Gma 20121212

For important disclosures, refer to the Disclosures Section, located at the end of this report.

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

Global Economics Team

Coordinators of this publication

Joachim Fels

[email protected]

+44 (0)20 7425 6138

Manoj Pradhan [email protected]

+44 (0)20 7425 3805

Spyros Andreopoulos [email protected]

+44 (0)20 7677 0528

Global

December 12, 2012

The Global Macro Analyst

Macro Surprises for 2013

We pick up a tradition introduced nearly three decades ago at Morgan Stanley by our legendary former US strategist Byron Wien. Each year, Byron (now at Blackstone) publishes his ten surprises for the upcoming year. He defines a surprise as an event that the average investor believes to have only at most a one in three chance of happening, while Byron believes it has at least a 50% likelihood of coming true. For our purposes, we are bending Byron’s rules somewhat. First, reflecting the many countries and regions we cover, we have more than ten surprises. Second, these surprises do NOT represent our base case. Rather, the events we describe would come as a surprise to us as well. However, we do believe that they depict plausible possible outcomes that would represent a meaningful surprise to the prevailing consensus. We outline the surprises below p 2

Just When You Thought it Was Dead, Inflation Returns

Debt Cancellation

US Over the Cliff and Likes it

US Housing Stalls Out

BoJ Adopts Rule-Based Monetary Policy

BoJ First to Buy Euro Area Bonds

Italian Politics Revives CRIC Cycle and Triggers OMT

From ‘Grexit’ to ‘Brixit’

The UK Formally Gives Up the Fight Against Inflation

Recession Returns to Australia

Not the Right Green Shoots in EM

China’s Shocking Tightening

The AXJ Productivity Booster

Mexico’s Moment Arrives

Brazilian Policy Shifts to Boosting Supply

Turkey Goes Boringly Orthodox in Rates

Back in the USSR

Global Economics Forecasts

Real GDP (%) CPI inflation (%)

2012E 2013E 2014E 2012E 2013E 2014E

Global Economy 3.1 3.1 4.0 3.4 3.1 3.3

G10 1.2 0.7 1.9 2.0 1.4 1.7

Emerging Markets 5.0 5.4 5.9 4.7 4.8 4.8 Source: Morgan Stanley Research forecasts

Spotlight Italy and the Political Cliff: A Winding Path to Where? The most pressing question for the next government is how to strengthen Italy’s economic fabric, and achieve a ‘new normal’ with sustained growth. More than anything else, this will determine the views of market participants on the reform path of Italy’s next leaders. p 5

The Morgan Stanley Global Economics View p 6 Global Macro Watch Euro Area: ECB Watch – Not Christmas Yet ............. p 8

UK: Autumn Statement: Not Pleasant Reading .......... p 8

UK: Slow Progress through the Twilight...................... p 9

CEEMEA: 2013 Preview – Macro Views and Risks... p 9

Latin America: Optimism Beyond the 2013 Cycle ... p 10

mailto:[email protected]




December 12, 2012 The Global Macro Analyst

Macro Surprises for 2013 Joachim Fels (44 20) 7425 6138

Over the past several weeks, we have been pushing our 2013 Outlook: Stuck in the Twilight Zone (November 19, 2012), highlighting our twilight, day and night scenarios for the global economy next year. In our base case, we expect global growth to remain stuck in the twilight zone that divides sustainable expansion from renewed recession. During 1H13, as long as policy uncertainty prevails, markets may be worrying more about a darker ‘night’ scenario, but during 2H, if the right policy actions are taken, twilight may give way to a better ‘day’ scenario and a better 2014.

However, in our last Global Macro Analyst for this year, we pick up a tradition introduced nearly three decades ago at Morgan Stanley by our legendary former US strategist Byron Wien. Each year, Byron (now at Blackstone) publishes his ten surprises for the upcoming year. He defines a surprise as an event that the average investor believes to have only at most a one in three chance of happening, while Byron believes it has at least a 50% likelihood of coming true. For our purposes, we are bending Byron’s rules somewhat. First, reflecting the many countries and regions we cover, we have more than ten surprises. Second, these surprises do NOT represent our base case. Rather, the events we describe would come as a surprise to us as well. However, we do believe that they depict plausible possible outcomes that would represent a meaningful surprise to the prevailing consensus.

Just When You Thought it Was Dead, Inflation Returns (Joachim Fels/Charles Goodhart)

A strong economic rebound in China and the US, adverse supply shocks in agriculture and worries about swelling central bank balance sheets lead to a sharp rise in actual and expected global inflation. Central banks don’t dare to respond, given high debt levels and financial fragilities, and either continue to ignore or abandon their inflation targets. Rising wheat prices lead to bread riots. In the UK, Chancellor Osborne advises the British to eat oatcakes instead.

Debt Cancellation (Spyros Andreopoulos)

The US Treasury, Japan’s Ministry of Finance and Her Majesty’s Treasury jointly announce that the Treasury debt held by the Federal Reserve, Bank of Japan and Bank of England respectively as a consequence of QE purchases are cancelled, and that these central banks will operate with negative equity until further notice. As a consequence,

government debt/GDP ratios are brought down by 11pp, 18pp and 25pp, respectively. Ratings agencies love it, as does the bond market – until it realises that large-scale debt monetisation has just taken place, and sells off sharply.

US Over the Cliff and Likes it (Vincent Reinhart)

The US goes over the fiscal cliff and likes it. A deal delayed to early 2013 in which politicians compromise because of concerns about financial markets would resolve uncertainty more assuredly than the baseline of stop-gap legislation followed by a plan later in the year. As a consequence, confidence gets a boost, pent-up business investment kicks in and the labour market improves more rapidly.

US Housing Stalls Out (David Greenlaw)

The burgeoning housing recovery in the US begins to stall due to credit tightening. There is still no private mortgage market at this point and financial problems are brewing at the FHA which could lead to a dramatic reduction in credit availability for first-time homebuyers. Meanwhile, putback risk continues to cause originators to increase scrutiny for conforming loans.

BoJ Leads World in Adopting Rule-Based Monetary Policy, but Exit from Deflation Lags (Robert Feldman/Takeshi Yamaguchi)

Following a change in its leadership, the Bank of Japan switches to target the ex-food ex-energy CPI, adopts price level targeting to make up for past deflation, and implements a base money growth rule based on deviations of the actual CPI from the desired path. However, the targeted CPI measure remains negative year on year in December 2013, and the BoJ maintains aggressive policy into 2014 and beyond.

