Green China?
March 09, 2007
By Stephen S. Roach | New York
Pollution is invariably one of the first impressions visitors form of China. From bicycles to cars in 25 years, urban China rarely sees much in the way of blue sky anymore. Rapid and large-scale industrialization only compounds the problem. The Chinese government knows full well it must take prompt and forceful actions to avoid an environmental crisis. There are encouraging signs it is now rising to the occasion. Can China pull it off while, at the same time, staying the course of its remarkable economic development strategy?
On a per capita basis, China’s pollution problem hardly jumps off the page. Its ratio of carbon emissions per person is less than half the global average and less than one-tenth that of the world’s biggest polluter – the United States. China’s enormous population, of course, distorts those comparisons. On an absolute basis, it’s a different story altogether. China’s total carbon emissions are more than double those of Japan and Russia, fractionally behind the European Union, and a little more than half those of the US. The essence of the Chinese environmental degradation problem is both its scale and growth. Over the 1992–2002 period, CO2 emissions in China have expanded at a 3.7% average annual rate – more than two and a half times the global average of 1.4%. At that rate, according to a recent report issued by the International Energy Agency, China will surpass the United States as the global leader in carbon emissions by 2009. In terms of sulfur dioxide, China’s current rate of discharge is already double its so-called environmental capacity – responsible for an acid rain that now covers about one-third of China’s total land mass. According to SO2-based measures of air pollution, seven of the ten most polluted cities in the world are in China. With respect to the emissions of organic water pollutants, China leads the world by more than three times the number two polluter – the United States. Moreover, fully 90% of China’s urban rivers are polluted, and 90% of its grassland has been degraded. (Data cited above are from Al Gore’s Inconvenient Truth [2006], Nicholas Stern’s The Economics of Climate Change [2007], and a recent paper prepared by the Development Research Center of China’s State Council, “China: Accelerating Structural Adjustment and Growth Pattern Change” [2007]). China’s environmental moment of truth is now at hand. The problem is twofold, in my view: It is not just an issue of moving from dirty to clean technologies that drive production, distribution, and transportation platforms, but it is also a matter of shifting the macro structure of the Chinese economy from a pollution-intensive to an environmentally-friendly mix. This latter point is a key and often overlooked aspect of China’s environmental challenge. It is also a crucial element of the rebalancing challenge that shapes China’s macro debate. The issue, in a nutshell, is that the Chinese economy is heavily skewed toward exports and fixed investment – two sectors that now collectively make up over 80% of China’s GDP. This concentration represents the most lopsided mix of a major economy in modern history. It is not sustainable from a macro point of view in that it threatens to produce the twin possibilities of a deflationary overhang of excess capacity and a protectionist backlash to an open-ended export boom. And it is not sustainable from an environmental point of view because the industrial-production-driven export and investment booms have a natural bias toward excessive carbon emissions. This latter conclusion is key but, unfortunately, difficult to quantify in light of the paucity of data on the carbon intensity of the various sectors of the Chinese economy. Bear with me as I take you through a brief, but important, digression that uses the United Kingdom production model to illustrate what China is up against. The Stern Review contains a detailed breakdown of the carbon intensity of 123 production sectors in the UK economy. Not surprisingly, services are at the low end of the UK spectrum in terms of carbon emissions – averaging around 0.3 on the carbon intensity scale; for manufacturing industries, the range is wide – motor vehicles ( 0.5) and sporting goods/toys (0.8) are at the low end while the paper (2.4) and steel (2.7) industries are at the high end. A comparable dispersion is evident in the energy share of total UK business costs – with non-transportation services at the low end of the spectrum and manufacturing industries at the high end. OK, China is not exactly England. But I strongly suspect – and this is my key analytical leap of faith – that the relative dispersion of the carbon- and energy-intensity of the major sectors of the Chinese economy is comparable to that of the UK. In other words, just as manufacturing is more carbon-intensive than services in the UK, the same ranking is likely in China. Under that presumption, consider the following: The latest data put China’s industrial sector at around 52% of its GDP – well in excess of the 32% share of the average developed economy and considerably higher than the 37% average of the low- and middle-income countries of the developing world. That means the manufacturing-intensive Chinese economy is most likely highly skewed toward a pollution- and energy-intensive model of economic activity. In the case of China, there is an important twist – it is the heaviest consumer of coal of all the major economies in the world today. According to China’s Development Research Center, coal-driven power accounted for fully 79% of total electricity generated in 2003 – eight percentage points higher than in 1990 and essentially double the 40% share of coal-powered electricity for the world as a whole. The adverse environmental implications of coal power are well known; according to the Stern Review, the CO2 emissions of coal per unit of energy generation are twice as much as those associated with the combustion of natural gas and about 50% more than those generated by oil-burning technologies. Inasmuch as UK coal consumption – fueling 34% of the country’s total energy generation – is less than half the share in China, there is actually good reason to believe that the pollution implications for the Chinese economy per unit of GDP would be a good deal worse than those implied by the British results cited above. The India comparison is also an interesting one in putting Chinese environmental issues in perspective. India’s per capita carbon emissions are only about half those in China and its total emissions are about one-third those of the Chinese. But the 4.3% average annual growth rate of Indian CO2 emissions over the 1992-2002 period is more than 15% faster than the rapid growth evident in China over the same period – suggesting that if India stays its current course, its environmental threats will quickly get out of hand. Even so, the structure of Indian GDP – a much smaller industrial portion (28%) than China (52%) and a much larger services share (53%) than China (34%) is biased toward a less pollution- and energy-intensive growth trajectory. That’s not to let India off the hook on environmental issues but only to stress that China is very much in a league of its own. China has a rare and important opportunity to kill two birds with one stone. A successful rebalancing of the Chinese economy – moving away from excess reliance on investment and exports and embracing more of a pro-consumption growth model – would be a huge plus in dealing with two key issues: On the one hand, it would enable China to avoid the capacity excesses and protectionist risks that might arise from a continued irrational expansion of a severely unbalanced real economy. But it would also have the advantage of tilting the mix of Chinese output away from a pollution- and energy-intensive growth trajectory. The latest statements from official Beijing are quite encouraging in addressing this conjoined problem. Premier Wen Jiabao’s 5 March “Work Report” to the National People’s Congress strongly endorsed a strategy of macro rebalancing, energy conservation, and environmental remediation. Just as China has had the will and determination to deliver on the reform front over the past 28 years, I am hopeful that it will rise to the occasion and deliver on the rebalancing front. In the end, there is no other choice. And time is growing short.
