 1200 56 1100 52 MSCI Europe ISM 48 1000 44 900 ISM 40 MSCI Europe 800 36 32 700 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Source: MSCI, ISM, Morgan Stanley Research 5
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The timing of QE3 does not fit the historical precedentAs the charts on this page show, traditionally the Fed has QE vs Financial Conditionsincreased monetary stimulus when equities have been falling, Fed announces Fed announces further $600bn purchase purchase of $850bn agency QE2 Flagged at Jackson QE2 Operation Twistinflation expectations are low and financial conditions are tight. 5 in agency MBS MBS and $300bn USTs Hole Starts starts 4 MS Financial Conditions IndexIn this regard, the timing of QE3 is quite different as it hasoccurred after a period of sharply rising equity prices, (relatively) 3high inflation expectations and loose financial conditions. 2 1Investors could interpret this difference in two ways - either: i) itshows just how determined the Fed is to keep doing everything 0necessary and thus is more likely to increase confidence and has -1greater chance of success in driving a growth rebound.. or ii) thatthe "bang for the buck" will be smaller this time as markets are -2 QE1 ended QE2 endedalready elevated...perhaps concerns on the latter explains why the -3Fed sounded more aggressive this time. Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: Bloomberg, Morgan Stanley Research QE vs Inflation expectations QE vs S&P Fed announces Fed announces further QE2 Flagged Fed announces Fed announces further QE2 Flagged $600bn purchase purchase of $850bn agency at Jackson QE2 Operation Twist $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist in agency MBS MBS and $300bn USTs Hole Starts starts agency MBS MBS and $300bn USTs Hole Starts starts 3.0 1500 2.5 1400 US 5yr Breakeven Inflation (%) 2.0 1300 1.5 1200 S&P 500 QE2 ended 1.0 1100 QE2 ended QE1 ended 0.5 1000 QE1 ended 0.0 900 -0.5 800 -1.0 700 -1.5 600 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Source: Bloomberg, Morgan Stanley Research Source: S&P, Morgan Stanley Research 6
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The Fed’s QE has boosted US PE ratios – as rate cuts used to do in prior cycles…In prior economic cycles the PE ratio of US equities generally rose during periods when the Fed Funds rate was falling.Despite ZIRP, this cycle is actually no different – periods of monetary policy intervention have again driven up the PE ratio for USequities. Post the 5 intervention events we flag in the chart below the median increase in the consensus 12m PE for MSCI USA hasbeen 10% over the next 3 months and 16% over the next 6 months (with a hit ratio of 100%). Policy response has been very effective at lifting the In prior cycles conventional Fed policy stimulus used 12m PE for MSCI USA (albeit temporarily) to prompt P/E expansion too Fed announces Fed announces further purchase of QE2 Flagged 20 35 $600bn purchase in $850bn agency MBS at Jackson QE2 Operation Twist agency M BS and $300bn USTs Hole Starts starts 16 18 30 16 15 14 MSCI US Trailing PE 25 12m PE for MSCI USA US Fed Funds Rate 14 12 10 20 13 8 12 15 QE1 ended 6 11 4 QE2 ended 10 2 10 0 5 Jan-71 Jan-76 Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11 9 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Periods of US rate cuts Fed Funds Rate US PE - rhs Source: Datastream, MSCI, IBES, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research 7
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012… and European policymakers are finally having a similar effectPost the Fed’s last 5 intervention events the average increase in Fed monetary intervention has also helped Europe’sthe consensus 12m PE for MSCI Europe has been 12% over the 12m PE – though not around QE2 Fed announcesnext 3 months and 28% over the next 6 months (with a hit ratio of Fed announces further purchase of $600bn purchase in $850bn agency MBS QE2 Flagged at Jackson QE2 Operation Twist80% and 100% respectively). 14 agency MBS and $300bn USTs Hole Starts starts 13In general, a less aggressive/co-ordinated approach to 12m PE for MSCI Europepolicymaking in Europe has meant that sovereign debt concerns 12have been a key driver of equity valuations (from a negative 11perspective) in this cycle. It is only relatively recently that Europeanmonetary policy is driving a similar re-rating in Europe’s 12m PE 10 QE1 endedratio. 9 QE2 ended 8 7 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Source: MSCI, IBES, Morgan Stanley ResearchIn Europe, less aggressive/co-ordinated policymaking … although the ECB’s more aggressive stance is has meant that sovereign debt concerns have been a now having some impact key driver of equity valuations in this cycle… 11.5 14 0 ECB announces OMT (06/09) Median CDS across European countries - INVERTED 11.0 Draghi bumblebee speech (26/07) 13 Europe Median CDS - rhs - INVERTED 100 10.5 end of LTRO2 MSCI Europe 12m PE MSCI Europe 12m PE 12 200 10.0 11 300 9.5 10 400 MSCI Europe 12m PE 9.0 EU summit (28/06) 9 500 ECB announces LTRO (8/12) 8.5 8 600 8.0 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Source: Datastream, MSCI, IBES, Bloomberg, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research 8