BoJ First to Buy Euro Area Bonds, ECB Left Watching and Waiting (Elga Bartsch)

The Bank of Japan, as part of its more aggressive policy stance to fight deflation (see above), starts to acquire euro area government bonds in order to push down the yen before the ECB is able to activate its OMT programme. While the BoJ acts, the ECB waits in vain for the Spanish government to apply for an ESM credit line and OMT bond purchases. The BoJ focuses its purchases on ESM/EFSF bonds as well as higher-yielding core and large peripheral markets and thus effectively becomes a lender of last resort for the euro area.

2

https://secure.ms.com/fidweb/firLink/webapp/openFile.jsp?action=stream&filename=mtb92524.pdf




Italian Politics Revives the CRIC Cycle and Triggers OMT (Elga Bartsch/Daniele Antonucci)

A lively anti-austerity campaign in the run-up to the early elections causes investors to seriously worry as to whether Italy could be contemplating an exit from the euro. The convertibility risk, which the ECB’s OMT announcement had reduced, returns and Italy is forced to seek an ESM credit line and becomes the first country to trigger the OMT. Unfortunately, the damage has been done as markets now believe that the convertibility risk is political rather than monetary. Investors sell the euro and peripheral assets and stock up on tinned food and mood-boosting pills.

From ‘Grexit’ to ‘Brixit’ (Elga Bartsch)

Financial markets come round to the idea that Greece will stay in the euro for the foreseeable future. Instead, investors are getting increasingly concerned about the UK’s political stance on Europe, especially in view of a possible referendum on EU membership. Polls during 1H13 start to suggest that an exit of the UK from the EU is now seen as more likely than an exit of Greece from the euro. The London property market wobbles as financial institutions start making contingency plans for moving employees to Frankfurt and Paris.

The UK Formally Gives Up the Fight Against Inflation (Melanie Baker)

As inflation looks set to remain well above 2% for yet another year, the government begins to fear that targeting inflation at the 2% level will mean an abrupt end to very low interest rates in the not-too-distant future...or a sharp loss of Bank of England credibility. MPs increasingly argue that embedding a bit more inflation might be a good thing for helping the UK economy out of its difficulties. The government raises the MPC’s inflation target and, for good measure, it merges the Monetary Policy Committee and Financial Policy Committee together.

Recession Returns to Australia (Gerard Minack)

Australia hasn't had a recession for 21 years - arguably, one is overdue. Markets view the risk as low: fixed income markets are pricing in only 1-2 more rate cuts, and equities have re-rated through 2012.

Not the Right Green Shoots in EM (Manoj Pradhan)

EM green shoots develop further, but from the ‘wrong’ sources of growth. Better DM growth and/or an unwinding of the shock to global exports stabilises EM exports and hence production.

Complacency sets in and structural reforms to move away from the broken, export-investment-led model are put on the back-burner. The result? EM growth deteriorates shortly after.

China’s Shocking Tightening (Helen Qiao)

The Chinese government inadvertently tightens financial conditions aggressively by applying a ‘shock therapy’ during the early stage of the recovery. Off-balance sheet lending activities are banned and forced to roll back onto commercial banks’ balance sheets, causing a major liquidity freeze in the system. More credit defaults occur, giving rise to higher systemic risks. The economic recovery unravels.

The AXJ Productivity Booster (Chetan Ahya)

Policy-makers in Asia ex-Japan move aggressively to implement policy reforms, boosting the region’s productivity dynamic. China accelerates the move up the value chain and boosts consumption growth; India unveils more measures to lift investment in the economy; and Indonesia initiates reforms which improve the competitiveness of the non-commodity sectors. This raises productivity growth in the region, which has slowed significantly since the crisis, and results in higher corporate profitability.

Mexico’s Moment Arrives in its Long-Troubled Oil and Gas Industry (Gray Newman/Luis Arcentales)

Newly inaugurated President Enrique Peña Nieto surprises with a passage of aggressive constitutional change in Mexico’s oil and gas industry – he gains the political upper hand in energy and fiscal reform by starting his six-year term with a big boost in social programmes and promises that energy/fiscal reform will provide even more revenues for social spending. MXN rallies on the prospects of a new FDI wave and the sovereign sees an upgrade.

Brazilian Policy Shifts from Stimulating Demand to Boosting Supply, with Ambitious Infrastructure Programme (Gray Newman/Arthur Carvalho)

President Dilma Rousseff surprises most Brazil watchers as she follows through on her promise of an ambitious infrastructure programme, lifting the globe’s sixth-largest economy from near the bottom of the globe’s infrastructure rankings. The technical details show attractive IRR triggering large investment inflows from abroad. BRL rallies more than expected on the news.

3


4


Turkey Goes Boringly Orthodox in Rates (Tevfik Aksoy)

The Central Bank of Turkey switches back to a conventional, orthodox and less exciting monetary policy in 2013. It removes the non-standard and creative tools designed to achieve inflation and financial stability goals at the same time. As a consequence, it faces new challenges of currency appreciation, currency volatility and no meaningful decline in the current account deficit. The experiment fails and policy switches back to non-conventional measures later in the year in an attempt to recoup the loss of credibility.

Back in the USSR (Jacob Nell)

Putin is successful in enticing Ukraine into the Eurasian Customs Union in return for energy subsidies which reduce its balance of payments financing need to a level which requires neither painful policy adjustment nor a sharp FX adjustment. This closes the door on EU entry for Ukraine, since you can’t be a member of two customs unions at once, and leads to economic reintegration of the main post-Soviet states – Russia, Ukraine, Kazakhstan and Belarus. The removal of trade and investment barriers – particularly if accompanied by a pro-investment, pro-market set of Russian-led policies – triggers higher growth across the region, while Russian energy subsidies would stabilise the hyrvnia and ruble.



Spotlight: Italy and the Political Cliff: A Winding Path to Where? Daniele Antonucci (44 20) 7425 8943

Italy’s experiment with its one-year-old technocratic government is coming to an end earlier than expected. The chances are that an elected government will follow, with elections possibly as soon as next February.

With austerity taking a toll on an already weak economic fabric, the risk is that discontent might well continue to rise, thus affecting the next government’s ability or willingness to pursue bold reforms – or result in a tough anti-reform election campaign at the very least.