Important Disclosure Information at the end of this Forum
The Capex Conundrum
March 09, 2007
By Richard Berner | New York
Corporate America seems increasingly unwilling to boost capital spending, despite moderately positive fundamentals. For example, after rising at a 7% rate in the three years ending in the first quarter of 2006, real equipment and software spending slowed to a 1.2% annualized crawl in the last three quarters of that year. Spending on commercial structures fared much better, with a three-year growth rate of 11.9% and a booming 19.2% annual rate over the past three quarters. But overall, the capital spending expansion has largely been missing in action — and, as our macro team’s global capex rant suggested last month, not just in the US but globally (see “The Global Capex Debate,” Global Economic Forum, February 16, 2007). To be sure, the subpar growth in net investment in this expansion has been a good thing for investors, reflecting what I’ve called “capital discipline” — the effort to boost or maintain high returns on invested capital (ROIC). That’s understandable; after all, investors are rewarding CFOs who cleaned up the capex excesses of the 1990s that crushed ROICs and who are now resolved to avoid them. And while I’m sympathetic to the notion that US companies might invest in China or India rather than in the US, the data don’t support the case for a radical substitution. US foreign direct investment (FDI) in those areas, while growing, amounts merely to $3-4 billion annually, compared with $200 billion in overall FDI. Portfolio diversification apparently argues for not putting all investment eggs in the China basket. Moreover, the threat of protectionism may inadvertently boost US investment by the foreign affiliates of Asian firms. Such Asian FDI inflows are running at about a $20-25 billion rate, half of which is from Japan. Back home, however, recent indicators of investment spending look downright dire. For example, overall capital spending contracted last quarter for the first time in nearly four years, and bookings for capital goods excluding defense and aircraft declined at a 13.6% annual rate in the three months ended in January. Will capital spending decelerate along with the economy? Or worse, will CFOs starve their companies of needed growth by succumbing to capital anorexia? In my view, near-term weakness seems probable, because there are several cyclical negatives. First, courtesy of the housing recession and the downturn in Detroit, the economy’s deceleration itself has probably dimmed overall perceptions of future growth and thus damped the perceived need to invest. Economic theory labels the impact of such a deceleration on investment the “accelerator” model; in practice, the “decelerator” typically takes a while to kick in. But that caution has shown up in reduced outlays for construction equipment by homebuilders and for equipment in related industries. And it shows up in CFO surveys. The first-half 2007 Morgan Stanley CFO survey shows that while CFOs expect to increase overall capital outlays by about 5.1% in 2007, they are now planning just 1.2% increases in non-IT spending, compared with 4.3% six months ago. And although respondents to the Duke/Fuqua CFO Survey are more upbeat — they raised year-ahead planned growth in capex outlays to 6.7% from 4.9% last quarter — they are still more focused on buying capacity through deals than building it themselves. Ironically, that’s the second cyclical negative: CFOs tempted to invest have to face financial sponsors who are the new sheriffs in town: They enforce discipline on CFOs by keeping them mindful of industry capacity in deciding whether to buy it or build it. Recent market turbulence hasn’t deterred this brand of shareholder activism from pushing still under-levered CFOs to change their capital structure and use more debt to reduce their weighted-average cost of capital. Nor has it apparently slowed their urge to take companies private, or to sustain returns by using some cash flow for share buybacks rather than indulge in excessive capital spending or frivolous, dilutive acquisitions. This is by now a familiar story, but it is far from over (see “Corporate America Levers Up,” Global Economic Forum, June 16, 2006). As evidence, the Fed’s flow of funds data show that nonfarm, nonfinancial corporations retired a record $701 billion (annual rate) of equity (net of issuance) in Q4 2006, while issuing a record $605 billion in debt to do it. The third cyclical negative is a collection of “paybacks” from one-time factors: Changes in tax laws and emissions regulations, and possibly less rebuilding in the Gulf Coast. Some of the deceleration in equipment outlays over 2006 likely was the result of a “payback” for the boost to spending from the “bonus depreciation” feature of the tax law that only expired for vehicles and other long-lived assets in January 2006. In addition, regulators are phasing in the first part of new, stringent emission standards for heavy trucks for model year 2007 and later that will increase their cost. To avoid those regulations, operators rushed to buy vehicles in 2005-06, and the payback in truck production and deliveries has already begun; heavy truck assemblies plunged 20.1% in January. Finally, some of the 2006 surge in structures investment likely represented rebuilding of facilities damaged by the 2005 hurricanes in the Gulf Coast and Florida. With the surge fading, the pace of structures investment has already cooled off. That’s a daunting array of cyclical headwinds. But I don’t think the weakness in capital spending will last much longer, nor is corporate anorexia likely. That’s because cyclical and secular tailwinds likely will ultimately get the upper hand. Among them: There is still strong “pent-up” demand. While they have receded from their peaks, animal spirits and operating rates are still high, and financing is still supportive. Secular forces, such as an aging population, the productivity and infrastructure imperatives, and the rush to build alternative fuel facilities, are strong. Several metrics buttress the pent-up demand thesis. One comes from standard models of investment behavior. Admittedly, these models have become increasingly less reliable guides to capital spending, possibly because these aren’t your father’s CFOs. Yet, had these relationships held, real equipment and software outlays would be nearly one-third higher today than they are. That cumulative shortfall represents nearly 3% of GDP. Such relationships predict a rising ratio of capital stock to GDP. But just to hold the US capital-output ratio constant requires roughly 6% growth in real equipment spending, reflecting the large scale of the existing capital stock and the heavy depreciation for today’s quickly-obsolete equipment. In fact, the capital stock of equipment and software has actually been declining in relation to GDP over the past four years. Real nonfarm business output rose by an average annual rate of 3.8% over that period, while the real stock of equipment and software rose by an average annual rate of 3.5%. Nonetheless, to achieve that, real gross investment in equipment and software rose at an average 6.6% rate. For investors, any shifts in these capital spending trends might carry both good and bad news. Further weakness in capital spending indicators would likely signal increased CFO anxiety about business conditions as well as a resolve to remain disciplined about capital allocation — bad news for the top line but not so bad for the bottom line. Capex anorexia — however unlikely — could make the global economy more inflation prone. Conversely, renewed capex strength could push up real interest rates, potentially by enough to hurt returns. There’s no mistaking the message in recent data: Near-term risks are tilted to the downside, potentially conveying a renewed sense of overall economic fragility that could, in turn, trigger additional caution, creating a downward spiral. In addition, financial conditions could tighten if lenders and investors, anxious about recent market volatility, further tighten lending standards. In contrast, the message in our analytics is that sooner or later corporate capital spending will reaccelerate.