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Monetary intervention has little impact on EPS (which is determined by growth) European earnings revisions move with global PMIsHistory suggests that Fed monetary intervention has little – an upgrade cycle requires our PMI series to reachdurable impact on the growth outlook in this cycle. Our thesis isthat, in a deleveraging economy, fiscal policy is a more 52-53 (equivalent to ISM c. 55) 25 MSCI Europe FY2 Earnings Revisions Ratio (%) 65.0important driver of economic activity than monetary policy. Global Weighted PMI (RHS) 20 62.5 15 60.0Effectively, while monetary intervention can tactically boost the 10 57.5PE ratio there is little evidence that it impacts the path of EPS. 5 55.0 0 52.5Our global PMI series remains at a weak level of 48.3 – -5 50.0historically we have not seen an EPS upgrade cycle until this -10 47.5indicator has been in the range of 52-53 (this is equivalent to -15 45.0an ISM of around 55). -20 42.5 -25 40.0 -30 37.5 -35 35.0 The link between Fed intervention and consensus 05 06 07 08 09 10 11 12 12m EPS is less obvious… Source: MSCI, Datastream, IBES, Morgan Stanley Research Fed announces further purchase of $850bn agency QE2 Flagged … even if we compare the changing growth rates of $600bn purchase in MBS and $300bn agency MBS USTs at Jackson QE2 Hole Starts Operation Twist starts consensus EPS expectations 110 further purchase of Fed announces $850bn agency QE2 Flagged $600bn purchase in MBS and $300bn at Jackson QE2 Operation TwistConsensus 12m EPS for MSCI USA agency MBS USTs Hole Starts starts 30 100 Consensus 12m EPS growth for MSCI USA 90 20 80 QE2 ended 10 QE1 ended 70 QE2 ended 60 QE1 ended 0 50 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 -10 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12Source: MSCI, Datastream, IBES, Morgan Stanley Research Source: MSCI, Datastream, IBES, Morgan Stanley Research 9
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The impact of US monetary intervention on macro growth indicators QE has tended to occur around turning points US labour market has tended to improve post QE in Economic Surprise Indices Fed announces Fed announces further $600bn purchase in purchase of $850bn agency QE2 Flagged at Jackson QE2 Operation Fed announces Fed announces further QE2 Flagged agency MBS MBS and $300bn USTs Hole Starts Twist starts $600bn purchase purchase of $850bn agency at Jackson QE2 Operation Twist in agency MBS MBS and $300bn USTs Hole Starts starts 700 US Weekly Initial Claims, Thousands (SA) - 4WA 80 60 650 G10 Economic Surprise Index 40 600 20 550 0 -20 500 QE1 ended -40 450 -60 QE1 ended 400 -80 QE2 ended QE2 ended -100 350 -120 300 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: Bloomberg, Morgan Stanley Research Source: Markit, Bloomberg, Morgan Stanley Research There is some evidence that QE has lifted Global PMIs US consumer confidence has generally risen post QE Fed announces Fed announces further QE2 Flagged Fed announces Fed announces further QE2 Flagged $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist $600bn purchase purchase of $850bn agency at Jackson QE2 Operation Twist agency MBS MBS and $300bn USTs Hole Starts starts in agency MBS MBS and $300bn USTs Hole Starts starts 60 100 90 55 US Consumer Confidence 80 Global PMI 70 50 QE1 ended QE2 ended 60 45 50 QE2 ended QE1 ended 40 40 30 35 20 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12Source: Institute of Supply Management, Haver Analytics, Morgan Stanley Research Source: Conference Board, Morgan Stanley ResearchNote: Global PMI = 30% China manufacturing PMI, 20% Euro Area manufacturing PMI, 30% Euro Area services PMI, 10% ISM manufacturing & 10% ISM services. 10
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The impact of US monetary intervention on sentiment AAII Net Bulls has tended to bounce post QE When we look across a number of our preferred sentiment indicators it is Fed announces apparent that QE has historically driven a quick improvement in investor Fed announces further purchase of $600bn $850bn agency QE2 Flagged at purchase in MBS and $300bn Jackson QE2 Operation optimism. agency MBS USTs Hole Starts Twist starts 50 AAII - Net Bullish, % (3 Week average) 40 30 20 10 0 -10 -20 -30 -40 -50 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Fed intervention tends to boost hedge fund net Source: AAII, Morgan Stanley Research exposure Put-call ratio generally falls post QE QE2 Flagged Fed announces at Jackson QE2 Operation Twist Fed announces further purchase of QE2 Hole Starts starts $600bn $850bn agency Flagged at 60 purchase in MBS and $300bn Jackson QE2 Operation agency MBS USTs Hole Starts Twist starts 1.3Hedge Fund Net Exposure, % 50 CBOE Put Call Ratio (3Wk Avg) 1.2 40 1.1 30 1.0 0.9 20 0.8 10 0.7 0 0.6 Oct 09 Mar 10 Aug 10 Jan 11 Jun 11 Nov 11 Apr 12 Sep 12 Jan 08 Jun 08 Nov 08 Apr 09 Sep 09 Feb 10 Jul 10 Dec 10 May 11 Oct 11 Mar 12 Aug 12Source: Morgan Stanley International Prime Brokerage, Morgan Stanley Research Source: CBOE, Morgan Stanley Research 11
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The impact of US monetary intervention on sentimentPrior episodes of QE were announced when the VIX was QE vs MTIconsiderably higher than it is today – we’re unlikely to see a further Fed announces Fed announces further $600bn purchase in purchase of $850bn agency QE2 Flagged at Jackson QE2 Operation Twistsharp decline in volatility. 1.0 agency MBS MBS and $300bn USTs Hole Starts starts Sell Above +0.5 Combined Market Timing Indicator 0.5At prior QE announcements our MTI has been either in, or close to,buy territory – that remains the case today with our MTI at -0.28. 0.0 -0.5 Buy Below -0.5 QE2 ended -1.0 QE1 ended -1.5 -2.0 -2.5 -3.0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 QE vs VIX Source: Morgan Stanley Research Fed announces Fed announces further QE2 Flagged Little link between QE and equity mutual fund flows $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation QE2 Flagged at Jackson QE2 US Weekly Flows into Equity Mutual Funds, $Bn - 4WA agency MBS MBS and $300bn USTs Hole Starts Twist starts Operation 70 Hole Starts Twist starts 6.0 60 4.0 2.0 50VIX (3Wk Avg) 0.0 40 -2.0 30 -4.0 QE1 ended -6.0 20 -8.0 QE2 ended 10 QE1 ended -10.0 QE2 ended 0 -12.0 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source: Bloomberg, Morgan Stanley Research Source: ICI, Morgan Stanley Research 12
