An ‘Untimely’ Question: What Could Go Wrong with the Economy?
July 23, 2007
By Qing Wang and Denise Yam | Hong Kong, Hong Kong
The National Bureau of Statistics released a key set of data for 2Q07 on July 19. It reveals yet another robust quarter, with GDP growth of 11.9%YoY, the fastest pace since 1995, and average CPI inflation at 3.6%YoY, the highest reading since October 2004. While exports and investment remain the two main growth drivers, consumption growth continues to demonstrate steady and strong momentum. These developments indicate very buoyant underlying activity and support our bullish view on the Chinese economy. However, rather than simply relish reading yet another round of impressive data, we prefer to consider what could potentially go wrong with the Chinese economy despite these strong headline data. We address this ‘untimely’ question in this note.
We envisage three scenarios under which things could go wrong with the Chinese economy in the next few years: i) an external shock that results in substantial weakening of external demand; ii) an internal shock (e.g., a stock market bubble burst) that threatens banking sector stability; and iii) a policy shock (or policy mis-step) that causes a hard landing of the economy. In our view, if things go wrong with the economy, it will most likely be the result of one of these scenarios. However, we attach a low probability to the above risks materializing fully — in part because we think there is now a considerable built-in cushion in the economy that should allow the Chinese authorities to take counteractive policy actions to contain and mitigate the impact of any such negative shocks. Moreover, the much-talked-about risk of a potential post-Olympic downturn in China is quite low, in our view. We find it much easier to identify scenarios under which things could potentially go wrong with the economy than to predict whether any of these scenarios will indeed play out. While under each scenario where we see the risk of something going wrong with the economy, we also find compelling reasons why these risks are unlikely to materialize in full, causing substantial damage to the economy. As a matter of fact, this exercise helps reaffirm our bullish view on China — which is essentially that the expansionary phase of the current cycle (reflecting the enormous benefits to China brought by globalization and the attendant positive impact on the rest of the global economy) has yet to run its course. Scenario I: A substantial weakening in external demand Exports have been the primary driver for growth in the current cycle. China has been reaping the greatest economic benefits from globalization. In the five years subsequent to China’s becoming a member of the WTO in late 2001, China’s exports have grown by average of 30% per annum, more than double the average pace of 12% in the previous five years (1997-2001). Exports expanded by another 28% YoY in 1H07. We estimate that exports now account for over 40% of GDP. With such large exposure to external demand, the Chinese economy is particularly vulnerable to a substantial weakening in China’s external demand stemming from, inter alia, a potential hard landing in the US economy, an all-out trade war between China and its major trading partners, and/or a major breakdown of the regular trade and capital flows channels as a result of terrorist attacks or natural disasters. A substantial weakening of China’s external demand would cause export growth to collapse. Chinese producers would have to turn to the domestic market to sell their products. This added supply in the domestic market would depress prices and could push the economy into deflation. China has suffered two episodes of deflation in recent history: one during the Asian financial crisis and the other in the aftermath of the NASDAQ stock bubble burst. The deflation either coincided with or occurred in the immediate aftermath of a collapse in export growth. If such a downturn in external demand were to persist, the damaging impact on the economy would be more profound, in our view. When external demand is strong, China’s ‘overcapacity of production’ is only a tendency, not an actual outcome, because ex ante overproduction translates into ex post trade surpluses (see China Economics: Our View on the Economy in a Single Diagram, June 25). If, however, external demand were to weaken substantially and persistently, China’s overproduction capacity and overinvestment problems would be laid bare, and non-performing assets and non-performing loans (NPLs) would emerge. Consequently, the soundness of the banking system could be subject to a serious test. Banks’ efforts to strengthen their balance sheets would entail higher lending standards and cautious lending behavior. The negative external shocks would thus likely be transmitted more broadly to the rest of the economy through banks’ credit channels. Instead of attempting to estimate the probability of such a scenario, we look at possible ways to mitigate this negative impact, if such a scenario were to unfold. In this regard, we believe that the Chinese government has the capacity to stimulate domestic demand by running an expansionary fiscal policy to offset a negative external demand shock. Specifically, China’s government debt level is quite low by emerging market economy standards. As of end 2005, China’s government debt was only about 18% of GDP, much lower than the 45-50% GDP levels in other emerging market economies. This low debt level suggests considerable room for expansionary fiscal policy, financed by government bonds, to boost the economy before the government runs into a debt sustainability problem. We therefore believe that, even if there were to be a substantial weakening in China’s external demand, the overall impact on the economy would likely be manageable in view of the government’s capacity to boost domestic demand through expansionary fiscal policy. Of course, this call hinges on the assumption that the external shock would be relatively short-lived (e.g., 1-2 years). If, however, it were to be a multi-year shock, the negative impact would be much more serious, as the government could not afford to run large fiscal deficits (i.e., financed by bond issuance) persistently without eventually running into a debt crisis. Scenario II: Banking sector instability in the aftermath of a stock market bubble burst A major correction in the stock market could cause serious damage to banks’ balance sheets, if the banks have large exposure — direct or indirect — to the stock market. In order to safeguard the quality of their assets and meet relevant prudential requirements, we