Important Disclosure Information at the end of this Forum
Heading for Another Rate Hike
March 09, 2007
By Elga Bartsch | London
As expected, the ECB raised interest rates by another 25bp at this week’s meeting, bringing the refi rate to 3.75%. After this rate increase, the ECB still views its monetary policy to be “on the accommodative side” and continues to see “upside risks to price stability” that need to be “monitored very closely”. Our reading of the press conference is that the ECB continues to be very much in tightening mode. In fact, it reserves the right to move again as early as May by insisting that the inflation risks warrant very close monitoring. We thus continue to expect another ECB rate hike before the summer recess. Hopes for a signal that the ECB was getting ready to put its tightening campaign on hold for a while were clearly disappointed. Money markets, which assigned a less than 50-50 chance to a June rate hike going into the press conference, have started to price in a higher probability of another rate hike before the summer recess. But they might have to price in even more. Our refi-meter model suggests that the next hike could come as early as June (see EuroTower Insights: What Marching Orders for Monetary Policy, March 5, 2007). The ECB only made two minor changes to its introductory statement. First, as stated above, it qualified somewhat the assessment of its monetary policy stance as being accommodative. Second, it now considers its refi rate to be “moderate” rather than “low”. In the subsequent Q&A session, ECB President Trichet emphasised that a “moderate” level of interest rates doesn’t mean an “appropriate” level of interest rates. The latter choice of words would signal that the ECB was heading for an extended holding operation, we believe. In addition, the new staff projections show upwardly revised growth estimates of 2.5% in 2007 and of 2.4% in 2008. As a result of this upward revision, the staff also raised slightly its 2008 inflation estimate from 1.9% to 2.0%. As before, the ECB Council views the risks to the growth outlook as being balanced in the near term and as being tilted to the downside in the longer term. The risks to the inflation outlook are still on the upside due to a potential pick-up in wage inflation, a potential rebound in energy prices and further indirect tax hikes. As ever, the Council is concerned about the vigorous money supply and credit growth against a backdrop of already ample liquidity. Shortly after the ECB press conference, a wage agreement, the first major one this year, was reached in Germany. In the chemical industry, the trade union and the employer association agreed on a higher-than-expected wage increase of 3.6% and a one-off payment of 0.7% (see German Economics: Clearing the Decks for IG Metall, February 23, 2007). This is the highest outcome for the 550,000 employees in the sector since 2002. While the effective wage rise in the chemical sector for 2007 is somewhat lower than what the headlines suggest, it still constitutes a notable pick-up in wage inflation. As such, it will likely fuel the ECB’s concerns about accelerating wage inflation in the euro area, we think. On our estimate, negotiated wages in the chemical industry will likely go up by an average 3.3% this year. This somewhat lower average increase is due to a negative base effect from a one-off payment granted in January 2006. Yet, the pay deal constitutes a notable pick-up in the pace of pay rises from the previous 2.7% increase in base salaries (over 19 months) plus a one-off payment of 1.2% paid out in January 2006. The previous deal amounted to an effective rise in negotiated wages of merely 1.0% in 2006, on our calculations. In addition, the mix between a rise in base salaries and one-off bonus payments has shifted considerably towards the former. Under the previous deal, one-off bonus payments still amounted to around 45% of the increase in base salaries. Now the share, which introduces some flexibility to the straight-jacket of industry-wide wage bargaining and which — very importantly — does not tend to be as inflationary as a rise in base salaries, has declined to around 20%. Note that a reduction in the employers’ contributions to the statutory unemployment insurance scheme by 1.2 percentage points of gross wages at the beginning of this year helps to limit the cost pressures somewhat. Nonetheless, the agreement sets the tone for this year’s wage round. Compared to its demand of 4-4.5%, the chemical workers’ union was able to get a very generous 75% of it as a settlement. If the metal workers’ union, IG Metall, which has demanded a 6.5% rise for the 3.4 million workers it represents, was able to secure a similar deal, this would imply a pay rise close to 5%. Such a settlement, which would be considerably higher than most observers including yours truly currently expect, would likely add to the inflation concerns of the ECB Council (EuroTower Insights: Whither Euroland Wages, October 20, 2006). In this case, reaching a refi rate of 4.25% before year-end would become more of a probability rather than just being a possibility. Currently, we are penciling in a 4.25% level for the refi rate for early 2008. But the risks of reaching that level earlier are rising right now.