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012QE vs asset class performance – commoditiesPrevious QE programs have been consistently bullish for commodity QE is bullish for the oil priceprices, although we note that gold’s best performance usually occurs Fed announces Fed announces further $600bn purchase in purchase of $850bn agency QE2 Flagged at Jackson QE2 Operation Twist agency MBS MBS and $300bn USTs Hole Starts startsahead of the announcement. 160 140Brent oil has already risen to $117 – on the last 3 occasions it reached$125 the global economy (and equity prices) started to suffer. E.g. Crude Oil ($/Bbl) 120whenever the oil price has been above $125 over the last five yearsEuropean equities have always fallen in value over the next 3 and 6 100months and by an average of 12% and 23% respectively. QE2 ended 80 60 QE1 ended 40 20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Gold’s best performance tends to occur in the run- QE is bullish for copper up to a QE announcement Fed announces Fed announces further QE2 Flagged $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist Fed announces Fed announces further QE2 Flagged agency MBS MBS and $300bn USTs Hole Starts starts $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist 11000 agency MBS MBS and $300bn USTs Hole Starts starts 2100 10000 1900 9000 1700 Copper ($/MT) Gold ($/Troy Oz.) 8000 1500 7000 QE2 ended 1300 6000 QE2 ended QE1 ended 1100 5000 4000 900 QE1 ended 3000 700 2000 500 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source for all charts: Datastream, Morgan Stanley Research 13
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012QE vs asset class performance – bonds & FX Little historical link between QE and Peripheral QE tends to drive a period of significant outperformance of EUR over bond spreads USD – although this time it is a bit different as the ECB is looking to Fed announces $600bn Fed announces further QE2 Flagged Average of Spanish and Italian Spreads (vs. German Yield), % purchase in agency purchase of $850bn agency at Jackson QE2 Operation purchase bonds too. MBS MBS and $300bn USTs Hole Starts Twist starts 700 2yr 10yr The start of previous QE programs has always seen a sharp rise in core 600 government bond yields. 500 400 The end of previous QE programs has always seen a sharp fall in core QE2 ended government bond yields. 300 QE1 ended 200 There hasn’t historically been a strong link between QE and peripheral bond spreads. 100 0 Core government bonds rose sharply after QE1 and Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 QE2 – and then fell sharply when those programs ended QE generally leads to a period of EUR strength vs USD Fed announces $600bn Fed announces further Fed announces Fed announces further QE2 Flagged purchase in agency purchase of $850bn agency QE2 Flagged at QE2 Operation $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation MBS MBS and $300bn USTs Jackson Hole Starts Twist starts agency MBS MBS and $300bn USTs Hole Starts Twist starts 5.0 1.60 US 4.5 1.5510yr Government Bond Yield, % Germany 4.0 1.50 1.45 3.5 EURUSD 1.40 3.0 1.35 QE2 ended 2.5 QE1 ended QE2 ended 1.30 2.0 QE1 ended 1.25 1.5 1.20 1.0 1.15 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source for all charts: Datastream, Morgan Stanley Research 14
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012 QE vs asset class performance – equities (regions)MSCI Europe generally reacts positively to Fed intervention QE does not give a consistent signal for Europe vs Fed announces Fed announces further $600bn purchase purchase of $850bn agency QE2 Flagged at Jackson QE2 Operation Twist UK relative performance in agency MBS MBS and $300bn USTs Hole Starts starts Fed announces Fed announces further QE2 Flagged $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist 1500 agency MBS MBS and $300bn USTs Hole Starts starts MSCI Europe vs. MSCI USA - Relative Price Index 120 1400 MSCI Europe - Price Index 1300 110 1200 100 1100 1000 QE2 ended 90 QE1 ended QE1 ended 900 80 QE2 ended 800 700 70 600 60 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 QE does not give a consistent signal for Europe vs UK QE does not give a consistent signal for Europe vs relative performance EM relative performance Fed announces Fed announces further QE2 Flagged Fed announces Fed announces further QE2 Flagged $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist $600bn purchase in purchase of $850bn agency at Jackson QE2 Operation Twist agency MBS MBS and $300bn USTs Hole Starts starts agency MBS MBS and $300bn USTs Hole Starts starts MSCI Europe vs. MSCI UK - Relative Price Index 105 MSCI Europe vs. MSCI EM - Relative Price Index 130 100 120 110 95 100 90 90 85 80 QE1 ended QE1 ended 80 70 QE2 ended QE2 ended 60 75 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source for all charts: MSCI, Morgan Stanley Research 15
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012QE vs asset class performance – Equity stylePrior QE programs have not given a consistent signal to rotate into QE often drives a rotation into ‘Value’ (although it didn’tValue stocks – e.g. Value did not outperform Growth post QE2. happen under QE2) Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 105QE does prompt a shift into higher beta stocks – in 4 of the 5 100periods highlighted below, QE has driven a strong increase in the 95number of high beta stocks (i.e. breadth) that outperformed MSCI Europe - Value vs. Growthsubsequently. 90 85 80 75 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced 70 Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts 65 60 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 QE has tended to prompt a sharp rotation into higher … and a corresponding rotation out of low beta beta areas of the market… names Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 3M Average % of High Beta Stocks Outperforming Each Month 90 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 3M Average % of Low Beta Stocks Outperforming Each Month 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 Nov-08 = Fed announces purchase of agency MBS Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Mar-09 = Further purchase of agency MBS and USTs announced 10 Aug-10 = QE2 flagged at Jackson Hole 10 Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Nov-10 = QE2 starts Sep-11 = Operation Twist starts Sep-11 = Operation Twist starts 0 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source for all charts: MSCI, Datastream, Morgan Stanley Research 16