would expect the banks to respond by raising their lending standards, squeezing overall bank lending. Thus, the impact of a major stock market correction would then be magnified by the credit channels of the banking system. The resulting damage on the real economy (e.g., investment, consumption) would be much larger, especially given the banks’ dominance in financial intermediation in China. Anecdotal evidence suggests that, since mid-2006, when the A-share market started to take off, some households have increased their overall leverage ratio through conventional household loans (e.g., mortgage loans) to invest in the stock market. With potential returns from investing in the stock market substantially and persistently higher than those from conventional investment activity, not only households but also the corporate sector could be tempted to leverage up with money borrowed from the banks to invest in the stock market. Moreover, since money is fungible, the banks could still be indirectly exposed to the stock market if the corporate sector invests its own funds into the stock market and simultaneously increases borrowing from the banks for other ‘legitimate’ purposes. However, given data paucity, any attempt to estimate banks’ real exposure to the stock market is largely guesswork, in our view. We have instead run a stress-test based on the published data for the major Chinese banks listed on the Hong Kong Stock Exchange, with a view to illustrating the risks involved. Specifically, we have assumed that a portion of all new bank loans since June last year, when the stock market started to take off, have been diverted to the stock market in one form or another. We also assume that the burst of the stock market bubble would turn these newly extended loans into NPLs, which would entail a complete write-off against the banks’ capital. Under this scenario, the capital adequacy ratio (CAR) of these banks would take a hit and could drop to below the minimum regulatory requirement. This would likely trigger the banks to scale down their exposure by reducing other lending, potentially causing a credit crunch. The current average Tier 1 capital adequacy ratio (CAR) for these banks is roughly 9%, well above the 4% minimum regulatory requirement. However, we estimate that, if 30% of the expansion in outstanding loans during June 2006-June 2007 has been diverted to the stock market and would turn into NPLs in the event of stock bubble burst, the banks’ average Tier 1 CAR could drop below the 4% threshold, thus triggering a credit crunch. Although this 30% of new loans being diverted into the stock market sounds a bit high at the current juncture, we do not believe that it is an unrealistic assumption, if stock market prices continue to rise rapidly. The deterioration in the asset quality of the banks could also undermine public confidence in the banking system. In a worst-case scenario, this may lead to run on the banks such that the banks would be pressured from both sides of their balance sheet. The probability of such a scenario hinges on the extent to which new bank loans have been diverted to the stock market. Since the China Banking Regulatory Commission (CBRC) prohibits Chinese banks from lending to investors to purchase stocks, no published official data are available on banks’ exposure to the stock market. However, cross-country experience suggests that the longer the bubbly stock market lasts, the more exposed the banking sector will likely become. However, the potential fallout from this scenario would be manageable, in our view. First, if the initial bubble burst is a market event instead of an economic one (i.e., there is no material deterioration in the economic fundamentals), the authorities might well resort to regulatory forbearance, such that banks would not be forced to cut down on their lending to meet the CAR requirement in the immediate aftermath of the burst, which would substantially reduce the risk of a serious credit crunch. Second, the government’s strong financial position might allow the bailing out of troubled banks. To illustrate this point, we assume that 30% of the expansion of outstanding loans of the entire banking system during June 2006-June 2007 turns into NPLs as a result of a stock market bubble burst. We estimate that, even if the government were to write off the entire stock of NPLs and recapitalize the banks with government bonds, its debt level would rise to only 23% of GDP from 18% currently, still well below the average level in most emerging market countries, and thus debt sustainability would not be an issue. Third, China’s outsize official FX reserves, together with capital account controls, should ensure limited risk of a widespread bank run. Specifically, with capital account controls in place, China’s ample FX reserves virtually obviate the risk of renminbi exchange rate devaluation, in our view. With unshaken confidence in the currency (i.e., residents in China are still willing to hold onto their renminbi assets despite a lack of confidence in the banking system), the PBoC’s role as a lender of last resort should allow it to inject ample liquidity into the system to head off any potential bank runs. Scenario III: Potential policy missteps China has enjoyed double-digit GDP growth for four consecutive years since 2003 and looks set to turn in another year of double-digit growth in 2007. However, in the past, China’s economic growth has been characterized by periods of cyclical surges in economic activity and inflation, followed by periods of retrenchment. These boom-bust cycles have been due in part to policy mis-steps, in our view. The 1986-90 cycle began with an early relaxation of monetary and fiscal policies in the run-up to the change of government in 1988 due to concerns that stringent policies, adopted during the previous cycle, were causing problems for stated-owned enterprises. Inflation rose to 19% in 1988, and the authorities subsequently responded with heavy-handed administrative measures, which brought about a hard landing in fixed-asset investment and GDP growth in the following years. The 1991-97 cycle was initiated by a rise in government spending and an easing in bank credit policies. By 1992, the year before the government change took place, an investment boom was already underway. Strong demand pressures led to inflation, exacerbated by liberalization of food prices and public sector wage hikes. The authorities responded in mid-2003 with a comprehensive policy package to cool the economy, including raising interest rates, direct control over bank lending, and tightening administrative control over investment