Important Disclosure Information at the end of this Forum
‘JPY Carry Trades’ the Undeserved Scapegoat
March 09, 2007
By Stephen Jen | London
Summary and conclusions Reading the news reports last week, one could be excused for believing that the fate of civilization depended on the so-called ‘JPY carry trades’. In my view, the role that these trades have played in the global risk-reduction in the past week-and-a-half has been grossly exaggerated. These trades in JPY matter for the JPY, but should not matter for other asset markets. In the near term, I believe USD/JPY and EUR/JPY are likely to rise rather than fall, as new JPY shorts are re-established. Over the medium term, I continue to look for (i) the BoJ to be more hawkish and more assertive and (ii) financial market volatility to rise. Until these two pre-conditions are met, our medium-term forecast for USD/JPY to trade down to 112 by end-2007 and 108 by end-2008 may be in jeopardy. In other words, while I have been structurally bullish on the JPY, ironically I have been unconvinced that the latest correction in USD/JPY and EUR/JPY will be sustained. In the short term, the risks to the JPY are biased to the weak side, in my view. Not clear why equity investors are so focused on the JPY I have been surprised by the focus on the ‘unwind of the JPY carry trades’ by many investors and commentators, particularly those outside the currency space. According to press reports, these ‘JPY carry trades’ are highly leveraged, allowing low interest rates in Japan to support global financial prices, regardless of what the Fed and the ECB’s policies are. This view of the world, that massive JPY shorts are financing long-Turkey and long-global equities positions, also implies that with any shock to this delicate situation (e.g., BoJ rate hikes or a rise in uncertainty), these JPY shorts would be violently unwound, triggering a collapse in global financial prices. I have been puzzled by this view of the world, and believe there are some misconceptions about the ‘JPY carry trades’: • Misconception 1. The unwinding of the JPY carry trades played a key role in the recent equity market sell-off. In the first five days of the recent risk-reduction, some US$3.0 trillion in equity market capitalization was wiped out. One estimate of the total stock of the JPY carry trades, suggested by Mr Watanabe, Vice Minister for International Affairs of Japan’s Ministry of Finance (MoF), is around US$150 billion. The total equity market capitalization for the world is around US$43 trillion. In other words, the size of the ‘JPY carry trades’, estimated by Mr Watanabe, is equivalent to around 0.36% of the world’s equity markets. The decline in the world’s market cap was already 20 times the size of the total stock of this type of JPY carry trade. Further, even though the AUD, NZD and INR are arguably the most popular longs for Japanese retail investors, these three currencies weakened last week, but did not underperform other currencies as much as they should have if the unwinding of JPY carry trades were the key driver of global instability. Blaming the unwinding of the ‘JPY carry trades’ for causing havoc last week is almost as bad as blaming the sell-off on the Chinese equity markets. To me, what happened in the last two weeks was the result of excess leverage, extreme mis-pricing in some markets and investors having the same trades. JPY shorts may have been a popular trade, but it is by no means a dominant position in the market, in my view. • Misconception 2. Japanese investors hold leveraged interest rate-sensitive foreign currency instruments in massive amounts. This is not correct. First, the figure US$150 billion of ‘JPY carry trades’ I mentioned above is a measure of the total stock of foreign mutual fund holdings by Japanese retail investors in the form of bonds. This is big but not huge. Even if there was some leveraging to financing these positions (though there are no hard data proving this point), the size of the leverage couldn’t be that big. Thus, these Japanese outflows are more ‘non-JPY longs’ than ‘JPY shorts’, and do not really deserve the term ‘carry trades’. Second, the returns on many overseas equity investments have grossly exceeded the 4.75% of the cash yield differentials. The motivation for Japanese retail investors to go overseas is as much structural as it is cyclical, and as much capital gains-driven as it is interest rate-driven. Using the term ‘JPY carry trades’ to refer to these equity plays is inappropriate, in my opinion. Third, there are foreign investors, especially hedge funds, who have more recently started to accumulate speculative JPY shorts in size. These are genuine JPY carry trades, i.e., they are interest rate-driven, and are financed by actual leveraged borrowing in JPY. The IMM positioning is a rough indicator of the large size of these positions. While IMM may not show record high short-JPY positions, short-JPY contracts in the past few weeks were nevertheless extremely high (around +115K to +173K contracts) compared with the average over the past decade (around +30K). A violent unwind of these positions could explain the JPY rally in the last week-and-a-half. All this time, Japanese retail investors have been remarkably calm. With the exception of a few hours on Monday (March 5) morning, Japanese institutional investors were net buyers of USD/JPY, not sellers. In short, the fact that the JPY rallied hard as the risky assets sold off, to me, was a reflection of general risk-reduction, especially by hedge funds. The direction of causality ran from global equities to the currency markets, not the other way around. Further, it was the foreign institutional funds that have been doing most of the buying of JPY in the last two weeks, not Japanese funds. • Misconception 3. The term ‘JPY carry trade’ is appropriate. It is a catchy term, but quite a misleading one. I have already mentioned above some of the reasons for my objection to this term. However, I don’t dispute that there are meaningful positions in the market that are short-JPY long-everything else, mainly because of the low yields in Japan. The existence of these positions make the ‘JPY carry trades’ a technically correct term, but I believe the use of the term is too broad and sloppy. • Misconception 4. There is incontrovertible proof of the presence of large ‘JPY carry trades’. On the contrary, data on these ‘JPY carry trades’ are ambiguous. We have written several pieces in the past highlighting the inconsistency in Japan’s data proving that there are large JPY outflows of this type. While some data that track the subscription rates by Japanese retail investors for foreign currency-denominated investment trust funds and uridashi issuances do suggest an increase in outflows starting in late 2005, official data from the MoF and the BoJ on cross-border portfolio flows don’t corroborate this at all (see Further Thoughts on the JPY Carry Trades, February 8, 2007). In fact, the latter data, which should be more comprehensive as they include not only mutual fund flows but also how lifers, pension funds, banks and other institutional funds may be doing, show that, in 2006, there were net bond inflows. Similarly, there is somehow a popular presumption that non-Japanese citizens (Eastern Europeans in particular) have been taking out their mortgages in JPY. We have looked at this issue more closely, and found that JPY loans outside Japan are small and have been declining, not rising (see Type 3 JPY Carry Trades: Fact or Fiction? November 2, 2006). CHF loans outside Switzerland have indeed become much more popular, but not JPY loans. However, I am puzzled to hear other commentators and investors mentioning this type of JPY carry trade, with no data to prove their claim. A currency world driven by nominal factors The fact that nominal factors (cash yield differentials) continue to be more powerful drivers than real variables in the currency space has surprised me. What worries me is that all the reasons I have thought of to explain the dominance of nominal variables — including (1) increased focus on policy rates due to inflation-targeting, (2) enhanced transparency and predictability of central banks, (3) structural capital outflows from aging populations, such as that of Japan, and (4) the greater importance of currency hedging due to financial globalization — are structural in nature. Risk-taking will recover; an opportunity to ‘upgrade’ With the very positive global economic outlook and abundant global liquidity, I see risk-taking recovering rapidly from the latest correction, though there should be better differentiation between assets than in the past. In other words, this is a great opportunity for investors to ‘upgrade’ their portfolios. Absent other changes, USD/JPY is more likely to reclaim 120 than to trade down to the low-teens, in my view. I am still waiting for the BoJ to become more assertive and hawkish and for the volatility in the financial markets to increase further. These two conditions will need to be satisfied for me to be confident that the JPY will appreciate and stay strong. Bottom line I believe the role that the ‘JPY carry trades’ played in the recent risk-reduction has been grossly exaggerated. While there are indeed JPY shorts due mainly to the low yields in Japan, market positioning is not big enough to threaten the global financial markets. The JPY rallying was a result of, rather than the reason behind, the volatility in the equity markets. Going forward, I see much of the speculative JPY shorts being rebuilt, pushing USD/JPY back above 120.