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The impact of US monetary intervention on equity group performance Commodity stocks perform strongly after QE Cyclicals outperformed around QE1 and QE2 but not Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Operation Twist 130 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 120 125 115 Commodities - Relative Price Index 120 110 Cyclicals - Relative Price Index 115 105 110 100 105 95 100 Nov-08 = Fed announces purchase of agency MBS 90 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Mar-09 = Further purchase of agency MBS and USTs announced 95 Aug-10 = QE2 flagged at Jackson Hole 85 Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Nov-10 = QE2 starts Sep-11 = Operation Twist starts Sep-11 = Operation Twist starts 90 80 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 QE is usually bad for Defensives Previously QE hasn’t help Financials much Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 140 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 110 135 100 130 Defensives - Relative Price Index 90 Financials - Relative Price Index 125 80 120 70 115 60 110 50 Nov-08 = Fed announces purchase of agency MBS 105 Nov-08 = Fed announces purchase of agency MBS 40 Mar-09 = Further purchase of agency MBS and USTs announced Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Aug-10 = QE2 flagged at Jackson Hole 100 30 Sep-11 = Operation Twist starts Nov-10 = QE2 starts Sep-11 = Operation Twist starts 95 20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source for all charts: Datastream, Morgan Stanley Research 17
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Prior Fed interventions saw sharpest rotation out of Defensives and into CommoditiesWe have looked at the relative performance of European sectors around the five periods of Fed intervention we highlighted earlierand the biggest change in performance can be seen in Materials that go from big laggards to the best leaders. Interestingly,Financials have not – on average – outperformed post Fed intervention. In the 3m before prior Fed interventions Defensives … in the 3m after prior Fed interventions most outperformed Financials and Materials… outperformance is concentrated in Commodities Financials Utilities Materials Telecomms IT Health CareIndustrials Financials Utilities Cons Disc Cons Disc ITHealth Care Cons Stap Energy Industrials Cons Stap EnergyTelecomms Materials -4 -2 0 2 4 6 8 -15 -10 -5 0 5 10 Median Relative Sector Performance 3M After Fed Bond Purchase / QE Announcements, % Median Relative Sector Performance 3M Before Fed Bond Purchase / QE Announcements, %Source: Datastream, MSCI, Morgan Stanley Research Source: Datastream, MSCI, Morgan Stanley Research 18
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Previous Fed interventions have not been positive for Banks or Real EstateWe also replicated the analysis for Industry Groups. In the 3m before prior Fed interventions the most In the 3m after prior Fed interventions Banks and Real successful pair trade would have been OW Retail Estate have underperformed most, then Defensives versus UW Banks Real Estate Banks Banks Div Fin Utilities Autos Telecomms Insurance Household Transport Tech Hardware Tech Hardware Pharma Materials Comm Serv Real Estate Health Care Cap Goods Div Fin Semis Food Retail Utilities Transport Software Media Cons Serv Retailing Food Retail Food & Bev Pharma Software Media Cons Dur Food & Bev Cap Goods Energy Insurance Cons Dur Cons ServHousehold Prod Semis Telecomms Energy Comm Serv Autos Health Care Materials Retailing -6 -4 -2 0 2 4 6 8 10 -15 -10 -5 0 5 10 15 Median Relative Industry Group Performance 3M After Fed Bond Purchase / QE Announcements,Median Relative Industry Group Performance 3M Before Fed Bond Purchase / QE Announcements, % %Source: Datastream, MSCI, Morgan Stanley Research Source: Datastream, MSCI, Morgan Stanley Research 19
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Sector backtest post prior Fed interventionHere’s the backtest in more detail. MSCI Europe - Relative Total Returns (%) Median Hit Ratio, % -6M -3M -1M +1M +3M +6M -6M -3M -1M +1M +3M +6M MSCI Europe (Abs) -15.0 -13.3 2.6 6.0 5.0 15.3 40 40 60 100 80 100 Industry Groups (Relative) Automobiles & Components -0.6 -6.1 0.7 9.0 6.0 7.1 40 40 60 80 60 80 Banks -21.9 -12.3 -4.8 -1.3 -3.8 2.8 0 20 20 40 20 60 Capital Goods -3.9 -2.4 0.2 3.3 3.2 6.5 40 40 60 80 60 100 Commercial & Professional Services 10.0 8.3 1.0 1.1 -1.7 2.2 100 80 60 60 40 60 Consumer Durables & Apparel 15.0 5.5 3.4 5.2 1.5 6.5 60 80 80 80 60 60 Consumer Services -0.7 0.7 1.1 1.3 4.7 -0.5 40 60 60 80 60 40 Diversified Financials -22.6 -10.8 -2.1 -2.1 -1.5 7.1 20 20 20 40 40 60 Energy 3.1 5.2 0.7 -0.7 5.6 1.7 60 80 80 40 80 60 Food & Staples Retailing 4.3 2.2 1.0 1.6 -1.5 -10.7 80 80 60 60 40 20 Food Beverage & Tobacco 10.9 4.1 0.5 -0.6 0.1 -3.4 100 100 60 40 60 20 Health Care Equipment & Services 4.0 9.5 -3.8 -3.4 -1.6 -4.9 60 60 40 20 40 20 Household & Personal Products 11.3 5.6 0.5 0.2 -2.5 -7.5 80 80 60 60 20 20 Insurance -6.0 -5.8 -2.3 7.3 4.5 6.2 0 0 40 60 60 80 Materials -5.2 -4.7 -1.7 5.9 7.4 13.0 20 40 40 80 80 80 Media 