approval. However, the macro-controls were temporarily reversed in late 1993, the year of government change, which, together with the renminbi exchange rate devaluation of 1994, resulted in a hyperinflation of 24% in 1994. While a soft landing was achieved eventually, the rapid expansion of bank credit in 1992-96 contributed to the bulk of the NPLs that impaired the banking system until the largest state-owned banks were recapitalized and restructured. Looking ahead, we cannot rule out completely the possibility of another boom-bust cycle in China within the next few years. Past experience suggests that economic activity tends to be very buoyant and even becomes overheated in the run-up to, and in the immediate aftermath of, a change of government. This appears in part to have reflected reluctance by the authorities to take early and decisive tightening measures to tackle potential economic overheating around these sensitive periods. China’s most important political event — the Communist Party Congress — occurs every five years. The 17th Communist Party Congress will take place in September or October this year, and will pave the way for the next change of government in March 2008, when the National People’s Congress meeting convenes. Against this political backdrop and in view of relatively low interest rates, undervalued exchange rates and strong corporate earnings, we see a risk that economic activity may become overheated and that the policy response may be inadequate. Besides this political cycle factor, we also believe that there is an ongoing structural slowdown in China’s money demand (see China Economics: Tighter Policy on Structural Shift in Money Demand, July 3). If the PBoC continues to target stable broad money (M2) growth, it risks running an overly accommodative monetary policy. In such a case, the authorities might be forced to take much stronger tightening measures to cool off the economy at a later stage (e.g., in 2009-10), with the attendant risk of causing an economic hard landing. On the other hand, the probability of such a boom-bust cycle playing out is now lower than previously, in our view. First, macroeconomic management in China appears to have improved substantially since the late 1990s, resulting in lower volatility in key macroeconomic variables (e.g., GDP growth, inflation, fixed asset investment) than in the 1980s and 1990s. Second, the Chinese economy has become much more open, decentralized and private-sector-driven. We believe that this change would weaken the impact of any draconian administrative measures to control the economy, such that the economy would likely adjust to the policy changes in a less haphazard fashion than before. Third, the Chinese authorities appear to have become more willing to take pre-emptive policy actions to address emerging problems in the economy. A case in point is the recent launching of a new round of macro tightening, while signs of overheating are still tentative (see China Economics: The Authorities Appear Poised to Initiate a New Round of Macro-tightening, June 13). But what about a post-Olympic Games downturn? There appears to be a popular concern among China observers that the economy may suffer a major downturn after the 2008 Beijing Olympic Games, as was the case in some other countries that hosted the Olympic Games in the past. This is because there tends to be a boom of Olympic Games-related investment spending (e.g., on infrastructure) in these countries in the run-up to the event. However, when the Games are over, activity tends to slow down substantially, leading to an economic recession. However, we think that the macroeconomic impact of the 2008 Olympic Games in Beijing is unlikely to be as large as many fear, because Beijing is small in terms of its importance in China’s national economy. We examine the experiences of the six Olympic Games since 1980. We find that, if the city in which the Games take place accounts for a large proportion of that country’s economy or population, then this ‘post-Olympics syndrome’ tends to be pronounced, especially when measured by real GDP growth. This is the case for Seoul (1988), Barcelona (1992) and Athens (2004), where there was a significant decline in national GDP growth in the year following the Games. In Sydney (2000), the slowdown in national GDP growth occurred in the year when the Games took place. However, if the city is small relative to the size of the national economy, the macroeconomic impact of the Olympic Games tends to be much smaller, even negligible. This is clearly the case for the 1996 Olympic Games held in Atlanta. The spike in US GDP growth in 1984 and the subsequent sharp decline in GDP growth appears to have had more to do with the full phase-in of President Reagan’s tax cut in 1984, which served as a major positive boost to economic growth in that year, than the Olympic Games effect per se. Beijing is ‘small’ in that its shares of China’s GDP and population are only about 4% and 1%, respectively. The large amount of Olympic Games-related spending in Beijing will likely have a significant impact on the local economy; however, its impact on the national economy is unlikely to be large, in our view. Other problems in the economy Besides the risks/vulnerabilities that we identify and discuss above, there are, of course, other problems in the economy, including income disparity and its attendant social and political tensions, environmental pollution and natural resource degradation, and an unbalanced growth model (i.e., relatively weak consumption). However, these problems are evolutionary and carry a low risk of explosive developments, in our view. Bottom line We find it much easier to identify scenarios under which things could potentially go wrong with the economy than to predict whether any of these scenarios will indeed play out. While under each scenario where we see the risk of something going wrong with the economy, we also find compelling reasons why these risks are unlikely to materialize in full, causing substantial damage to the economy. This is in part because we think there is now a considerable built-in cushion in the economy that should allow the Chinese authorities to take counteractive policy actions to contain and mitigate the impact of any such negative shocks. As a matter of fact, this exercise helps reaffirm our bullish view on China — which is essentially that the expansionary phase of the current cycle (reflecting the enormous benefits to China brought by globalization and the attendant positive impact on the rest of the global economy) has yet to run its course (see China Economics: Upgrade Our GDP Growth Forecasts, June 18).