Historical evidence indicates that, close to a government collapse, the cumulative rise in short-term interest rates is about 24bp. Similarly, equity markets fall by around 5% over the same period. These effects have tended to reverse after a government change.

Italian Political Events Do Move Italian Bond and Equity Markets – Based on History

Asset Prices Before / After Gov't Changes*

24

39

20

8

-5.0 -4.1

0.63.0

10

-2.6

-10

0

10

20

30

40

50

2 weeks beforeend of old

Same day and2 weeks after

end of old

Period betweenend of old and

start of new

2 weeks beforestart of new

Same day and2 weeks afterstart of new

Short-term interest rates (bp)

Equity returns (%)

Asset Prices Before / After External Events*

11

8

-0.4 -0.4

3

0.2

-5

0

5

10

15

1 week before event 1 week after event 2 weeks after event

Short-term interest rates (bp) Equity returns (%)

Source: Adapted from Fratzscher and Stracca (2009), “Does It Pay to Have the Euro?” ECB Working Paper No. 1064, Morgan Stanley Research; *Cumulative responses (1973-2007).

If market pressure were to resume in full force, the OMT backstop might be a possibility. But the hurdle to apply for sovereign support – if needed – is probably higher than elsewhere, and difficult to negotiate in the midst of an election campaign.

There are some tentative signs that the economy is shrinking at a slower pace, as the bulk of the budget correction is behind us. But one risk is that interest rates – which have recently been lower than expected and better behaved – will start rising again, as they’ve been doing over the past couple of days.

Will the fiscal policy path change? Not really. Its direction is set, we think. U-turns are unlikely. Could someone envisage, say, a reduction in the pension age, now that it has been raised and indexed to life expectancy? This seems too far-fetched, as markets would punish such slippage, in our view.

Sizeable Primary Surplus to Offset Interest Expenses Almost Entirely Going Forward

Budget Balance & Gov't Debt (% of GDP)

-8

-4

0

4

8

2002 2004 2006 2008 2010 2012 2014

Interest spendingBudget Balance (% of GDP)

MS Forecasts

Primary budget balance

Overall budget balance

Source: ISTAT, Bank of Italy, Morgan Stanley Research forecasts

The most pressing question for the next Italian government is how to strengthen the country’s economic fabric, and achieve a ‘new normal’ with sustained growth. More than anything else, this is what will determine the views of market participants on the reform path of Italy’s next political leaders.

For full details, see Italy and the Political Cliff – A Winding Path to Where? December 10, 2012.

5





6

The Morgan Stanley Global Economics View

Our Core Global Views Key Macro Risk Events Global economy stuck in the ‘twilight zone’: The global economy remains stuck in

the twilight zone, the fuzzy region that separates sustainable growth from renewed

recession. Deleveraging in the DM world, broken EM growth models and huge

uncertainty around DM policy are to blame for taking us there. We will need both policy

action and traction by policy-makers to get us out of this zone.

Eurozone not out of the woods yet: We think that resolution of the euro area

sovereign and banking crisis requires both a fiscal union and a banking union coupled

with the ECB being willing and able to be the lender of last resort to governments.

While the ECB has taken a decisive step towards fulfilling this role, progress on fiscal

and banking union remains painfully slow and full of setbacks. Eurozone break-up,

although not our central case, remains conceivable.

Fiscal dominance: Don’t expect DM central banks to tighten soon – they are locked

into a regime of fiscal dominance, where increases in the real interest rate worsen

government debt sustainability, inflation targeting becomes unfeasible and monetary

policy is forced to remain super-accommodative.

Financial repression and inflation: Part of the solution to high government debt

levels can be imposing artificially low, or even negative, real returns on captive investor

groups – financial repression. Inflation – allowed by central banks constrained by fiscal

dominance into a passive monetary stance – could be part of this solution, too.

EM growth model broken – needs structural reform: EM economies face external

and internal challenges that render the old, export-led model of growth defunct. Weak

DM consumers, onshoring of DM manufacturing and risks to external funding all work

against EMs externally. Internally, the focus on export-led growth has meant that

important sources of domestic demand have been neglected. Aggressive policy

stimulus will probably make imbalances worse. For potential output growth to rise,

policy stimulus needs to go to the ‘right’ sources of domestic demand. There is some

progress in India and to lesser extent in Brazil, but the key remains China.

December 13-14, 2012

EU Summit

January 1, 2013

US fiscal cliff – current law means 5pp of potential GDP

fiscal tightening

January 1, 2013

Deadline for legislative framework on eurozone Single

Supervisory Mechanism

February 2013

Italian parliamentary elections

Around February 2013

Successor to Bank of Japan Governor Shirakawa

announced

Mid-February 2013

US government expected to reach debt ceiling

April 8, 2013

Shirakawa’s tenure as Bank of Japan governor ends

September 2013

German parliamentary elections

January 1, 2014

ECB to assume regulation of all eurozone banks

Regional Themes Asia ex Japan: India and China need internal rebalancing – China needs to boost

consumption, India investment. This would be part of global rebalancing, too. While

China undergoes its policy transition, India’s administration has unveiled some reforms

that go in the right direction. However, the rebalancing is likely to be a drawn-out

process in both countries.

Latin America: Greater divergence in Latin America, with Brazil reaccelerating, Peru

and Colombia slowing, and Argentina and Venezuela recently suffering from weaker

domestic conditions and weaker commodity prices. Recent policy measures from Brazil,

and especially Mexico, are encouraging, but implementation remains a key risk.

CEEMEA: Growth is slowing everywhere in the region but countries are at different

stages of the cycle. Russia’s performance will depend on delivery of President Putin’s

pro-investment economic strategy, CEE’s on developments in the euro area.

