A synopsis of the major reports issued globally by Morgan Stanley strategists in the past week. Please see full versions of these articles on our Client Link Website. Please contact your Morgan Stanley representative for access if needed.
US Credit Strategy: Short End of the Stick
R. Hussain, G. Peters, A. Richmond
High-grade credit is still the best house in a bad neighborhood over a longer horizon. That's our base case, while the odds are stacked against a constructive view on credit in the near term. Soon 2Q earnings reports will begin, and negative guidance is poised to increase, as 2H08 earnings expectations still look unreasonably high to us. Investors should be looking to shorter-dated maturities over long bonds as inflationary pressure will weigh on yields generally.
Europe Equity Strategy: Time to Go Goose Hunting
Teun Draaisma
We remain cautious on European equities, even though MSCI Europe is quite close to new lows. We think that new lows are more likely now than we thought a few months ago. This is because inflation, rates and central bank language have surprised us on the upside in recent weeks and months. Growth is slowing and analysts' earnings growth and margin expectations are way too high still. In addition, valuations are not cheap enough yet to be an outright buy signal.
Global Equity Strategy: Growth vs. Rating - Downunder Daily
Gerard Minack
What's the most likely way my six-month market view could be wrong? Amidst a global slowdown, investors may focus on the prospect of lower inflation and rates, rather than lower growth and earnings. In other words, investors look through the earnings downgrades expected by me (and our other strategists), and a market re-rating offsets earnings downgrades. My base case is that earnings downgrades will dominate any change in the market's P/E rating.
Asia-Pacific Equity Strategy: After the Fuel Price Rises
R. Tsai, M. Wood, C. Ng
Asia's five countries with fuel price controls have all lifted prices over the past month, from 10% to 48%. We expect this to hit regional growth and inflation by about 0.1% and 0.8%, respectively, and lead central banks to nudge rates higher. The impact on earnings will most likely be positive, led by China. We see several key catalysts for a trough in markets beginning to form: a top in oil and China food prices, depressed valuations and pessimistic sentiment.
China Equity Strategy & Economics: China Summit 2008
Jerry Lou, Qing Wang
Long-term optimism meets with near-term caution. For the near term, inflation rules investors' minds, based on our recent China Summit conference. Risk of sustained and high inflation is considered the key challenge to the economy near term. Potential social and political instability and policy missteps are seen as the primary risk in the medium term. But most clients felt that China would be able to sustain strong growth over the medium term.
Commodity Strategy: Agriculture - When It Rains It Pours
H. Allidina, J. Friesen, M. Pape
Corn stocks could fall to critical levels in the event of lower yields or acreage estimates - due to the flooding in the US Midwest. This implies more pain for both the livestock and ethanol industries as prices move higher in the face of tight supply. While the soybean planting window extends a bit longer, suggesting more hope for soybeans to be planted or replanted, the soybean crop faces similar risks. At this point, our price estimates are unchanged.
GEMs Equity Strategy: Turkey - Where Is the Most Value?
Jonathan Garner et al.
Turkish equities can get cheaper, in our view, and we still think it is too early to buy. Given rising earnings risks, high political uncertainty, and increasing currency and business cycle risks, we recommend GEMs investors stay underweight Turkey. But for dedicated Turkey-only investors, or those with existing positions in the market, we recommend several stock picks, and we also think investors should start to think about how to position for a recovery.
Korea Equity Strategy: Headwinds over Earnings Momentum in Exporters
Chanik Park, Jason Pyo
Stock selection should be focused on strong balance sheets, as upside momentum could be capped by headwinds from rising interest rates. We still prefer exporters and commodity plays over domestic consumption, financials and construction. We see potential risk in the banks from an unfavorable interest rate environment and overly strong loan demand for working capital in various industries. We have reduced our weight in banks.
A synopsis of the major reports issued globally by Morgan Stanley economists in the past week. Please see full versions of these articles on our Client Link Website. Please contact your Morgan Stanley representative for access if needed.