Important Disclosure Information at the end of this Forum
A New Beginning
July 23, 2007
By Serhan Cevik | Istanbul
Election results bring political stability and mark a new beginning for the Turkish economy. Until April 27, when institutional disruptions heightened uncertainty, we were expecting this year’s elections to be one of the least unpredictable ones in Turkish history. Our model based on economic factors pointed to growing support for the AK Party, albeit with a smaller number of seats in parliament. However, with disturbing developments, we feared polarization in voting behavior and a more fragmented parliament. It turns out that the voters looked beyond fear-driven politics and opted for political normalization and economic stability. For the first time since 1954, the ruling party increased its votes for the second term — from 34.3% in 2002 to 46.5% this year. According to preliminary results, two other parties passed the threshold for parliamentary representation, with CHP and MHP receiving 20.9% and 14.3%, respectively. As a result, AKP now has 340 seats in the 550-seat parliament — enough to form a single-party government. Moreover, the new parliament represents 86% of the votes, up from 55% in the previous assembly. Thus, we see the election results as a solid foundation for political normalization and a new beginning for the Turkish economy. Turkish voters have given a mandate for economic and institutional reforms. The AKP’s landslide victory is not surprising, if we focus on uninterrupted economic growth and disinflation in the past five years that more than doubled per capita income and even delivered steady improvements in income distribution (see The Rise of the Middle Class, May 14, 2007). No wonder AKP attained most of its gains among middle-income voters and consolidated its position at the center of the political spectrum. This is why we think that Turkish voters have moved beyond the status quo barrier and renewed the mandate for reforms. The new political configuration is a clear sign of Turkey trying to liberate itself from the confines of anachronistic institutions and to re-energize modernization efforts. It seems that the authorities also realize this opportunity and are likely to deepen institutional and constitutional reforms. Therefore, we expect political normalization and greater openness to help Turkey with gaining more traction in membership negotiations with the European Union and accelerating economic convergence (see A Big Bang Theory of Convergence, June 8, 2007). Political stability will lead to lower interest rates and faster growth, in our view. With a stable political outlook, we revise up our real GDP growth estimates from 5.6% to 6% this year and from 7.2% to 8.5% in 2008. Although there are still potential sources of uncertainty, political stability will help to maintain growth momentum, just like in the last five years. In addition to strong export growth, the accumulated energy in the domestic economy will turn into a major engine of output expansion. With lower interest rates in the coming months, we expect acceleration in credit growth and a sustained recovery in domestic demand. This may be great news for the equity market, but it could become a nightmare for the central bank’s efforts to bring inflation down to the 4% target. This is why we also expect only gradual monetary easing — about 75bp — later this year. At this stage, Turkey needs price stability and fiscal discipline in order to remove distortions in the economy. In our view, sustainable macroeconomic normalization and microeconomic reforms aiming to remove structural bottlenecks would help Turkey to realize its full economic potential. Becoming a trillion dollar economy is no longer a fantasy from the cloud-cuckoo land. Our calculations show that Turkey has the potential to become a trillion dollar economy over the next ten years — or even earlier if we account for the expected revision in national accounts (see Trillion Dollar Economy, July 18, 2007). With political stability, becoming a trillion dollar economy is no longer a fantasy and will have significant implications for asset markets. We expect structural reforms to increase productivity-driven output growth and thereby corporate earnings. On the other hand, fiscal consolidation and disinflation towards price stability will reduce the risk premium and bring down interest rates. Such a virtuous cycle of economic growth and financial deepening would attract foreign (direct) investment and encourage residents to reinitiate portfolio de-dollarization. In other words, the Istan-Bull will keep running, as long as there are no ‘exogenous’ obstacles.