For our global forecasts, see The Global Macro Analyst: 2013 Outlook: Stuck in the Twilight Zone, November 19, 2012. For our cross-asset views, see Cross-Asset Strategy: 2013: Transition Path, December 12, 2012.








https://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=437322&docFileType=1&linksrc=rl-res-site&lastParam=/EMERGINGISSUES270612_RI.pdf


https://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=472778&docFileType=1&linksrc=rl-res-site&lastParam=/gma1911ccfinal_repRI.pdf

https://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=477082&docFileType=1&linksrc=rl-res-site&lastParam=/CAN_121212_RI.pdf



Key Forecast Profile Global Economics Team

Quarterly Annual 2012 2013 2014 2012E 2013E 2014E

Real GDP (%Q, SAAR) 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE

Global** 2.9 2.3 3.0 2.6 2.7 3.2 3.7 4.1 3.9 3.7 3.8 3.8 3.1 3.1 4.0

G10 1.7 0.4 1.1 -0.2 0.4 0.9 1.7 2.1 2.1 1.6 1.9 2.0 1.2 0.7 1.9

US 2.0 1.3 2.8 0.7* 0.8 1.2 2.2 2.8 2.8 2.9 2.9 2.9 2.2 1.4 2.7

Euro Area 0.0 -0.7 -0.5 -1.6 -0.8 0.0 0.6 1.0 1.0 1.0 1.0 1.0 -0.5 -0.5 0.9

Japan 5.2 0.3 -3.5 -0.2 0.6 1.7 1.9 2.3 2.0 -2.4 -0.2 0.9 2.0 0.4 0.8

UK -1.2 -1.5 3.9 -1.2 1.2 0.0 1.6 1.6 1.9 2.0 1.2 1.2 -0.2 0.8 1.6

EM (%Y) 5.3 4.9 4.6 5.0 5.1 5.2 5.6 5.5 5.8 5.9 5.9 5.9 5.0 5.4 5.9

China (%Y) 8.1 7.6 7.4 7.7 8.0 8.2 8.4 8.2 8.1 8.1 7.9 7.7 7.7 8.2 8.0

India (%Y) 5.3 5.5 5.3 5.1 5.8 6.0 6.2 6.3 6.4 6.9 7.1 7.1 5.3 6.1 6.9

Brazil (%Y) 0.8 0.5 0.9 1.8 2.3 2.5 3.3 2.9 3.1 3.1 3.9 3.6 1.6 2.8 3.4

Russia (%Y) 4.9 4.0 2.9 2.7 2.6 3.0 3.1 3.5 4.0 4.3 4.3 4.1 3.6 3.1 3.7

Consumer price inflation (%Y)

Global 3.7 3.3 3.2 3.2 2.9 3.1 3.3 3.2 3.2 3.4 3.4 3.2 3.4 3.1 3.3

G10 2.4 1.8 1.7 1.9 1.4 1.4 1.4 1.3 1.5 1.7 1.7 1.7 2.0 1.4 1.7

US 2.8 1.9 1.7 1.9 1.2 1.5 1.4 1.3 1.5 1.5 1.6 1.6 2.1 1.3 1.6

Euro Area 2.7 2.5 2.5 2.5 2.1 1.8 1.8 1.8 1.9 2.0 1.7 1.6 2.5 1.9 1.8

Japan 0.1 0.0 -0.2 0.0 -0.3 -0.5 -0.5 -0.5 -0.4 1.4 1.5 1.6 0.0 -0.4 1.0

UK 3.5 2.8 2.4 2.7 2.6 2.7 2.8 2.5 2.5 2.6 2.5 2.1 2.8 2.6 2.4

EM 5.0 4.9 4.6 4.5 4.4 4.8 5.1 5.0 4.9 4.9 4.9 4.7 4.7 4.8 4.8

China 3.8 2.9 1.9 1.9 1.6 2.8 3.8 3.9 3.6 3.9 3.9 3.2 2.6 3.0 3.6

India 7.2 10.1 9.8 9.3 8.6 7.5 6.9 7.1 6.7 6.4 6.6 6.9 9.1 7.5 6.7

Brazil 5.8 5.0 5.2 5.5 5.6 5.8 5.7 5.5 5.8 5.8 5.7 5.9 5.4 5.6 5.8

Russia 3.9 3.8 6.0 6.6 7.0 7.2 6.5 6.0 5.5 5.1 5.2 5.4 5.1 6.7 5.3

Monetary policy rate (% p.a.)

Global 3.2 3.1 3.0 2.9 2.9 2.9 2.9 2.9 3.0 3.1 3.1 3.2 2.9 2.9 3.2

G10 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.4 0.4

US 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15

Euro Area 1.00 1.00 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.50 0.50

Japan 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05

UK 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.00 0.50 0.50 1.00

EM 6.1 5.9 5.7 5.6 5.6 5.5 5.5 5.5 5.6 5.8 5.9 5.9 5.6 5.5 5.9

China 6.56 6.31 6.00 6.00 6.00 6.00 6.00 6.00 6.25 6.50 6.75 6.75 6.00 6.00 6.75

India 8.50 8.00 8.00 8.00 7.75 7.25 7.25 7.25 7.00 7.00 7.00 7.00 8.00 7.25 7.00

Brazil 9.75 8.50 7.50 7.25 7.25 7.25 7.25 7.25 8.25 8.25 8.25 8.25 7.25 7.25 8.25

Russia 5.25 5.25 5.50 5.50 5.75 5.75 5.75 5.50 5.25 5.00 4.75 4.75 5.50 5.50 4.75

Note: Global and regional aggregates are GDP-weighted averages, using PPPs. Japan policy rate is a range from 0.00-0.10%, with 0.05% as the midpoint; CPI numbers are period averages. *US GDP forecast for the current quarter is a tracking estimate. **G10+BRICs+Korea Source: Morgan Stanley Research forecasts

7



Global Macro WatchEuro Area: ECB Watch – Not Christmas Yet

Elga Bartsch (44 20) 7425 5434

Contrary to our expectations, but in line with market expectations, the ECB did not cut rates on December 6: In addition, the press conference did not send the strong signal for a rate reduction in 1Q13 that we hoped for either. Hence, we need to acknowledge the risk that the ECB might simply stay put going forward. Apparently, there were some Council Members pushing for a rate reduction. But the prevailing consensus was to keep rates unchanged. The rate cut discussion also did not extend to an in-depth debate on a depo rate cut.

Growth projections lowered markedly again, inflation seen inside the target range: The new staff projections show another marked reduction in the growth outlook and a subdued inflation rate in 2014. The Governing Council now sees the current weakness extending into next year and expects a recovery to set in only in 2H13. Despite the marked downward revisions, however, the outlook for price stability has not changed materially in the view of the Governing Council. Instead, ECB President Draghi stressed on several occasions that the ECB’s policy stance is accommodative and that the ECB has already taken far-reaching measures.