Global Economics: The Double-Digit Inflation Club
Joachim Fels, Manoj Pradhan
Around 50 of the 190 or so countries in the world now have inflation running at double-digit rates. Almost all of these are EM economies. Sustained high inflation is bad for long-run growth. Thus, there is reason to worry about the continuation of the economic success story in EM countries that have high inflation, are unable or unwilling to tighten policy sufficiently, and are commodity consumers rather than producers.
US Economics: Hedging Inflation Risks - Opportunities and Pitfalls in US Products
R. Berner, J. Caron, G. Goncalves
We think inflation uncertainty has just begun to rise. How should investors profit from and protect against rising inflation risks? Although some of this is in the price, it reinforces our view that hedging inflation risks with volatility products is attractive. Indeed, a combination of such products with more traditional positions in inflation breakevens (BEIs) can prove a profitable way to hedge against an inflation increase - whether it occurs or not.
Currencies: Some EM Central Banks to Be Stress-Tested by Inflation
Stephen Jen
Challenges ahead for monetary authorities. Inflationary pressures triggered by energy and food prices pose a considerable challenge to monetary authorities, particularly those in emerging markets. A simple rule-of-thumb is that the currency of the country experiencing inflationary pressures should benefit, as investors generally expect central banks to react hawkishly to such risks. But if energy and food price inflation persists, this may no longer apply.
Japan Economics: Buy Japan on Inflation? (Part II)
Takehiro Sato
Inflation does not provide a reason to be bullish on Japan's domestic demand. Indeed, primary goods inflation has been dampening demand not just in Japan, but also in the export-driving Asian region, exacerbating the risks of a Japanese recession. Overcoming the second oil crisis and pulling out of recession took Japan three years in the early 1980s. We see a yawning gap between the market's heated expectations and the reality here.
China Economics: Broadening Weakness - China Chartbook
Q. Wang, D. Yam, K. Tai
An imported soft landing is in sight but not yet within reach. Under our baseline 'imported soft-landing' scenario, we envisage that China's GDP growth would decline to 10% in 2008 while CPI inflation would stay on a downward trajectory for the remainder of the year, averaging 6.5%. We stand by our Three No's call: No campaign-style administrative tightening. No large one-off RMB revaluation. And no aggressive rate hikes.
India Economics: RBI Hikes Policy Rates Inter-Meeting
Chetan Ahya, Tanvee Gupta
Rate hike driven by inflationary concerns. The Reserve Bank of India announced an intermeeting 50 basis points hike in the repo rate (the rate at which RBI infuses liquidity) and cash reserve ratio to 8.50% and 8.75%, respectively. Inflation has remained significantly higher than the RBI's comfort zone of 5.5% for the past 16 consecutive weeks. In addition, the rise in oil prices since April implies the trade deficit will widen further.
Nigeria Economics: Will the True Inflation Number Please Stand Up
Michael Kafe, Andrea Masia
Rate hike of 50 bp likely in August. Inflation pressures are firmly on the upside in Nigeria. Also, state governors have now agreed to the National Economic Council's decision to release as much as $5.4 billion from the Excess Crude account this month for spending on development of the country's power infrastructure. In the past, the Monetary Policy Committee has responded to such huge cash disbursements with tighter money.
Vietnam Economics: Reining In the Tiger Cub
D. Tan, C. Ahya, S. Singh
Showing classic signs of overheating. Vietnam is facing the classic overheating problems of a typical emerging market attempting to move from a centrally planned economy with a large public-sector presence to a market-oriented economy dominated by the private sector. A weak institutional framework to manage this transition has pushed a number of macro indicators to unsustainable levels. We believe a sharp rise in lending rates will cause GDP growth to slow to 5.5-6% by first-quarter 2009 from 9.2% in 4Q07.
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Global Stock Ratings Distribution (as of April 30, 2008) 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 and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively. | | Investment Banking Clients (IBC) | | | | | | | Overweight/Buy | 1012 | 43% | 326 | 44% | 32% | Equal-weight/Hold | 996 | 42% | 319 | 43% | 32% | Underweight/Sell | 363 | 15% | 103 | 14% | 28% | Total | 2,371 | | 748 | | |
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