Important Disclosure Information at the end of this Forum
Introducing an Equity Market Cap Tracker
March 09, 2007
By Stephen Jen | London
Summary and conclusions In our view, the epicenter of the recent volatility in the financial markets is the equity and credit markets, not the foreign exchange markets. The latter were affected by the former, and, contrary to popular opinion among equity investors, the JPY was unlikely to be the key driver of the recent equity market sell-off. Given the significant volatility in the global equity markets, and the likelihood that the equity markets will remain more volatile than they have been in recent months, in this note, we present our ‘equity market cap tracker’ that tracks the daily variations in 39 equity markets in the world. Here are our key points. (1) Since February 26, 2007, close to US$2.2 trillion worth of market capitalization has been wiped out. (The total global market cap is around US$43 trillion.) (2) The risk-reduction last May/June was more severe: US$5.3 trillion worth of equity market cap was wiped off. There has been substantially more volatility in the equity markets than in the currency markets. This was most stark in the emerging market space. (3) Relative to last May/June, there are important differences and similarities. (4) The role that the ‘JPY carry trade’ has played in the past two weeks is grossly exaggerated, in our view. (5) We now wonder if the BoT’s decision last December was that bad after all. Our equity market cap tracker We computed the daily changes in equity market capitalization for 39 selected countries, representing all the major regions: North America, Europe, Asia and the three key emerging markets (AXJ, LatAm and Eastern Europe). We make the following observations. 1. Total equity market caps are massive, and are still on an expanding trend. At present, the world’s aggregate equity market capitalization is US$43 trillion — equivalent to around 88% of the world’s GDP (which is around US$47.8 trillion). Global market cap has increased sharply in recent years, rising by 140% since its trough in 2002, and is now 30.5% larger than the last peak witnessed before the bursting of the IT bubble in early 2000. The US accounts for close to 40% of the world’s equity market cap (36% to be exact), higher than its share of global GDP. The EMU’s equity markets are half the size as that of the US. Japan, the UK and AXJ have broadly similar shares of the world total. LatAm and Emerging Europe have relatively small equity markets. China’s equity market cap is tiny: equivalent to only 14% of China’s GDP or 0.8% of the world’s market cap. The popular claim that the sell-off in Shanghai’s A-Share market drove down the world’s equity markets is unconvincing to us. 2. US$2.2 trillion worth of market capitalization wiped out in this sell-off, but the impact on the real economy should be modest. Since last Monday, February 26, US$2.2 trillion (around 4.9%) of the world’s market cap has been wiped out. This is large in absolute terms, but smaller than the US$5.3 trillion in market cap loss from last May/June. Cross-country correlations were very high. By region, emerging markets exhibited their ‘high-beta’ characteristics as they suffered steeper corrections than the major markets. Despite the sources of investors’ worries being in the US (the US sub-prime market and the outlook of the US economy), European equity markets actually underperformed. Nevertheless, over the past year, the equity markets in the EMU (up 21%), AXJ (up 25%) and Emerging Europe (up 25%) still massively outperformed. In general, the markets that have been laggards in the past year (the US and Japan) did not sell off as much last week. From a longer-term perspective, global equity market cap is still on a growth trend, up US$5.8 trillion from a year ago, including the recent sell-off. While equity wealth is indeed one factor that determines consumption, the marginal propensity to consume out of equity wealth is lower than that out of property wealth, which is generally estimated to be around 3-5¢ on the dollar. The latest equity market correction, therefore, should not have a meaningful effect on consumption around the world, unless this trend becomes entrenched. 3. Comparing to the sell-off last May/June. In our view, the differences between this current risk-reduction phase and last May/June are perhaps more interesting than the similarities. We highlight several key differences: First, in contrast to last May/June when the process of risk-reduction went from the peripheral markets ‘inwards’, towards the core markets, this time around, the process is precisely the reverse. It was not until this Monday that emerging markets came under significant pressure, after almost a week of sell-offs in the core equity markets. Second, the epicenter this time, in our view, is clearly the equity/credit markets, with the currency markets being caught up in the storm. Last May/June, volatility in the currency markets preceded that in other markets, and the former was more intense than the latter. Currency movements, with the exception of the TRY and the ZAR, have been rather modest, relative to the equity market volatility. Third, we believe that the main driver behind the sell-off last May/June was the (erroneous) expectation that the Fed had fallen behind the curve. This time around, however, extreme positioning, leverage and valuation have been more important. We are not that convinced that the fears about a recession in the US are genuine: investors talk about it, but this is such a familiar debate that we don’t believe it was a primary driver in the past two weeks. What this means to us is that the adjustment last May/June was regrettable, as it appears that the fear was ‘in our heads’, unsubstantiated by data. However, this time around, misaligned valuation and excessive leverage are real and the broad-based correction should give investors an opportunity to ‘upgrade’ their portfolios. 