No encouraging policy signals from the ECB on rates or unconventional measures at this stage: Unfortunately, there was little in the press conference to give us hope on additional ECB easing early in the New Year. Hence, we might have to brace ourselves for the ECB staying on hold in 2013. Similarly, there were no clear hints on unconventional measures of credit easing. In fact, when asked about additional measures the ECB could take, Draghi rattled through what the ECB has done in the past and the positive impact that these measures have had.

For full details, see ECB Watch: Not Christmas Yet, December 6, 2012.

Euro Area: New ECB Staff Projections

%Y 2012 2013 2014

GDP -0.5 -0.3 1.2 HICP 2.5 1.6 1.4

Source: ECB

UK: Autumn Statement: Not Pleasant Reading

Melanie Baker (44 20) 7425 8607 Jonathan Ashworth (44 20) 7425 1820

As expected, the Autumn Statement and latest set of OBR economic and fiscal projections did not make for particularly pleasant reading: The fiscal projections are broadly worse than in March and the OBR now judges that the supplementary fiscal rule is unlikely to be met. We continue to think that all this will lead investors to further question the future of the UK’s credit rating.

The OBR sharply lowered its GDP growth forecasts and revised its deficit and debt projections up: The deficit numbers were not as bad as we’d expected for this and next fiscal year largely because of additional special factors we hadn’t anticipated (rather than any underlying improvements in the fiscal position), including an earlier effect from the APF cash transfer, 4G spectrum sale proceeds and Swiss tax repatriation. Still, the deficit forecast at the end of this parliament (2014-15) is now ~1pp higher than in March 2012 at 5.2% of GDP (3pp higher than in the current government’s first budget). Public sector net debt as a percentage of GDP peaks a year later on the new OBR forecasts, implying a break of the fiscal rules.

Lots of policy measures – little effect on our economic forecasts: These included a lower corporation tax rate and the cancellation of the January fuel duty rise, partly offset by additional departmental spending cuts and lower planned increases in benefits. All in all, however, there was nothing in this statement to materially change our forecasts for the economy.

Big picture for the UK’s fiscal finances is unchanged: None of this changes the big picture for UK public finances. The fiscal numbers still look worrying to us. Austerity is set to remain a significant drag on the economy for many years to come. Partly as a result, we continue to find it hard to get too excited about the UK’s near-term growth prospects.

For full details, see UK Economics: Autumn Statement: Not Pleasant Reading, December 5, 2012.

8






Global Macro WatchUK: 2013 and 2014 Outlook: Slow Progress through the Twilight

Melanie Baker (44 20) 7425 8607 Jonathan Ashworth (44 20) 7425 1820

An untidy recovery, prone to setbacks… Our central case is for untidy progress; for growth that grinds rather than bounds higher; and for monetary policy that will have increased traction over the period rather than given the economy the kick-start it could do with at present. The gradual rebalancing we envisage over the medium term is likely to continue to make for an untidy recovery, especially given that much of the rest of the world are keen to/need to pull off a rebalancing act too.

…assumes policy-makers ‘stick to the programme’: For the UK, we think we are close to the limits of policy effectiveness and room for manoeuvre. Monetary policy needs to be kept accommodative and fiscal austerity plans need to remain in place.

Our central case outlook: We expect only 0.8% GDP growth in 2013 and 1.6% in 2014, remaining below consensus. The key drags on UK growth (the external environment, fiscal austerity and credit conditions) seem set to drag a little less over the next two years, and we think that there are good reasons to expect a grind higher in consumer spending growth. Whether or not we get more QE remains a finely balanced call, but by mid-2014 we expect to see some modest reduction in policy accommodation (including two 25bp rate rises).

Three things likely to make for a bumpy ride: In addition to the ongoing need to rebalance, we think that inflation risks may build quickly in a recovery as the economy bumps up against capacity constraints and political developments could well throw up challenges as we get closer to the May 2015 general election.

Three key themes: We suggest three themes that we think will (continue to) be important for the next two years: i) Fiscal slippage; ii) Resolution of the productivity puzzle; iii) Political uncertainty and institutional change.

For full details, see UK Economics: 2013 and 2014 Outlook: Slow Progress through the Twilight, December 11, 2012.

CEEMEA: 2013 Preview – Macro Views and Risks

CEEMEA economics team

We analyse briefly the macro outlook for each country under our coverage, with an emphasis on risk events in 2013: As always, we note that CEEMEA is a very diverse region. We believe that the aggregate CEEMEA growth rate (GDP-weighted average growth of the main countries) will remain unchanged, at 2.6%Y (same as this year), but there will be significant country differences.

For instance, we remain bearish on growth prospects for the Central European countries. Essentially, we expect no growth at all in Hungary and in the Czech Republic in 2013, despite the fact that both countries contracted in 2012. Even Poland, once a growth outperformer thanks to resilient domestic demand, will see a mere 1.5%Y expansion in 2013 due to slower credit, consumption and investment.

On the other hand, we expect that other countries will perform better. Turkey will accelerate and grow by 4%Y in 2013, the fastest among the large CEEMEA economies, in our view. Russia will grow by a respectable 3.1%Y, but still a clear slowdown in comparison to 2010, 2011 and 2012. South Africa is expected to improve its growth rate only marginally to 2.5%Y in 2013 from 2.3%Y in 2012, partially due the impact of the local strike action of late 2012.

On the policy front, we expect most central banks to deliver monetary easing, in response to the benign interest rate environment. We believe that policy rates will test new lows in Central Europe and Turkey, they will be lowered in Nigeria, Ghana and Kenya, and will stay on hold in South Africa. In Russia, we see a modest hike in 1Q13 (25bp), followed by a 25bp rate cut in late 2013 as inflation declines to target.

As always in such a diverse region, there are a number of country-specific risk/reward events, such as central bank management changes in Russia and Hungary, IMF negotiations in Ukraine and Hungary, geopolitical issues in Turkey and Israel, investment initiatives in Russia and Poland, political/election risks in South Africa, Romania, the Czech Republic, Ghana and Kenya and our expectations of a sovereign rating upgrade in Turkey and a downgrade in Hungary.

For full details, see “CEEMEA 2013 Preview: Macro Views and Risks”, CEEMEA Macro Monitor, December 7, 2012.