8.6 3.6 2.1 -1.1 -0.9 -2.3 100 100 80 20 20 0 Pharmaceuticals Biotechnology & Life Sciences 18.5 3.5 -1.0 -2.0 -2.1 -7.7 60 80 40 20 40 0 Real Estate 2.7 -4.3 -0.3 2.6 -5.3 2.9 60 40 40 60 0 60 Retailing 13.3 13.1 5.5 3.1 -0.1 1.0 100 100 80 80 40 60 Semiconductors & Semiconductor Equipment 0.2 -0.9 -0.4 4.4 5.1 11.6 60 40 40 60 60 80 Software & Services 4.7 0.6 1.3 -2.3 0.7 5.4 80 60 80 40 60 80 Technology Hardware & Equipment -7.1 -5.2 -2.3 0.9 -2.4 -5.5 20 20 40 60 20 20 Telecommunication Services 13.4 7.7 3.6 -3.2 -3.4 -11.2 100 100 80 40 20 0 Transportation -8.9 -5.5 -2.2 0.2 -1.2 -2.6 40 20 20 60 40 40 Utilities 0.8 -0.1 1.7 -3.5 -3.5 -7.4 60 40 80 0 0 0 Sectors (Relative) Consumer Discretionary 8.4 2.6 1.6 4.3 -0.3 1.6 100 100 100 80 40 80 Consumer Staples 13.3 5.8 -0.1 -0.1 0.2 -3.4 100 100 40 40 60 0 Energy 3.1 5.2 0.7 -0.7 5.6 1.7 60 80 80 40 80 60 Financials -19.8 -12.7 -3.5 -1.6 -1.6 4.5 0 20 20 40 40 60 Health Care 17.1 4.0 -1.4 -1.5 -2.0 -7.2 60 80 40 20 40 0 Industrials -4.2 -2.2 0.2 3.0 1.9 4.5 40 20 60 80 60 100 Information Technology -1.4 -2.3 -2.7 1.2 -0.3 0.6 40 40 40 60 40 60 Materials -5.2 -4.7 -1.7 5.9 7.4 13.0 20 40 40 80 80 80 Telecommunication Services 13.4 7.7 3.6 -3.2 -3.4 -11.2 100 100 80 40 20 0 Utilities 0.8 -0.1 1.7 -3.5 -3.5 -7.4 60 40 80 0 0 0 Source: MSCI, Factset, Morgan Stanley Research 20
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Sector performance around the LTROHere we also show the relative sector performance trends post theannouncement of the LTRO – in this situation Financials were the bestperformers while defensives lagged badly. Relative sector performance around the LTRO announcement Post the LTRO we saw a rotation out of Defensives -6M Relative Total Returns vs. Market -3M -1M +1M +3M +6M and into Financials, IT and Consumer Discretionary MSCI Europe (Abs) -12.3 4.0 4.2 7.3 13.2 5.7 Automobiles & Components -15.4 -5.0 1.1 11.1 12.7 5.1 Banks -21.2 -3.8 1.8 4.8 7.2 -0.9 Capital Goods -8.7 -1.9 1.9 4.3 3.2 0.3 Commercial & Professional Services 6.4 -1.7 1.3 0.1 4.0 9.5 Consumer Durables & Apparel 0.3 -9.7 -3.0 6.2 10.3 10.7Telecomms Consumer Services 2.4 -2.8 0.0 0.0 2.3 12.6 Diversified Financials -19.0 -1.5 1.7 6.5 8.7 -4.8Health Care Energy 14.4 6.0 -0.1 -2.8 -4.1 -7.9 Food & Staples Retailing 3.9 1.6 -5.6 -10.9 -12.9 -15.0 Food Beverage & Tobacco 19.1 3.7 0.0 -5.3 -2.8 4.8 Utilities Health Care Equipment & Services 13.3 -2.3 -1.3 -1.9 -2.6 9.2 Household & Personal Products 6.1 -1.5 -0.1 -1.1 2.1 9.7 Energy Insurance -6.1 4.5 1.4 3.9 8.6 6.6 Materials -9.2 -2.8 1.0 5.8 2.3 -2.3 Cons Stap Media 2.6 -0.9 -0.2 -1.0 -0.9 0.0 Pharmaceuticals Biotechnology & Life Sciences 18.5 6.0 3.8 -3.9 -6.0 3.0 Materials Real Estate -13.1 -9.3 -2.1 3.4 6.2 10.5 Retailing 11.3 -3.0 -2.4 -0.7 4.2 12.7 Semiconductors & Semiconductor Equipment 10.2 -2.9 -0.6 2.3 5.7 9.0Industrials Software & Services 7.6 0.7 -8.7 2.4 14.1 12.1 Technology Hardware & Equipment -17.3 -15.2 -10.5 3.5 -4.8 -16.6 IT Telecommunication Services 7.4 -0.2 -3.5 -5.2 -11.0 -6.4 Transportation -7.1 -1.2 0.4 1.8 6.1 6.3 Cons Disc Utilities -5.3 -6.4 -4.4 -4.7 -4.1 -2.8 Consumer Discretionary -2.3 -4.8 -0.9 4.3 6.8 7.3 Financials Consumer Staples 15.6 2.9 -0.8 -5.7 -3.8 2.5 Energy 14.4 6.0 -0.1 -2.8 -4.1 -7.9 Financials -16.9 -1.6 1.5 4.8 7.8 0.8 -15 -10 -5 0 5 10 Health Care 18.0 5.1 3.2 -3.7 -5.7 3.7 Relative Sector Performance in Europe 3M After ECB Announced LTRO (%) Industrials -6.9 -1.8 1.7 3.6 3.6 2.1 Information Technology -1.3 -5.9 -7.5 2.7 5.8 1.8 Materials -9.2 -2.8 1.0 5.8 2.3 -2.3 Telecommunication Services 7.4 -0.2 -3.5 -5.2 -11.0 -6.4 Utilities -5.3 -6.4 -4.4 -4.7 -4.1 -2.8Source: Datastream, MSCI, Morgan Stanley Research Source: Datastream, MSCI, Morgan Stanley Research 21
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Recent Sector performance Market Cap Price Return Relative to Europe - Local Currency USD % Europe % $bn Total 1W 1M 3M 6M 12M YTDIts not too late to buy commodity sectors Europe 6,818 100.0 0.0 0.0 0.0 0.0 0.0 0.0Materials remains the worst performer over the Automobiles & Components 168 2.5 1.7 -1.2 3.7 -7.4 8.0 12.6last 6m while Energy has underperformed over Banks 680 10.0 3.1 8.1 6.7 -2.0 -0.9 5.3every time frame shown bar 1 week. Capital Goods 567 8.3 0.8 0.4 2.2 -2.8 0.2 0.0 Commercial & Professional Service 94 1.4 -1.6 -1.0 -4.1 3.4 7.9 7.7 Consumer Durables & Apparel 137 2.0 -5.3 -6.2 -4.7 -5.2 0.4 8.0 Consumer Services 59 0.9 -0.5 -0.3 1.0 8.3 8.4 10.4 Diversified Financials 227 3.3 5.1 11.0 3.4 -7.5 -3.8 -1.0 Energy 790 11.6 0.5 -1.6 -1.5 -4.9 -2.9 -8.7 Food & Staples Retailing 114 1.7 -2.0 0.6 1.3 -0.2 -13.8 -15.4Defensives remain outperformers on 6m view Food Beverage & Tobacco 768 11.3 -3.9 -5.1 -5.8 4.0 5.4 1.6 Health Care Equipment & Services 84 1.2 -1.2 0.1 -4.6 9.2 5.5 6.0The best performers over the last 6m are Household & Personal Products 109 1.6 -2.2 -1.8 -2.9 8.4 10.9 12.7Healthcare, Consumer Staples, Utilities and Insurance 352 5.2 1.8 4.5 10.8 5.9 18.8 13.4 Materials 648 9.5 1.7 -0.5 -1.8 -6.2 -7.6 -2.2Telecoms. Media 119 1.7 -0.8 -0.4 2.5 2.4 2.7 1.9 Pharmaceuticals Biotechnology & 735 10.8 -1.9 -2.9 -1.0 9.3 7.3 1.2 Real Estate 67 1.0 -0.7 -2.1 0.8 2.9 -3.4 7.3 Retailing 100 1.5 -3.9 -3.6 -0.9 6.0 10.7 8.0 Semiconductors & Semiconductor 48 0.7 -0.8 -5.9 -4.6 1.2 3.6 3.7 Software & Services 96 1.4 0.5 3.2 5.5 5.1 21.9 20.3 Technology Hardware & Equipmen 54 0.8 4.0 -1.5 -8.6 -18.3 -34.1 -22.8 Telecommunication Services 419 6.1 0.0 -1.4 -3.0 1.2 -12.7 -10.6 Transportation 75 1.1 0.4 0.7 1.0 -1.0 5.8 7.0 Utilities 307 4.5 1.4 5.0 1.2 1.5 -7.4 -4.3 Consumer Discretionary 583 8.6 -1.7 -2.6 0.3 -1.4 5.5 8.2 Consumer Staples 991 14.5 -3.5 -4.2 -4.7 3.9 3.2 0.2 Energy 790 11.6 0.5 -1.6 -1.5 -4.9 -2.9 -8.7 Financials 1,327 19.5 2.9 7.0 6.9 -0.7 3.2 6.3 Health Care 819 12.0 -1.8 -2.6 -1.4 9.3 7.1 1.7 Industrials 736 10.8 0.4 0.3 1.2 -1.8 1.7 1.7 Information Technology 198 2.9 1.1 -0.4 -1.1 -3.0 -3.1 1.7 Materials 648 9.5 1.7 -0.5 -1.8 -6.2 -7.6 -2.2 Telecommunication Services 419 6.1 0.0 -1.4 -3.0 1.2 -12.7 -10.6 Utilities 307 4.5 1.4 5.0 1.2 1.5 -7.4 -4.3Source: MSCI, Factset, Morgan Stanley Research 22