Important Disclosure Information at the end of this Forum
On House Prices and the HICP
July 23, 2007
By Elga Bartsch | London
A number of factors suggest upside risks to euro area inflation in the coming years. These factors are behind our call that inflation will make more of a comeback in the next few years than is currently priced into financial markets. Several secular and cyclical factors that have been deriving global disinflation are now coming to an end, we think. Previously, we argued that governments’ tax policies are likely to add to inflation (see EuroTower Insights: Inflation Made by Governments, July 13, 2007). Another important factor is an overhaul of the HICP once the costs of owner-occupied housing (OOH) get included in the official statistics. While the exact timing and impact of the methodological change are not known (yet), the new HICP including OOH will likely show inflation that is meaningfully above the current metric. Such a HICP revision would likely trigger another debate about the ECB’s inflation ceiling. The inclusion of OOH in the HICP is likely to lift inflation estimates … The reason is straightforward: In the long run, house prices should rise with income growth, which is typically higher than inflation. The question is by how much the inclusion of OOH in the HICP would raise measured inflation. Two years ago, we first presented a rough-and-ready estimate of the impact of OOH based on a recalibrated HICP. Rescaling the current housing component to reflect the housing cost of owner-occupiers would on average add 0.5 percentage points to measured HICP inflation (see EuroTower Insights: A Further Lift from House Prices? August 4, 2005). Together with indications of a higher volatility of inflation over time and a greater variation in inflation between countries, a marked rise in average inflation would likely trigger a new debate about the ECB’s definition of price stability. Currently, the ECB defines price stability as “the year-over-year rate of change in the HICP of less than, but close, to 2%”. … and would likely trigger a debate about the ECB’s definition of price stability. The ECB’s inflation ceiling was confirmed in its comprehensive strategy review in May 2003. The ceiling takes into account a possible measurement bias in the HICP, the presence of downward rigidities in prices and wages, divergent inflation rates between different EMU countries and the presence of a zero boundary for nominal interests. All these factors would need to be reconsidered in the light of a new HICP including OOH, we think. For starters, the fact that OOH isn’t included in the HICP suggests that there might actually be a downward bias in measured inflation. In addition, if Euroland inflation was to become more volatile over time due to the inclusion of OOH, this could imply that a bigger safety margin would be needed to prevent the ECB refi rate from regularly hitting the zero boundary. Brace yourself for more inflation variance over time and across countries. Finally, the inclusion of OOH could result in a greater discrepancy between the inflation rates of individual countries. With individual core countries possibly being even closer to the zero boundary on the new metric than before, this could reinforce the debate about raising the inflation ceiling, especially in an enlarged EMU. The impact of the inclusion of OOH on country-specific inflation depends on three main factors. The first factor is the role of owner-occupied housing in each country. The higher the share of households living in owner-occupied housing, the greater the impact on the CPI is likely to be. Within the euro area, the share of OOH varies from 43% in Germany to 84% in Spain. The second factor is the extent to which rent controls and other housing policies prevent rents from reflecting housing market conditions. The third factor is the actual house price dynamics in the respective country. The range varies from small declines in house prices in Germany to large increases in Spain and France. The inclusion of OOH will likely also make it more difficult for Central and Eastern European countries, which experience booming property markets, to fulfill the Maastricht inflation criteria for EMU entry. Last but not least, even greater inflation discrepancies between countries could also challenge the ECB’s one-policy-fits-all approach. First pilot studies carried out by Eurostat suggest that our estimate of the impact of OOH is probably at the upper end of the likely range. According to a recent Eurostat paper, the impact might be a more moderate 0.3 percentage points for the net acquisition method of estimating OOH costs preferred by European statisticians. The reason for the more limited impact than in our estimate and than the average impact of owner-equivalent rents in the US is that while house purchases tend to be big (very big indeed) spending items, they don’t happen very frequently, especially when transactions between private households are disregarded for the purpose of measuring inflation and only house purchases from another sector of the economy (such as a construction company or a housing association) would be considered in the HICP. Helping to re-establish monetary indicators ?
An additional advantage of a broader definition of the HICP could be that it might help to re-establish a closer relationship between monetary indicators and inflation. In a new discussion paper, two Bundesbank economists argue that once house prices or housing wealth are included in a traditional estimate of a money demand function, the relationship between money, income and interest rates becomes stable again (see Claus Greiber and Ralph Setzer, Money and Housing —Evidence for the Euro Area and the US, Bundesbank Discussion Paper 12/2007). A stable money demand function is essential for establishing a stable long-term relationship between money and inflation. However, extending the HICP to OOH is not the same as including house prices in the HICP. The OOH estimates, which will likely be based on the net acquisition approach, imply that a large part of the housing costs considered will be those for new dwellings. This is because transactions within the household sector won’t be taken into account in estimating OOH. However, they are taken into account in residential housing price indices. In addition, the change in acquisition costs will be estimated net of the change in land prices, because land is deemed an asset and not a consumer good. Despite these differences, it is clear that the inclusion of OOH in the HICP would reduce estimates of excess liquidity and thus help to improve the empirical relationship between money and inflation. Note that the inclusion of owner occupied housing doesn’t not mean that the ECB would implicitly start to target to asset prices. Instead of targeting asset prices, the ECB should and would continue to pay close attention to developments in money and credit aggregates, we think. Bottom line
Measured HICP inflation might be higher than was previously estimated once OOH is included in the HICP. This might warrant a new discussion on the definition of price stability. Despite the important anchor-function of the ECB’s definition of price stability, there is a non-negligible chance that it could change, if and when the inflation definition changes. An upward revision would reinforce our inflation concerns. More volatile euro area inflation rates would likely cause the risk premium embedded in long-term bond yields to rise.