4. JPY carry trades. By one definition, the total outstanding stock of ‘JPY carry trades’ is around US$150 billion. Since the total market cap of the world’s equity markets is US$43 trillion, it is a stretch, in our view, to argue that the unwinding of JPY carry trades brought down the global equity markets. Unwinding of speculative short-JPY positions outside Japan was a part of the global risk-reduction exercise, but it was more a result of, rather than the reason behind, the sell-off in global equities, in our opinion. 5. Second thoughts on Thailand’s capital controls? While the BoT’s introduction of the URR (unremunerated reserve requirement) on December 18, 2006, was met with broadly negative assessments from market analysts, including ourselves, it is interesting to note that, in this sell-off, Thailand suffered the least repercussions of all the countries we included in our sample and the Thai baht actually appreciated against the dollar. We are, in general, supportive of the orthodox view that capital markets should be open, particularly when financial globalization has become such a powerful trend. However, the experience of the past week-and-a-half does raise the interesting question whether the BoT really did make a policy error. We expect risk-taking to almost fully recover We believe this sell-off is a short-term correction in a structural bull trend. The global economy is very robust, and growth is more balanced geographically and sectorally than at any time since the recovery began in 2002. In light of the persistent excess savings in the world (and surprisingly low capital expenditures), global liquidity will remain abundant. Having said this, reductions in value-at-risk (VaR) could crimp some global liquidity. Further, to the extent that some assets are still grossly over-valued, this is a good opportunity for investors to upgrade their portfolios, and risk-taking will almost recover fully in the not-too-distant future, in our view. Bottom line While we believe risk-taking will almost fully recover after this sell-off, we suspect equity markets could remain more volatile than they have been in the past few years. We have constructed a market cap tracker to help us monitor the daily changes in the key equity markets in the world, and to help us think about how changes in risk affect the currency markets.
Important Disclosure Information at the end of this Forum
Quarterly Currency Valuation Update
March 09, 2007
By Stephen Jen | London
Summary and conclusions We updated our fair value (FV) calculations for the G7 dollar index, the G10 bilateral exchange rate and the AXJ (Asia ex-Japan) currencies, using preliminary 4Q economic data that have just become available. The G7 dollar index still seems to be appropriately priced, for the third quarter in a row. Although the G7 dollar index’s fair value followed a slightly downward-sloping line since 2002, it has now stabilized. In contrast, the familiar misalignments persist for the G10 currencies. These misalignments are mostly visible for the low-yielders, as both the JPY and the CHF remain significantly under-valued. Further, the EUR/USD and the GBP/USD continue to be over-valued, possibly reflecting some portfolio effects that have supported these currencies. All three commodity currencies are overvalued, but much less so for the CAD than for the AUD and the NZD. The AXJ currencies (ex China) are still in slightly over-valued territory against the dollar. In terms of numbers, the median FV of EUR/USD is 1.13 and that of USD/JPY is 106. Our thoughts We have the following thoughts. • Thought 1. The recent episode of risk-reduction led to exchange rate movements towards their FVs. We have become more confident in our valuation framework, after witnessing the developments in the currency markets during the recent round of risk-reduction. In the last two weeks, virtually every single exchange rate moved towards its FV! This suggests to us that risk-taking, liquidity and leverage may have culminated in a situation where exchange rates were misaligned through financial flows, rather than the real fundamentals. • Thought 2. Risk-reduction is likely to prove to be temporary. This is a judgment call on our part. We are not convinced that this recent round of risk-reduction will be long-lasting, though a modest crimping of risk-taking may be possible. By and large, risk-taking, we believe, should almost fully recover and will be gradually rebuilt. In other words, we think that the market will perceive this as a temporary phenomenon, allowing investors to re-enter previously held trades at better entry levels. If we are right in this, we think that the low-yielders could come under renewed pressure in the coming weeks. In particular, and despite its fundamentals, the JPY’s recent gains appear fragile to us. The carry trade environment could persist for somewhat longer, pushing exchange rates back into misaligned territory, however convinced we are by the fair value calculations. • Thought 3. US data will be key. When the ‘dust settles’, investors are likely to focus back on the US economic fundamentals and the familiar soft- versus hard-landing debate. In any case, our view remains that a soft landing in the US is the most likely scenario, one that will ironically be most negative for the dollar. The dollar should, therefore, remain on its back foot through 1H. • Thought 4. The commodity currencies still appear over-valued. While the CAD is only slightly overvalued, both the AUD and NZD appear still much too strong relative to their fundamentals. We think that cash yield differentials may help explain in part why both these currencies are more over-valued. The main risk to the AUD and NZD, in our view, is the impact of a slowdown in demand growth in China. Unwinding of JPY carry trades remains a risk, but it is perhaps a risk for later this year, rather than in the near future. Bottom line We have updated our fair value (FV) calculations. The main story remains unchanged: the G7 dollar index is fairly valued, but many bilateral exchange rates remain misaligned. The recent round of risk-reduction freed up virtually all exchange rates to move towards their fair values. This is important, and implies that capital flows have kept these exchange rates away from their FVs.