9





10


Global Macro Watch

Latin America: Optimism Beyond the 2013 Cycle

Gray Newman (1 212) 761 6510

We expect Latin America to once again post above-trend growth, even as the region’s pace of growth slows slightly from 2012: Sounds familiar? The cyclical story for 2013 at face value seems similar to the one we described a year ago as we looked towards 2012 and even that of two years ago going into 2011. In both years, we argued that the region would slow, but would still manage to produce above-trend growth. And once again, as was the case last year, we argue that the greatest risks to our forecast for Latin America lie outside the region – what we have described as the Risks to Abundance (see “Latin America in 2012: The Risks to Abundance Return”, This Week in Latin America, November 28, 2011). For all the challenges that Latin America faces, none are likely to have as great of an impact on the cycle in 2013 as the global environment.

This year our global economics team has christened its outlook as that of the Twilight Zone – the grey, fuzzy area that divides sustainable recovery from a renewed recession (see 2013 Outlook: Stuck in the Twilight Zone, November 19, 2012). By now, I suspect that all global watchers are familiar with the trio of risks: the US ‘fiscal cliff’; the unfolding sovereign crisis in Europe; and the uncertainty in China.

What makes this year different is our global team’s view that the outlook for 2013 could change depending on the actions taken by policy-makers: Indeed, our global team recommends that investors should remain “nimble and prepared” to switch between Night, Twilight and Day.

You might argue that there is little surprise that the globe matters so much to the region: Yet a decade ago, I remember when the idiosyncratic risks within the region were much greater and were our central concern. Today, the balance sheets of the region’s largest economies are simply in strong enough shape that, with one or two exceptions (Venezuela and perhaps Argentina), it is difficult to argue that the greatest risks to the region are home-grown.

The good news and what sets our forecast for the region for 2013 apart from our past forecasts is our optimism that there may be significant upside to the outlook for the region’s two largest economies – not so much in the 2013 cycle, but beyond next year. There is also the potential for a stronger reform push in Colombia led by an ambitious infrastructure programme as Daniel Volberg has argued, but I think that the possible upside surprises in Brazil and Mexico have the potential to have the greatest regional impact.

For full details, see “Latin America: Optimism Beyond the 2013 Cycle”, Week Ahead in Latin America, December 7, 2012.

http://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=391200&docFileType=1&linksrc=rl-res-site&lastParam=/GNEW112811.pdf

http://secure.ms.com/eqr/rlink/webapp/Research?action=streamFile&docId=391200&docFileType=1&linksrc=rl-res-site&lastParam=/GNEW112811.pdf





Inflation Target Monitor & Next Rate Move Global Economics Team. Contact: [email protected]

Inflation target Latest month

12M MS fcast

Next rate decision

Currentrate

Market expects

(bp)

MS expects

(bp) Risks to our call

US 2.0% PCE Price Index 1.6% 1.7% 30 Jan 0.15 -1 0 No risks, same through mid-2015

Euro Area < 2% HICP (u) 2.2% 1.8% 10 Jan 0.75 -3 -25 ECB could wait to cut, esp. with depo rate

Japan 1% CPI (u) 0.0% -0.5% 20 Dec 0.05 0 0 Easing in Dec MPM likely, but BoJ may wait until Jan

UK 2% CPI 2.6% 2.5% 10 Jan 0.50 -3 0 Some risk of a QE restart

Canada 1-3% CPI 1.2% 1.8% 23 Jan 1.00 0 0 -

Switzerland <2% CPI (u) -0.2% 0.2% 13 Dec 0.00 - 0 -

Sweden 2.0% CPI 0.4% 0.7% 18 Dec 1.25 -8 -25 Cut in Feb instead

Norway 2.5% CPI 1.1% - 19 Dec 1.50 -2 0 Balanced risks

Australia 2-3% over the cycle 2.0% 2.1% 05 Feb 3.00 -15 0 -

New Zealand 1-3% CPI 0.8% - 31 Jan 2.50 -3 0 -

Russia 5-6% CPI 6.5% 6.1% 1-15 Jan 5.50 - 0 -

Poland 2.5% (+/- 1%) CPI 3.4% 2.5% 09 Jan 4.25 - -25 -

Czech Rep. 2.0% (+/-1%) CPI 2.7% 2.6% 19 Dec 0.05 - 0 -

Hungary 3.0% CPI 5.2% 5.4% 18 Dec 6.00 - -25 -

Romania 3.0% (+/-1%) CPI 4.6% 4.0% 07 Jan 5.25 - 0 -

Turkey 5% CPI end-’12 6.4% 6.3% 18 Dec 5.75 0 -25 CBT might hold until 1Q13

Israel 1-3% 1.8% 2.0% 24 Dec 2.00 - 0 -

S. Africa 3-6% 4.9% 6.0% 24 Jan 5.00 - 0 SARB GDP downgrade ushers in rate cut

Nigeria - 11.7% 11.6% Jan 12.00 - 0 Collapse in core CPI ushers in early rate cut

Ghana 8.7% CPI 9.2% 10.0% 23 Jan 15.00 - 0 CPI decelerates further, MPC cuts rates

China - 2.0% 3.0% N/A 6.00 - 0 Further deterioration in global growth outlook

India - 7.5% 7.5% 18 Dec 8.00 - 0 -

Hong Kong - 3.8% 5.6% 11-12 Dec 0.50 - 0 -

S. Korea 2-4% 1.6% 3.0% 13 Dec 2.75 - 0 Rate cut due to weak domestic demand

Taiwan - 1.6% 1.5% 19 Dec 1.88 - 0 Rate cut as domestic demand and exports remain weak

Indonesia 4.5% +/- 1.0% 4.3% 5.4% 10 Jan^ 5.75 - 0 Evenly balanced

Malaysia - 1.3% 2.7% 31 Jan 3.00 - 0 Downside risks

Thailand 0.5-3.0% core CPI 2.7% 3.3% 09 Jan 2.75 - 0 Downside risks

Brazil 4.5% +/-2.0% IPCA 5.5% 5.5% 16 Jan 7.25 0 0 -

Mexico 3% +/-1% CPI 4.2% 3.8% 18 Jan 4.50 0 0 -

Argentina 15.5-24.2% M2 growth 10.2% 10.0% NA 12.07 - - -

Chile 3% +/-1% CPI 2.2% 3.5% 13 Dec 5.00 0 0 Buoyant domestic demand pushing inflation

Peru 2% +/-1% CPI 2.7% 2.5% 10 Jan 4.25 0 0 -

Colombia 3% +/-1% CPI 2.8% 3.2% 21 Dec 4.50 0 0 - (u) = unofficial Notes: Inflation numbers in red indicate values above target; MS expectations in red (green) indicate our rate forecasts are above (below) market expectations. Japan policy rate is an interval of 0.00-0.10%; *Core measure. ^Approximate date. Source: National central banks, Morgan Stanley Research