Important Disclosure Information at the end of this Forum
Review and Preview
July 23, 2007
By Ted Wieseman and David Greenlaw | New York, New York
Treasuries moved sharply higher over the past week as the market continued to benefit from a major flight to safety as credit, loan and mortgage markets weakened significantly on net for the week, though a lot of intraday volatility in the risk reduction trade drove Treasuries back and forth in sympathy at times. Credit spreads blew out to new wides, the leveraged loan market continued to weaken, and the mortgage default swap market looked like it might be finding a bottom at points during the week but was back at new lows by the weekend. Concerns about the health of the financial sector and general widening in credit spreads, on top of the general flight-to-safety bid driving up Treasuries, contributed to swap spreads blowing out to new highs. And even though the overall stock market did relatively okay on the week, with the S&P 500 ending down 1.2% after a pullback Friday from a record close Thursday, financial stocks (and their credit spreads) were hammered, which was of more concern to bond investors than the overall equity market performance. With investors focusing on deteriorating credit conditions and fleeing to the safety of Treasuries, economic data are pretty much irrelevant at this point. Generally market-unfriendly results from the key data reports — a marginally worse-than-expected CPI inflation report, upside in the key early regional manufacturing surveys that pointed to another strong ISM report, solid jobless claims data that suggested a solid employment report, and a surprising gain in housing starts that pointed to a much smaller decline in residential investment in 2Q than has been seen in some time, and a sharp rise in factory output — had zero market impact. Even Fed Chairman Bernanke’s relatively hawkish monetary policy testimony that evinced no significant concerns about the ongoing risk reduction trade and, in our view, confirmed that the bar remains quite high for a change in Fed policy in either direction for the foreseeable future was a non-event for investors. Anticipation of his testimony briefly led to a pause in the flight-to-safety bid Wednesday morning, but once his remarks were out of the way and generally ignored, fear-driven buying quickly resumed. On the week, benchmark Treasury yields plunged 13-16bp, the market’s best week since the aftermath of the late February global stock market plunge, leaving them at their lows since mid-May for the front end and early June for the longer end. The flight-to-safety/risk -reduction trade ebbed and flowed through the week as credit markets were very volatile, but significant overall net deterioration still left the Treasury market significantly stronger on the week at Thursday’s close. On Friday, a huge further flight-to-safety bid kicked in as risk markets rolled over, doubling the gains the Treasury market had posted on the week through Thursday. For the week, the 2-year, 3-year and 5-year yields all plunged 16bp to 4.77%, 4.79% and 4.85%, respectively, the 10-year yield fell 15bp to 4.96%, and the 30-year yield dropped 13bp to 5.07%. TIPS underperformed, but didn’t do all that badly, given the magnitude of the rally in the nominals market. The benchmark 5-year inflation breakeven fell 6bp to 2.20% and the 10-year 3bp to 2.36%, a combination that led to a 1bp uptick in the 5-year/5-year forward breakeven to 2.51%. Risk markets were widely clobbered on the week. The mortgage default swap market, where this whole risk-reduction move got its start early in the year, actually looked like it might be finding a bottom midweek, but was back in its familiar freefall by Friday. All the 07-01 series ABX indices (the new on-the-run 07-02 series debuted late in the week) except the AA plunged to new all-time lows Friday for significant declines on the week — AAA (95.13 versus 97.31), AA (88.22 versus 92.06), A (68.08 versus 72.36), BBB (45.89 versus 52.59), and BBB- (42.10 versus 48.97). The leveraged loan market continued to deteriorate badly, with the LCDX index moving lower every day to end the week at 94.83 (+271bp), down from 97.20 (+197bp) at the end of the prior week. The corporate credit market was extremely volatile through the week and the back and forth moves in spreads were key drivers of intraday Treasury volatility, but also ended much worse on the week, with the current series 5-year Hi-Vol CDX index trading at a new high of +135bp late Friday, more than 20bp wider on the week. In a major and growing disconnect, with all this going on somehow the stock market managed to hit a record high Thursday before pulling just 1.3% from the peak on Friday. Of more direct concern to bond market investors, however, and a further support to the flight-to-safety rally was a terrible relative performance by financial stocks, with the S&P 500 investment bank and brokerage sub-index down 7% on the week and the diversified banks and other diversified financial services indices both down 4%, an underperformance also seen in financial sector credit spreads. Along with the general widening in corporate credit spreads, the particularly poor performance of the financial sector contributed to a widening to new highs in swap spreads. The benchmark 10-year swap spread rose 4bp on the week to 68.75bp and the 5-year 4bp to 60.25bp, both four-year highs. Fed Chairman Bernanke presented a relatively upbeat picture of the outlook for growth and inflation along with a balanced assessment of the identifiable risks in his semi-annual monetary policy testimony. The general message from the testimony was consistent with our view that there is a high bar for changing rates in either direction at this point. The assessment of the risks to the economic outlook was two-sided, though the continued focus on upside to inflation as the main risk was reiterated. This was amplified by the subsequently released