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.
Global Interest Rate Strategy: Fundamentals Trump Technicals
Jim Caron, Laurence Mutkin
Own longer-dated volatility - sticking with our core view. Despite the recent flattening of the curve, we still like holding steepeners. We continue to position for rising inflation pressures and maintain our core view of owning longer-dated volatility. In our opinion, the key to profits in May will be to separate the technical unwind of safe-haven and short-covering trades from a proper fundamental evaluation of market risks at hand.
Global Credit Strategy: Cycling Out of Europe
Gregory Peters, Global Credit Strategy Team
Credit conditions going global. It's too early to fade the economic headwinds still blowing in the US, and they should eventually make their way to Europe. US high grade non-financials broadly have more relative appeal to us, particularly considering the recoupling we anticipate in Europe. For some time, we have pushed back on the decoupling theme as it pertains to economic performance of Europe and Asia relative to the US.
Europe Equity Strategy: Agflation - Here to Stay
Ronan Carr, Teun Draaisma
Bullish outlook for agriculture products and food prices for the next 3-5 years, driven by rising developing-world incomes, high oil prices and demand for biofuels, and low inventory levels. There are potential new sources of supply in the long run from large existing areas of farmland and improving crop yields. However, such supply would necessitate investment and time - at least 1-2 years. Short-term outlook: beware the volatility.
Asia/Pacific Equity Strategy: Asia #1; China The Engine
R. Tsai, M. Wood, C. Ng
Asia is now less dependent on the US than ever before, and is capable of a soft decoupling from the US downturn. Asian domestic demand, based on 13 volume indicators, is now larger than that of the US. In current-USD terms, 2007 GDP for Asia-Pacific ex-Japan was US$8.1 trillion, a record 59% of US GDP, but its true size is masked by cheap currencies and labour costs. Commodity markets reflect this shift, but domestic-focused Asian equities have yet to do so.
GEMs Equity Strategy: We Visit Argentina, South Africa, and Brazil
J. Garner, M. Wang, V. Silva
Diverging trends. After recent country visits, we were struck by diverging trends between Brazil (structural improvement) and Argentina and South Africa (deepening structural problems). We retain our equal-weight position on Brazil and underweight stance on Argentina and South Africa. We expect further real exchange rate appreciation of Brazil's currency relative to those of Argentina and South Africa, plus further P/E multiple expansion in favour of Brazil.
India Equity Strategy: Bond Market Wakes Up; Retrospective - April 2008
Ridham Desai, Sheela Rathi
Activity in the bond market was the highlight of April. After rising through the month, the yield curve flattened 22 bp m/m as RBI held rates unchanged. The one-year corporate bond spread rose to a four-year high. April was the first month in 2008 when Indian equities outperformed the emerging and regional markets. India's performance ranking among the EM rose to sixth position. For the year to date, India is still among the worst-performing EMs (rank 23).
Global Strategy: Slow Crunch - Downunder Daily
Gerard Minack
Credit crunches tend to be slow-moving affairs. This is important: The continued tightening of credit conditions is one reason to expect that growth will disappoint in the second half - and not just in the US. Lenders appear to be getting more restrictive. That, in turn, suggests that the economic headwind from the credit crunch is intensifying, not easing. This is consistent with the elevated spreads in most credit markets.
Commodity Strategy: Developing World Waking Up to Coffee
H. Allidina, J. Friesen, M. Pape
Recommend protected short or neutral position. While we see coffee prices trending higher through our forecast horizon, we believe the forward curve is slightly overbought relative to fundamentals. As such, we recommend a protected short position, or for the more risk-averse, neutral exposure. We also recommend going long Arabica coffee and short Robusta. Despite slowing global growth, we should see surging coffee demand growth in the developing world.
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: Naturally Below Neutral - The Global Monetary Analyst
Joachim Fels, Manoj Pradhan
How expansionary is the Fed really, given various headwinds? Financial headwinds are likely to have reduced the natural, or neutral, interest rate by about 40 bp, to 3.7%, according to our natural rate model. Thus, even taking this into account, the Fed at 2% is very expansionary. Just as a restrictive Fed in 2006/07 eventually hammered growth, an expansionary Fed should bring about economic healing - but not before 2009, in our view.
US Economics: Disconnect
Richard Berner, David Greenlaw
The economic fallout begins. Financial turmoil peaked six weeks ago, but the economic downturn is only beginning. It's still a recession, in our view, and that's no longer in the price after recent rallies. Indeed, we see weaker US growth over the next few quarters than we did a month ago. Soaring energy and food quotes mean upside risks to inflation and downside risks to discretionary income and growth. And overseas growth is beginning to soften.
Currencies: Four Fall-Lines of Dominos - A Ranking
Stephen Jen, Luca Bindelli
Investors should focus on how the currency dominos will fall as the US slowdown starts to be felt in the rest of the world. For each fall line, we rank the relevant characteristics of the economy before assigning a score. Sequencing is important, as not all currencies will be equally vulnerable or will weaken at the same time. EUR/USD may not look that vulnerable in our scorecard, but given its degree of overvaluation, it will be vulnerable to downside surprises to growth.
Japan Economics: No More a Kabuki Play, More of a Reality
Takehiro Sato, Takeshi Yamaguchi
Raising our ultra-bearish economic outlook for 2008; lowering our 2009 forecast. With personal consumption in the US moving in a positive direction now, we do not look for adjustment pressure to intensify drastically in the short term. Also, the financial crisis has apparently eased, providing further evidence that excessive pessimism may no longer be justified. That said, we remain cautious ahead, as 2009 could bring a more acute double-dip.
Asia/Pacific Economics: AXJ Inflation Spikes Up
Chetan Ahya, Tanvee Gupta
Non-food Inflation at multiyear high. The headline inflation rate for the Asia ex-Japan accelerated to 7.5% YoY in March, the highest since January 1999. Non-food inflation hit a multiyear high, even as oil prices were largely unchanged in the region. We believe a fall in commodity prices will be critical to ensure a sustained reduction in inflation pressure. Asia/Pacific central banks continue to respond, and pressure is rising for Thailand and the Philippines to tighten.
China Economics: Cost Pressures and Profit Margins - Facts and Thoughts
Qing Wang
Imported soft landing in sight. China's macro picture has become clearer with 1Q behind us. Going forward, we expect the market to pay increasing attention to the outlook for corporate profitability and earnings in view of rapidly rising input prices amid a deteriorating external environment, pointing to a rather murky picture at the micro level. Industrial profit margins are likely to experience increasing downward pressures, in our view.
France Economics: Mrs Lagarde Turns Sarkonomics into Supply Side Reforms
Eric Chaney
Potential retail deregulation. The economic modernisation bill unveiled by Finance Minister Lagarde could make the French economy more competitive, if it is not overly weakened by Parliament. Its most prominent feature is significant retail-sector deregulation. Provided that MPs do not excessively alter the initial project, we think that these supply side reforms should enhance long-term growth, cut inflation, and support consumer spending.
Brazil Economics: Investment Grade, Why Worry?
Marcelo Carvalho
Brazil's investment-grade from S&P is deserved, in our view, and reflects significant accomplishments. However, like graduation day, it should mark a starting point, not the final destination. There is still plenty of room for improvement on structural reforms, and questions remain about the long-term sustainability of Brazil's fiscal framework.. The recent upgrade promises to lure more capital flows into Brazil, although no sudden deluge is likely.
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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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