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The impact of US monetary intervention on sector performance QE is bullish for Materials QE has mixed influence on Consumer Discretionary Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 130 150 Consumer Discretionary - Relative Price Index 120 140 Materials - Relative Price Index 110 130 100 120 90 110 80 100 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Nov-08 = Fed announces purchase of agency MBS Aug-10 = QE2 flagged at Jackson Hole Mar-09 = Further purchase of agency MBS and USTs announced 70 Nov-10 = QE2 starts 90 Aug-10 = QE2 flagged at Jackson Hole Sep-11 = Operation Twist starts Nov-10 = QE2 starts Sep-11 = Operation Twist starts 60 80 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 With the exception of QE1, Fed intervention is bullish Industrials outperformed post QE but not Operation for Energy Twist Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 150 115 140 110 Industrials - Relative Price Index 105 Energy - Relative Price Index 130 100 120 95 110 90 100 Nov-08 = Fed announces purchase of agency MBS Nov-08 = Fed announces purchase of agency MBS 85 Mar-09 = Further purchase of agency MBS and USTs announced Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Aug-10 = QE2 flagged at Jackson Hole 90 Nov-10 = QE2 starts Nov-10 = QE2 starts 80 Sep-11 = Operation Twist starts Sep-11 = Operation Twist starts 80 75 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12Source for all charts: Datastream, MSCI, Morgan Stanley Research 23
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012The impact of US monetary intervention on sector performance QE has not been a bullish signal for Financials Health Care usually underperforms post QE Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 110 170 100 160 90Financials - Relative Price Index Health Care - Relative Price Index 150 80 140 70 130 60 120 50 Nov-08 = Fed announces purchase of agency MBS 40 Mar-09 = Further purchase of agency MBS and USTs announced 110 Nov-08 = Fed announces purchase of agency MBS Aug-10 = QE2 flagged at Jackson Hole Mar-09 = Further purchase of agency MBS and USTs announced Nov-10 = QE2 starts Aug-10 = QE2 flagged at Jackson Hole 30 Sep-11 = Operation Twist starts 100 Nov-10 = QE2 starts Sep-11 = Operation Twist starts 20 90 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 QE is bearish for Telecoms QE is bearish for Utilities Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 140 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 120 Telecommunication Services - Relative Price Index 130 110 120 100 Utilities - Relative Price Index 90 110 80 100 70 90 60 Nov-08 = Fed announces purchase of agency MBS Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole 80 Aug-10 = QE2 flagged at Jackson Hole 50 Nov-10 = QE2 starts Nov-10 = QE2 starts Sep-11 = Operation Twist starts Sep-11 = Operation Twist starts 70 40 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source for all charts: Datastream, MSCI, Morgan Stanley Research 24
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Appendix – QE and sector 12m PE and EPS trends QE vs 12m PE and EPS for Materials QE vs 12m PE and EPS for Energy Materials Energy Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 18 40 11.0 24 16 35 10.5 22 14 10.0 30 9.5 20 12 25 9.0 10 18 20 8.5 8 N12M PE N12M PE 16 15 8.0 N12M EPS 6 (RHS) N12M EPS (RHS) 7.5 14 10 4 7.0 2 5 12 6.5 0 0 6.0 10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts QE vs 12m PE and EPS for Industrials QE vs 12m PE and EPS for Consumer Discretionary Industrials Consumer Discretionary Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 18 16 20 10 15 18 9 16 14 8 13 16 14 12 7 14 12 11 6 N12M PE N12M PE 10 12 N12M EPS 5 10 N12M EPS (RHS) 9 10 (RHS) 4 8 8 8 3 7 6 6 6 2 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist startsSource for all charts: Datastream, MSCI, IBES, Morgan Stanley Research 25
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Appendix – QE and sector 12m PE and EPS trends QE vs 12m PE and EPS for Financials QE vs 12m PE and EPS for Health Care Financials Health Care Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 16 12 14 10.0 N12M EPS 11 (RHS) 9.5 14 13 10 12 9.0 9 N12M PE 12 10 8.5 8 8 7 11 8.0 N12M PE 6 6 7.5 N12M EPS (RHS) 10 5 4 7.0 4 9 2 6.5 3 0 2 8 6.0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts QE vs 12m PE and EPS for IT QE vs 12m PE and EPS for Consumer Staples Information Technology Consumer Staples Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 Nov-08 Mar-09 Aug-10 Nov-10 Sep-11 20 6.0 16 12.0 18 5.5 11.5 15 5.0 11.0 16 14 4.5 10.5 14 N12M PE 4.0 13 10.0 12 3.5 9.5 N12M PE N12M EPS 12 (RHS) 10 N12M EPS 3.0 9.0 (RHS) 11 8 2.5 8.5 6 2.0 10 8.0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announced Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts Aug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist startsSource for all charts: Datastream, MSCI, IBES, Morgan Stanley Research 26