minutes from the June FOMC meeting, at which FOMC members agreed that downside growth risks had diminished but upside inflation risks hadn’t. The testimony also reinforced the sense that the Fed views much of the recent shake-out in credit markets as a sensible repricing of risk that will prove beneficial to the economy over the long run. Indeed, while credit spreads “have widened somewhat” and “terms for some leveraged business loans have tightened”, spreads remain near the low end of their historical ranges and “financing activity in the bond and business loan markets has remained fairly brisk”. On Friday, St Louis Fed President Poole was particularly pointed in burying the ‘Greenspan put’ as he dismissed the idea that the Fed should ride to the rescue of people losing money because they underestimated risk — “The punishment has been meted out to those who have done misdeeds and made bad judgments. We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.” Despite all this, and with no support from the economic data, the futures markets still moved to price in a significantly more dovish Fed path on the week. In the nearer term, the December fed funds contract gained 3.5bp to 5.18% and the January contract 6bp to 5.16%, raising the odds of a rate cut by year-end to 35%. Eurodollar futures gains were led by 16-16.5bp rallies by the reds (Sep 08 to Mar 09), with the low-rate Sep 08 contract gaining 16.5bp to 5.085%, more than fully pricing in a 25bp rate cut next year. The week’s key data release, the CPI inflation report, was a bit worse than expected but like all of the week’s economic news it was ignored. The overall CPI rose a higher-than-expected 0.2% in June, leaving the year-on-year pace flat at +2.7%. Another sharp gain in food (+0.5%) was partly offset by a gasoline-led dip in energy (-0.5%). The core gained a high 0.2% (+0.23% out another decimal place), but the year-on-year pace still held unchanged at +2.2%. There were a number of offsetting swings in core components. Hotel prices surged 2.5%, bringing the annualized gain over the past three months to +27% after a 5% drop over the prior three months. On the other side, apparel (-0.6%) was down for a fourth month, and medical care (+0.2%), communications (-0.2%) and education (+0.2%) all posted low readings. The key owners’ equivalent rent component gained 0.2%, reducing the year-on-year pace to a 14-month low of +3.3%, down from a recent peak of +4.3% in December. This deceleration in OER has fully accounted for the slowing in overall core inflation seen this year. Translating the CPI results, we look for a 0.17% gain in the core PCE price index, which would also leave the annual pace of that key inflation gauge unchanged, at +1.9%. A better-than-expected housing starts report had positive implications for this Friday’s 2Q GDP report. Starts posted a surprising 2.3% gain in June to a 1.467 million unit annual rate, though there were offsetting downward revisions to May (-3.4% to 1.467 million) and April (-0.4% to 1.485 million). The more volatile multi-family category (+12.5% to 316,000) accounted for all of the upside, while the single-family component (-0.2% to 1.151 million) dipped marginally to a five-month low. Given the big inventory overhang in condos, the multi-family upside probably reflected gains in rental units. The upside in June starts led us to raise significantly the moderate drop we had previously been assuming for the residential component of the June construction spending report, which boosted our 2Q residential investment forecast modestly, enough to raise our overall GDP forecast a tenth to +3.7%. We now look for residential investment to subtract less than a half percentage point from 2Q growth after drags of on average 1.0pp over the prior four quarters. The improvement to overall growth provided by this much smaller drag from housing in 2Q will probably be short-lived. Given the still severe overhang of inventories of unsold homes, we expect to see a significant reacceleration in the rate of decline of residential investment in 3Q. Looking ahead to the key early round of July data, early indicators were generally positive. While showing divergence in the volatile headline sentiment measures, both the Empire State and Philly Fed manufacturing surveys were strong on a more ISM-comparable weighted average basis, the former rising to 57.3 from 56.7 and the latter to 54.6 from 53.3. So, on a preliminary basis (which we will update as the remaining regional Fed manufacturing surveys are released over the next week-and-a-half), we look for the ISM to hold at the relatively high level of 56.0 in July after the sharp gains posted over the prior three months. This would extend a strong June for the factory sector, when output jumped 0.6%, one of the best gains in the past year. Meanwhile, the recent divergence between initial and continuing jobless claims is a bit perplexing, but at this point we look for the pace of job growth in July to be roughly in line with the year-to-date average and forecast a 150,000 gain in non-farm payrolls. Investor focus in the upcoming week will almost certainly remain on credit conditions. Economic data will probably continue to be largely ignored. There are only a few data releases on the calendar in any case, all later in the week, with Friday’s GDP report the most notable release. Before that, there will be a lot of supply to take down midweek — a US$6 billion reopening of the 20-year TIPS on Tuesday and then 2-year and 5-year auctions Wednesday and Thursday, terms of which will be announced Monday. We expect unchanged sizes of US$18 billion and US$13 billion, respectively. In Fed news, the Beige Book prepared for the upcoming August 7 FOMC meeting will be released Wednesday. There are a few Fed speeches scheduled, but mostly on topics unrelated to the current economic or policy situation. In addition to the GDP report, notable data releases due out include existing home sales