11



12


Global Monetary Policy Rate Forecasts Current 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

United States 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15

Euro Area 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

Japan 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05

United Kingdom 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.00

Canada 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Switzerland 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.50

Sweden 1.25 1.00 1.00 1.00 1.00 1.25 1.25 1.50 1.50 1.75

Norway 1.50 1.50 1.50 1.50 1.75 1.75 2.00 2.00 2.25 2.50

Australia 3.00 3.00 2.75 2.50 2.50 2.50 2.50 2.50 2.75 3.00

New Zealand 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.25 3.25 3.25

Russia 5.50 5.50 5.75 5.75 5.75 5.50 5.25 5.00 4.75 4.75

Poland 4.25 4.25 3.75 3.25 3.25 3.25 3.25 3.25 3.25 3.50

Czech Republic 0.05 0.05 0.05 0.05 0.05 0.05 0.25 0.50 0.75 1.00

Hungary 6.00 5.75 5.25 5.00 5.00 5.00 5.00 5.00 5.00 5.00

Romania 5.25 5.25 5.25 5.25 5.25 5.25 5.50 5.75 6.00 6.00

Turkey 5.75 5.50 5.25 5.25 5.25 5.25 5.50 5.75 5.75 5.75

Israel 2.00 2.00 1.75 1.75 1.75 2.00 2.50 2.75 2.75 2.75

South Africa 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

Nigeria 12.00 12.00 10.50 9.00 9.00 9.00 9.00 9.00 9.00 9.00

Ghana 15.00 15.00 15.00 14.50 14.00 14.00 14.00 14.00 14.00 14.00

China 6.00 6.00 6.00 6.00 6.00 6.00 6.25 6.50 6.75 6.75

India 8.00 8.00 7.75 7.25 7.25 7.25 7.00 7.00 7.00 7.00

Hong Kong 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

S. Korea 2.75 2.75 2.75 2.75 2.75 2.75 3.00 3.25 3.50 3.50

Taiwan 1.88 1.88 1.88 1.88 1.88 2.00 2.13 2.25 2.38 2.38

Indonesia 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75

Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

Thailand 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75

Brazil 7.25 7.25 7.25 7.25 7.25 7.25 8.25 8.25 8.25 8.25

Mexico 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50

Chile 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50 5.50

Peru 4.25 4.25 4.25 4.25 4.25 4.25 4.50 4.75 4.75 4.75

Colombia 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.75 5.00 5.00 Source: National Central Banks, Morgan Stanley Research forecasts; Note: Japan policy rate is an interval of 0.00-0.10%.

Fed and Eurosystem Balance Sheet Monitor

0

500

1,000

1,500

2,000

2,500

3,000

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Size of B/S

Excess Reserves

Federal Reserve (Bil.$)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Size of B/S

Total Reserves

Eurosystem (Bil.€)

Source: Haver Analytics Source: Haver Analytics



Global GDP and Inflation Forecasts Real GDP (%) CPI inflation (%)