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Disclosures Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as financial advisor to BAE Systems plc ("BAE Systems") in relation to discussions with European Aeronautic Defence and Space Company EADS N.V.regarding a possible combination of their businesses through the creation of a dual listed company structure, as announced on 12 September 2012. BAE Systems has agreed to pay fees to Morgan Stanley for itsfinancial services. Please refer to the notes at the end of the report.Morgan Stanley & Co. Limited is acting as financial advisor to Groupama SA ("Groupama") in relation to the agreed disposal of Gan Eurocourtage to Allianz SE ("Allianz") as announced on 8 June 2012. Groupamahas agreed to pay fees to Morgan Stanley & Co. Limited for its financial services. Please refer to the notes at the end of the report.Morgan Stanley is acting as financial advisor to Ariba, Inc. ("Ariba") in connection with its definitive agreement to be acquired by SAP America, Inc., a subsidiary of SAP AG, as announced on May 22, 2012. Theproposed transaction is subject to customary closing conditions, including a shareholder vote for Ariba, and regulatory approvals.Ariba has agreed to pay fees to Morgan Stanley for its financial services that are contingent upon the consummation of the proposed transaction. This report and the information provided herein is not intended to (i)provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. Please refer to the notesat the end of the report.Morgan Stanley & Co. Limited is acting as financial adviser to Ryanair Holdings plc in relation to the proposed cash offer for Aer Lingus Group plc. Morgan Stanley & Co International plc acts as corporate broker toRyanair Holdings plc. Please refer to the notes at the end of the report.Prices as of 14 September 2012: BT GROUP (£ 2.31) VODAFONE GROUP (£ 1.74) TULLOW OIL (£ 14.50) SAIPEM ORD (€ 39.92) NOVARTIS (SFr 55.70) ROCHE HOLDING GENUSS (SFr 175.80) SANOFI(€ 67.16) IMPERIAL TOBACCO GROUP (£ 23.06) BRITISH AMERICAN TOBACCO (£ 31.70) ING GROEP (€ 6.89) SAP STAMM (€ 54.77) DASSAULT SYSTEMES (€ 79.07) MUENCHENER RUECKVERSICH. (€124.45) PRUDENTIAL (£ 8.54) RIO TINTO PLC (£ 32.44) EADS (€ 25.81) RYANAIR HOLDINGS (€ 4.33) AP MOLLER MAERSK B (DKK 41440.00) HSBC HOLDINGS (GB) (£ 5.84) SWEDBANK (SEK 122.50)BARCLAYS (£ 2.29) REED ELSEVIER (GB) (£ 6.03) INTERCONTINENTAL HOTELS (£ 16.46) VOLKSWAGEN STAMM (€ 151.50) ANHEUSER-BUSCH INBEV (€ 64.97) AFRICAN BARRICK GOLD (£ 4.67)UNIBAIL-RODAMCO (€ 163.65) ROYAL DUTCH SHELL B (£ 23.20) SCHNEIDER ELECTRIC (€ 52.39) LANXESS (€ 67.31) UBS NAMEN (SFr 12.57) BNP PARIBAS (€ 40.19) AEGON (€ 4.50) ALLIANZ (€ 96.47)NESTLE (SFr 58.65) DEUTSCHE TELEKOM (€ 9.69) TERNA (€ 2.92) IBERDROLA (€ 3.81) ATLANTIA (€ 12.38) RWE STAMM (€ 35.68) UCB (GROUPE) (€ 43.73) BG GROUP (£ 12.95) AKZO NOBEL (€ 48.64)HOME RETAIL GROUP (£ 0.95) SES A-FDR (€ 20.71) 27
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012DisclosuresMorgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of theFinancial Services and Markets Act 2000, research which has been prepared by any of its affiliates. As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, MorganStanley & Co International plc and its affiliates.For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website atwww.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.For valuation methodology and risks associated with any price targets referenced in this research report, please email morganstanley.research@morganstanley.com with a request for valuation methodology and riskson a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirectcompensation in exchange for expressing specific recommendations or views in this report: Graham Secker.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.Important US Regulatory Disclosures on Subject CompaniesThe following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Ronan Carr - VodafoneGroup(common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their industry as defined by the Global Industry ClassificationStandard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distributionor other involuntary acquisition.As of August 31, 2012, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Akzo Nobel, Allianz, British AmericanTobacco Plc, Deutsche Telekom, EADS, Imperial Tobacco, InterContinental Hotels Group, Munich Re, Nestle, Novartis, Prudential plc, Reed Elsevier NV, Roche, Royal Dutch Shell, Ryanair, Sanofi SA, SAP AG,SES, Unibail-Rodamco.Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of AEGON, Akzo Nobel, BNP Paribas, Deutsche Telekom, HSBC, Iberdrola SA, Royal Dutch Shell,RWE AG, UBS, Unibail-Rodamco, Vodafone Group, Volkswagen.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, Atlantia S.p.A., BarclaysBank, BNP Paribas, BT Group plc, Deutsche Telekom, EADS, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Nestle, Novartis, Prudential plc, Roche, Royal Dutch Shell, RWE AG, Ryanair, Sanofi SA, SAPAG, SES, UBS, Unibail-Rodamco, Vodafone Group, Volkswagen.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, APMoller-Maersk, Atlantia S.p.A., Barclays Bank, BG Group, BNP Paribas, British American Tobacco Plc, BT Group plc, Dassault Systemes SA, Deutsche Telekom, EADS, Home Retail Group, HSBC, Iberdrola SA,Imperial Tobacco, ING, InterContinental Hotels Group, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Ryanair, Saipem, Sanofi SA, SAP AG, SchneiderElectric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-BuschInBev, Barclays Bank, BG Group, BNP Paribas, BT Group plc, Deutsche Telekom, EADS, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche,Royal Dutch Shell, RWE AG, Ryanair, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: AEGON, African Barrick Gold Plc,Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk, Atlantia S.p.A., Barclays Bank, BG Group, BNP Paribas, British American Tobacco Plc, BT Group plc, Dassault Systemes SA, Deutsche Telekom,EADS, Home Retail Group, HSBC, Iberdrola SA, Imperial Tobacco, ING, InterContinental Hotels Group, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG,Ryanair, Saipem, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a clientrelationship with the following company: AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk, Barclays Bank, BG Group, BNP Paribas, British American Tobacco Plc, BTGroup plc, Deutsche Telekom, EADS, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Ryanair, Sanofi SA,SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen. 28