Important Disclosure Information at the end of this Forum
Whither X, for X = 1 to 6
March 09, 2007
By Robert Alan Feldman | Tokyo
Over the last three weeks, I have had intensive discussions with investors in Europe, North America, Australia and Asia about the Japanese economy and financial markets. Remarkably, despite the wide swings in the equity market, the concerns have remained largely the same. I take this as a good sign, i.e., that investors have not been fundamentally shaken by the risk adjustments of the last few weeks. So what are investors thinking about? 1. Whither the yen? The large majority of investors believe that the recent strengthening of the yen was merely a correction, and does not imply a shift of direction toward yen strength. With the BoJ unlikely to be able to hike rates more, and with US rates likely to remain high, the interest rate differential will remain, and Japanese investors (especially retail investors) will keep shoveling capital out the door. Hence, the yen is likely to re-weaken, according to the consensus. What was different these three weeks from last January was the willingness of investors to listen to alternative views. In January, virtually no one believed than any yen strength was possible, and listening to opposing views was a waste of time. Very few think so any more, even if they stick to the weak yen view. Moreover, the fact that resident capital outflows in the bond category — the main source of outflow in recent years — have fallen from Y18 trillion per year on average in 2003-05 to only Y5 trillion in 2006 was quite a surprise to most investors. So was the fact that the 2006 current account surplus (which represents the supply of dollars that needs to be recycled) reached the highest level as a share of GDP since 1986. This all implies that investors now regard yen/dollar as less of a one-way bet. Market movements over the last few weeks underscore this sentiment. One can reasonably expect this change of perception about risk in the FX market to affect stock selection by foreign investors. 2. Whither consumption? The second most frequent question concerned the future of consumption. Most investors understand that data quality in this area is very poor, and that circumstantial evidence is needed. This fact has led most investors to focus on wage growth as the proxy for health of consumption. It is not pretty. Hourly wages have decelerated, even as the quantity indicators (such as the unemployment rate and the job-offers-seekers ratio) have improved. Moreover, the old explanation — a rising number of part-timers — no longer works, because the share of part-timers is actually falling. Unlike domestic investors, however, a large portion of foreign investors are not aware of the impact of retirement of the baby boomers on wages. Foreign investors are surprised to learn that the baby boomers will take jobs at their old companies at 30-40% lower wages and be happy about it. The reason for the surprise is largely a lack of familiarity with the Japanese labor market customs, and pension treatments. Once explained, however, these factors calm foreign investor fears of continued weak consumption. That said, the majority still believe that Japan cannot have a vibrant economy until consumption becomes a growth leader. I tried to argue against this view, on the grounds that a sustainable growth rate in the face of aging requires constant deepening of the capital stock, and thus requires relatively slow growth of consumption. My protestations largely fell on deaf ears, however. I expect foreign investors to continue to focus on consumption as a theme. This fact gives investors who agree with my view a longer window in which to search for capex-related stocks, which I believe include some of the most promising in Japan’s equity market. 3. Whither monetary policy? The third prime topic was monetary policy. The vast majority of foreign investors have a great deal of difficulty reading BoJ policy. After voting 6-3 against a rate hike in January, the BoJ voted 8-1 in favor of a hike in February, with very little evidence of any major change in the economic fundamentals, even while CPI changes head south. Both credibility and transparency of the BoJ have dropped, in the minds of foreign investors. While generally positive to the idea of ‘normalization’ of interest rates, investors have a difficult time defining the term. Nor has the BoJ been particularly helpful. Having defined a ‘reference range’ for price stability of 0-2%, the BoJ is ‘normalizing’ rates when the CPI ex fresh food has decelerated from 0.3% Y/Y in August 2006 to 0% Y/Y in January 2007, and the CPI ex food and energy has remained in negative territory (or 0.0% Y/Y on three occasions) continuously since 1998. Regardless of opinions about the BoJ decisions, most investors agree with my colleague Takehiro Sato and myself that the BoJ will be on hold for a long time. This view essentially takes monetary policy off the agenda in stock selection. The main implication is that banks are less likely to be the focus of attention, since a quiet BoJ lowers hopes for rate hikes that lead to higher earnings. Another implication is that small cap stocks get a boost relative to large caps, since the former will not suffer from higher interest payments and the latter will not gain from higher interest earnings. 4. Whiter industrial reorganization? Investors also spend considerable time asking about corporate reorganization. The proposed takeover of a major Japanese securities house by a foreign financial firm posed the background for investor interest, but the issue in fact goes much deeper. Indeed, if Japan is to maintain its standard of living in the face of an aging population, then productivity gains are essential. Technology and globalization can only provide so much. There needs to be consolidation in a very broad range of Japanese industries. On this point, investors were unanimous. The difference of opinion comes in how to invest in reorganization as a theme. Some investors focused on buying potential targets of M&A, but others thought such a strategy risked tying up capital for long periods with uncertain returns. Others focused on buying the acquirers, which tend to be strong companies to begin with. The critique of this latter strategy was that strong firms are often already highly valued in markets, and may not have the will to acquire weaker counterparts. In such situations, a trigger is needed to start reorganization actions. Interestingly, a majority of investors were unaware of recent good news on triggers. First, there has been important change in merger policy, the easing of ‘safe harbor’ rules that give automatic approval to mergers that do not harm competition significantly. Second, there will soon be the introduction of Japan Depository Rights (JDRs), which will make foreign listing in Japan easier and cheaper, and thus help spur mergers between foreign and domestic firms. Third, a spate of merger and tie-up announcements has given new credibility to expectations of accelerated M&A. In light of these factors, I expect a growing level of foreign interest in reorganization investments by foreigners. Industries with large efficiency gaps among firms are likely areas for foreign investment. (For a treatment of efficiency gaps, see my two papers — Opportunities Abound, January 11, 2007 and Industrial Reorganization: Who’s Next? January 15, 2007.) 5. Whither Abe? About half of the global investor base asked about how PM Abe is doing. Most are concerned about the drop of support for the PM and for the Cabinet, and implications for the Upper House election. That said, the depth of worry was rather shallow. Few seem to think that political factors are a threat to the economy at this point. Come summer, however, attitudes could change. The views expressed by foreign investors largely follow those in the foreign press, which in turn follow those in the Japanese press. As the July Upper House election nears, the Japanese press is likely to turn hostile to the government, and this hostility will be reflected in foreign press stories as well. Some political risk premium could surface in foreign attitudes toward Japan over the summer, and then dissipate after the election. 6. Whither property? Finally, a significant share of investors asked about the property market. Some were excited by the increases in property prices and rents, but others compared Japanese real estate price increases to those in other countries unfavorably. However, there were remarkably few investors who understood the large differentials of land price movements not only between big cities and small ones, but even within the big cities. Granted, there were very few real estate investors among the clients on this trip; presumably, dedicated real estate investors would have more detailed information. However, the attitudes of institutional investors on the issue of real estate are likely to be driven by headline events, along with moves toward consolidation in the JREIT industry. It seems unlikely that a new dose of investments in Japanese equities will come from foreigners excited about real estate.