2011 2012E 2013E 2014E 2011 2012E 2013E 2014E

Global Economy 3.9 3.1 3.1 4.0 4.4 3.4 3.1 3.3

G10 1.4 1.2 0.7 1.9 2.7 2.0 1.4 1.7

US 1.8 2.2 1.4 2.7 3.1 2.1 1.3 1.6

Euro Area 1.5 -0.5 -0.5 0.9 2.7 2.5 1.9 1.8

Germany 3.0 0.8 0.3 1.3 2.3 2.0 2.1 1.7

France 1.7 0.1 -0.1 0.8 2.1 2.0 1.4 1.7

Italy 0.6 -2.1 -1.2 0.5 2.8 3.1 1.7 2.2

Spain 0.4 -1.5 -1.5 0.8 3.2 2.5 2.1 1.4

Japan -0.6 2.0 0.4 0.8 -0.3 0.0 -0.4 1.0

UK 0.9 -0.2 0.8 1.6 4.5 2.8 2.6 2.4

Canada 2.4 2.0 1.8 2.5 2.9 1.7 1.7 2.0

Sweden 3.9 0.8 1.4 2.3 3.0 0.9 0.7 2.1

Australia 2.4 3.5 3.3 3.8 3.3 1.8 2.6 2.4

Emerging Markets 6.6 5.0 5.4 5.9 6.2 4.7 4.8 4.8

CEEMEA 5.1 2.9 3.1 4.1 6.9 5.7 5.9 5.4

Russia 4.3 3.6 3.1 3.7 8.5 5.1 6.7 5.3

Poland 4.3 2.4 1.5 2.7 4.3 3.7 2.3 2.0

Czech Rep 1.7 -1.0 0.0 1.9 1.9 3.4 2.6 1.7

Hungary 1.7 -1.3 0.0 1.3 3.9 5.8 5.3 3.6

Ukraine 5.2 0.2 0.8 4.0 8.4 0.6 7.0 8.8

Kazakhstan 7.5 4.5 5.8 6.5 8.4 5.2 7.2 7.3

Turkey 8.5 3.0 4.0 5.0 6.5 8.9 6.2 6.1

Israel 4.7 2.8 3.0 3.4 3.5 1.8 2.1 2.1

South Africa 3.1 2.3 2.5 3.3 5.0 5.6 5.8 5.5

Nigeria 7.4 6.3 7.5 8.2 10.9 12.0 10.0 10.5

Ghana 14.4 7.5 7.5 7.0 8.7 9.2 9.6 10.3

Asia ex-Japan 7.6 6.2 6.8 7.0 5.8 4.1 4.0 4.2

China 9.3 7.7 8.2 8.0 5.4 2.6 3.0 3.6

India 7.5 5.3 6.1 6.9 8.9 9.1 7.5 6.7

Hong Kong 4.9 1.2 3.8 4.5 5.3 4.1 5.6 4.7

Korea 3.6 2.3 3.7 4.2 4.0 2.5 3.0 3.2

Taiwan 4.0 1.2 2.9 4.0 1.4 1.9 1.5 1.8

Singapore 4.9 1.5 2.3 4.0 5.2 4.7 3.6 3.6

Indonesia 6.5 6.2 5.6 5.9 5.4 4.4 5.4 5.4

Malaysia 5.1 5.1 4.0 4.5 3.2 1.7 2.5 2.5

Thailand 0.1 5.2 4.0 4.7 3.8 3.0 3.4 3.2

Latin America 4.5 3.0 2.9 3.8 6.7 6.2 6.5 6.6

Brazil 2.7 1.6 2.8 3.4 6.6 5.4 5.6 5.8

Mexico 3.9 3.8 3.2 4.2 3.4 4.2 3.9 3.8

Chile 6.0 5.1 4.2 4.7 3.3 3.2 3.5 3.1

Peru 6.9 6.4 5.5 5.8 3.4 3.8 3.0 2.5

Colombia 5.9 4.9 4.4 5.1 3.4 3.2 3.2 3.1

Argentina 8.9 1.1 0.5 2.5 9.8 10.1 10.1 10.1

Venezuela 4.2 4.8 2.1 1.7 26.1 20.8 24.9 28.0 Source: IMF, Morgan Stanley Research forecasts

13



Global Economics Team Global Economics

Joachim Fels Global [email protected] +44 (0)20 7425 6138

Manoj Pradhan Global [email protected] +44 (0)20 7425 3805

Spyros Andreopoulos Global [email protected] +44 (0)20 7677 0528

Patryk Drozdzik Global [email protected] +44 (0)20 7425 7483

Sung Woen Kang Global [email protected] +44 (0)20 7425 8995

Americas

Vincent Reinhart US [email protected] +1 212 761 3537

David Greenlaw US [email protected] +1 212 761 7157

Ted Wieseman US [email protected] +1 212 761 3407

Dane Vrabac US [email protected] +1 212 761 1929

John Abraham US [email protected] +1 212 761 5629

Gray Newman Latam, Brazil [email protected] +1 212 761 6510

Luis Arcentales Chile, Mexico [email protected] +1 212 761 4913

Arthur Carvalho Brazil [email protected] +55 11 3048 6272

Daniel Volberg Peru, Colombia, Argentina, Venezuela [email protected] +1 212 761 0124

Europe & South Africa

Elga Bartsch Euro Area, ECB, Germany [email protected] +44 (0)20 7425 5434

Daniele Antonucci Italy, Spain, Greece, Portugal [email protected] +44 (0)20 7425 8943

Olivier Bizimana France, Belgium [email protected] +44 (0)20 7425 6290

Melanie Baker UK [email protected] +44 (0)20 7425 8607

Jonathan Ashworth UK [email protected] +44 (0)20 7425 1820

Tevfik Aksoy Turkey, Israel [email protected] +44 (0)20 7677 6917

Pasquale Diana Poland, Hungary, Czech, Romania [email protected] +44 (0)20 7677 4183

Jaroslaw Strzalkowski Poland, Hungary, Czech, Romania [email protected] +44 (0)20 7425 9035

Michael Kafe South Africa [email protected] +27 11 587 0806

Andrea Masia South Africa, Nigeria [email protected] +27 11 587 0807

Jacob Nell Russia, Kazakhstan, Ukraine, Belarus [email protected] +7 495 287 2134

Alina Slyusarchuk Russia, Kazakhstan, Ukraine, Belarus [email protected] +44 (0)20 7677 6869

Asia

Robert Feldman Japan [email protected] +81 3 5424 5385

Takeshi Yamaguchi Japan [email protected] +81 3 5424 5387

Chetan Ahya Asia ex-Japan, India [email protected] +852 2239 7812

Helen Qiao China [email protected] +852 2848 6511

Denise Yam China, Hong Kong [email protected] +852 2848 5301

Sharon Lam Korea, Taiwan [email protected] +852 2848 8927

Yuande Zhu China, Hong Kong [email protected] +852 2239 7820

Jason Liu Korea, Taiwan [email protected] +852 2848 6882

Deyi Tan ASEAN [email protected] +65 6834 6703

Derrick Kam Asia ex-Japan [email protected] +852 2239 7826

Seen Meng Chew ASEAN [email protected] +65 6834 6739

Upasana Chachra India [email protected] +91 22 6118 2246 Morgan Stanley entities: London/South Africa – Morgan Stanley & Co. International plc; New York – Morgan Stanley & Co. LLC; Hong Kong/Shanghai – Morgan Stanley Asia Limited.; Singapore – Morgan Stanley Asia (Singapore) Pte.; Japan – Morgan Stanley MUFG Securities Co., Ltd.; India – Morgan Stanley India Company Private Limited; Russia – OOO Morgan Stanley Bank; Brazil – Morgan Stanley C.T.V.M. S.A.

14







































Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley & Co. LLC and/or Morgan Stanley C.T.V.M. S.A. and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. and/or Morgan Stanley & Co. International plc and/or RMB Morgan Stanley (Proprietary) Limited and/or Morgan Stanley MUFG Securities Co., Ltd. and/or Morgan Stanley Capital Group Japan Co., Ltd. and/or Morgan Stanley Asia Limited and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research) and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, and/or PT Morgan Stanley Asia Indonesia and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email [email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important Disclosure for Morgan Stanley Smith Barney LLC Customers The subject matter in this Morgan Stanley report may also be covered in a similar report from Citigroup Global Markets Inc. Ask your Financial Advisor or use Research Center to view any reports in addition to this report.

Important Disclosures 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 Street Reform and Consumer Protection Act. 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. Morgan Stanley 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 strategy will depend on an investor's 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 be eligible 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 your investments 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 or other 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 future performance 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 company's securities/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 Research analysts', 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. 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 no representation 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 of 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, including investment banking personnel. 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. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Vietnam this report is issued by Morgan Stanley Singapore Holdings; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. LLC, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by the Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Services Authority, also disseminates Morgan Stanley Research in the UK. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a

15


16


member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.


The Americas

1585 Broadway

New York, NY 10036-8293

United States

Tel: +1 (1)212 761 4000

Europe

20 Bank Street, Canary Wharf

London E14 4AD

United Kingdom

Tel: +44 (0)20 7425 8000

Japan

4-20-3, Ebisu,

Shibuya-ku,

Tokyo 150-6008, Japan

Tel: +81 (0)3 5424 5000

Asia/Pacific

1 Austin Road West

Kowloon

Hong Kong

Tel: +852 2848 5200

© 2012 Morgan Stanley

Gma 20121212

Economy & Finance

Transcript of Gma 20121212