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012DisclosuresAn employee, director or consultant of Morgan Stanley is a director of Prudential plc. This person is not a research analyst or a member of a research analysts household.Morgan Stanley & Co. LLC makes a market in the securities of AEGON, Anheuser-Busch InBev, Barclays Bank, British American Tobacco Plc, BT Group plc, HSBC, ING, InterContinental Hotels Group, Novartis,Prudential plc, Reed Elsevier NV, Roche, Royal Dutch Shell, Ryanair, Sanofi SA, SAP AG, UBS, Vodafone Group.Morgan Stanley & Co. International plc is a corporate broker to BG Group, Imperial Tobacco, Ryanair, Tullow Oil.The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investorclient feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and otherproprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments ofcompanies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to thestocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. Inaddition, since Morgan Stanley Research contains more complete information concerning the analysts views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents fromthe rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investors decision to buy or sell a stock should depend on individual circumstances (such as theinvestors existing holdings) and other considerations.Global Stock Ratings Distribution (as of August 31, 2012)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated andUnderweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but representrecommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weightand Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC)Stock Rating % of % of % ofCategory Count Total Count Total IBC Rating CategoryOverweight/Buy 1108 37% 445 41% 40%Equal-weight/Hold 1283 43% 499 46% 39%Not-Rated/Hold 109 4% 34 3% 31%Underweight/Sell 469 16% 115 11% 25%Total 2,969 1093Data 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 existing holdings) and otherconsiderations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O). The stocks total return is expected to exceed the average total return of the analysts industry (or industry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stocks total return is expected to be in line with the average total return of the analysts industry (or industry 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 average total return of the analysts industry (or industry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stocks total return is expected to be below the average total return of the analysts industry (or industry teams) 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. 29
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012DisclosuresAnalyst 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, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI countryindex..Important Disclosures for Morgan Stanley Smith Barney LLC CustomersCiti Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center toview any available CIRA research reports 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 and Citigroup 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 and https://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 who reviews the Equity Researchreport on behalf of Morgan Stanley. This could create a conflict of interest.Other Important DisclosuresMorgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk,Atlantia S.p.A., Barclays Bank, BNP Paribas, British American Tobacco Plc, Deutsche Telekom, EADS, Home Retail Group, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Munich Re, Nestle, Novartis,Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, UBS, Unibail-Rodamco, Vodafone Group, Volkswagen.Morgan 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 of the Dodd-Frank Wall StreetReform and Consumer Protection Act.Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research onthe same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go toClient Link at www.morganstanley.com.Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. MorganStanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategywill depend on an investors circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not beeligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell any security/instrument or to participate in any trading strategy. The value of and income from yourinvestments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies orother factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of futureperformance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject companyssecurities/instruments.The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality,accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Researchanalysts, strategists or economists compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosureson Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companiesmentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways differentfrom those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives ofsecurities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons.With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make norepresentation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage 30
    • MORGAN STANLEY RESEARCH The implications of QE for equity investors September 17, 2012Disclosuresof a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, includinginvestment banking personnel.Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved byauthorized members of Research management.Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report.To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. 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