Important Disclosure Information at the end of this Forum
Back to the Fundamentals
March 09, 2007
By Takehiro Sato | from Paris
The exuberance and its sharp reversal last week, stemming from overblown expectations that yen carry trades would continue to be profitable for an extended period, are a reminder that there are no free lunches. That said, we recommended sticking with a fundamental buy-on-weakness stance last weekend, and this strategy has proven effective so far in getting through the meltdown, supported by solid macro data. Indeed, last week’s data flow, such as on personal consumption, grassroots sentiment and capex, were mostly supportive for our upbeat stance. Contrary to glum expectations, consumption data in January showed an overall pick-up from a weak December for both supply- and demand-side data. In fact, the January synthetic consumption index in real terms, which amalgamates supply- and demand-side statistics such as for consumer goods shipments and household spending, rose 0.8% over October-December, on par with GDP-based consumption, and maintained similar growth as in the previous quarter. This kicks off the January-March quarter nicely, overall. Likewise, real January consumption in the Cabinet Office’s Composite Index was up 1.8% MoM, and real GDP in the same index was +1.1% over the October-December period (+4.5% annualized), starting the year off strong too. So, from even just a mean reversion perspective, personal consumption looks like a good area of the economy to be positive about. Grassroots sentiment has also turned positive. In the February Economy Watchers Survey, watchers’ sentiment improved impressively in the household segment, and the BoJ’s rate hike only affected sentiment in the corporate segment. Among the watchers’ comments, in the household segment many mentioned front-loaded sales of seasonal items in the retail industry. Some also noted growth in upmarket goods. In the corporate segment, although some voiced concerns about a possible rising interest rate burden ahead, others noted that potential home buyers should remain numerous even in a rising interest rate setting. On the employment side, many spoke of ongoing improvement in the employment situation, though some also referred to a fall in the number of job offers. One concern is that the February survey was conducted during February 25-28 and showed limited impact from the global market corrections at the tail end of the month. So, it is possible that the recent market upheaval could have a greater say in the next survey to be conducted during March 25-31. That said, if the headline DIs bottom in January, history suggests that a sense of economic rekindling could gain traction from April. Capex remains solid. The October-December quarter MoF Corporate Statistics tabbed capex, excluding software, at a vibrant +17.6% YoY (+5.2% seasonally adjusted), which was the largest gain in these statistics. As such, we look for a slight upward revision to October-December real GDP (2nd preliminary; TBA: March 12). January machinery orders also bounced back moderately from December, and we look for core orders to rise comfortably for a second consecutive quarter after dipping last July-September. The data suggest that private domestic demand, chiefly capex, stood further out as the driver of the economy, fitting with our scenario. Meanwhile, even personal consumption is now giving signs of a kind of mean reversion. Asset markets, and especially the equity markets, are proving more susceptible to corrections now, and with investors opting to avoid risks in the wake of renewed concerns in the US housing market, it is feasible that the economy could enter a mini-dip, based on a comparison with last year. In particular, Japanese cars could fall out of favor in North America as gas prices subside, eliminating autos production and exports as a driver for the economy, as they were for exports last year. Still, personal consumption, which undermined the economy last year, has held stronger than expected in January and February even after rebounding sharply last October-December. Companies are quite aggressive on capex too with the tight labor market. We doubt domestic demand will fall into an unexpectedly deep dip. Under such conditions, the lone concern is price movements. Ironically, the price trend is bound to turn negative shortly after the BoJ’s rate hike, which likely ends any hope of an additional rate hike ahead. This is disadvantageous for the banks in their effort to raise loan contract rates, especially when bank lending shows some signs of growth moderating like now. Incidentally, the let-off in loan growth will make for more active arbitrage transactions between loan rates and JGB yields, so long as loan rates do not climb. Therefore, the main risk is further long-term interest rate declines prior to the end of F3/07 due to a revival of a cash flow dynamics. Finally, we are monitoring yen loans by foreign banks located in Japan that are assumed to be closely linked to yen carry trades. The value of outstanding loans at such banks levelled off at ¥6.6 trillion (growth slowing to +46.9% YoY), suggesting that these yen-denominated overseas loans in yen carry trades may have already tapered off at the end of last year. As we’ve noted, the notion that yen carry trades would continue forever after the BoJ’s rate hike was obviously baseless over-optimism. Even so, we urge against overt pessimism, since the bulk of original carry trade positions could also remain intact and likely surge again, as the search for another free lunch goes on.
Important Disclosure Information at the end of this Forum
Disclosure Statement
The information and opinions in this report were prepared or are disseminated by Morgan Stanley & Co. Incorporated and/or Morgan Stanley & Co. International Limited and/or Morgan Stanley Japan Securities Co., Ltd. and/or Morgan Stanley Dean Witter Asia Limited and/or Morgan Stanley Dean Witter Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H) and/or Morgan Stanley & Co. International Limited, Taipei Branch and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean Witter Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents), and/or JM Morgan Stanley Securities Private Limited and their affiliates (collectively, "Morgan Stanley").
Global Research
Conflict Management Policy
This research observes our conflict management policy, available at www.morganstanley.com/institutional/research/management_policies.html
Important Disclosures
This report does not provide individually tailored investment advice. It 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 them to seek a financial adviser's advice. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we do not represent that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a company. Facts and views in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
To our readers in Taiwan: This publication is distributed by Morgan Stanley & Co. International Limited, Taipei Branch; it may not be distributed to 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 Dean Witter Asia Limited as part of its regulated activities in Hong Kong; if you have any queries concerning it, contact our Hong Kong sales representatives.
This publication is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main, 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 this document 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. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents. Morgan Stanley & Co. International Limited, 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 the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act.
Trademarks and service marks herein are their owners' property. Third-party data providers make no warranties or representations of the accuracy, completeness, or timeliness of their data 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. This report 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 is available on request.
|