Wednesday, durable goods and new home sales Thursday, and University of Michigan consumer confidence Friday: * We expect June existing home sales to fall 1.5% to a 5.90 million unit annual rate. The pending home sales index continues to drift lower, pointing to a further slide in resales. In terms of home values, it’s worth noting that the median sales price series included in the existing home sales report is not seasonally adjusted and tends to show a noticeable uptick during the spring and summer months. Thus, the recent elevation in the selling price series included in this report should probably be discounted. * We look for a 1.0% gain in June durable goods orders. Based on company reports, bookings in the volatile aircraft category appear likely to hold in at a relatively high level this month. Elsewhere, the ISM survey points to solid underlying momentum in order activity. And some components are likely to get a boost from a seasonal quirk that seems to lead to some unusual elevation in the final month of the quarter. This should all add up to a solid 0.8% rise in the key core sector — non-defense capital goods excluding aircraft. Finally, core shipments are expected to post a similar gain of about 0.7%. * The survey of homebuilders continues to show some gradual deterioration, so we look for another 1.6% dip in June new home sales to a 900,000 unit annual rate. While we suspect that sales are approaching a sustainable pace, the market still needs to work through an inventory overhang. We suspect that the backlog will ultimately be cleared via a further slowing in new construction rather than a pick-up in sales. * We forecast 2Q real GDP growth of 3.7% annualized. A significant narrowing in the trade gap, along with some rebuilding of depleted inventories and a solid gain in non-residential construction, should help to offset a sharp moderation in real consumer spending and a further decline in residential activity — though much smaller than in recent prior quarters — leading to a rebound in GDP growth. Specifically, we have final sales at +2.8% in 2Q, with consumption at +1.3%, business fixed investment at +8.2%, residential at -8.5%, government at +2.7%, and net exports adding about one full percentage point. In our view, the expected growth pick-up in 2Q clearly overstates the economy’s recent underlying performance, much as the very low +0.7% GDP reading for the first quarter appeared to understate the true picture. Indeed, in hindsight, it seems quite clear that a number of technical quirks in the data subtracted from estimated GDP in 1Q, but are adding back in 2Q. We expect GDP growth to settle down to about a 2.5% pace in the second half of the year. Finally, the chain weight price index for overall GDP is expected to be +2.4% in 2Q, with the core PCE price gauge rising a modest 1.4%.
Important Disclosure Information at the end of this Forum
The Oil-Dollar Link: US Implications
July 23, 2007
By Richard Berner | New York
Oil prices have risen close to record highs and the dollar has touched all-time lows recently. Brent crude last week hovered just under $80/bbl, while the euro moved to a record $1.38 and the dollar sank below its 1995 lows on a trade-weighted basis against major currencies. That co-movement is no coincidence, in our view. To be sure, the primary drivers of the 33% rise in Brent crude quotes so far in 2007 have been the familiar forces of still-robust global growth and limited growth in the supply of crude and refined products. And the time-honored fundamentals driving the dollar — strong differentials between overseas and US returns and growth — remain very much in play in this year’s 5-6% move against both the euro and other major currencies. Nonetheless, we believe that the interplay among oil prices, the dollar, and the responses of oil producers may create a vicious circle in which both oil prices and the dollar overshoot. Brent crude may rise past $80/bbl and the dollar may continue to weaken, and those moves could elevate US inflation. While US Treasuries are rallying as investors focus on the meltdown in credit, the oil-dollar link may limit or reverse the attractiveness of US bonds. Here’s why. The oil-dollar link is impossible to prove because the evidence for it is only circumstantial. However, the logic for each of the three parts in the circle is solid, in our view. First, the orderly decline in the dollar is reducing the non-dollar value of oil producers’ receipts, and thus of their purchasing power. Second, Eric Chaney and I think oil producers are trying to offset that purchasing power lost to a weaker dollar by restraining crude supply, thus keeping prices high. Finally, we and Stephen Jen believe that oil producers likely are diversifying portfolios away from the dollar to hedge returns and, for some, in response to worries about the possibility that USD assets might be frozen or confiscated. Even absent such OPEC actions, however, the dollar seems likely to test further new lows. There are questions about the ongoing strength of overseas growth and the corresponding actions of central banks such as the European Central Bank, but there’s little doubt that there’s more upside than downside risk. Late last week, markets reasonably priced in another 40 bp of ECB tightening by year-end. In contrast, fears that the subprime mortgage meltdown will spill further into risky asset markets, hobble US growth and lead to Fed ease are currently in play. Moreover, Stephen Jen believes that US real money accounts will continue to diversify away from dollar-denominated assets as they seek higher-performing investments abroad. Indeed, despite the four-year outperformance of many overseas markets in comparison to the US, and a cumulative $1.26 trillion in US outflows into non-US markets, US institutional and retail investors are still underweight overseas assets in their portfolios. So the scope for further diversification is still positive (see “The Biggest Dollar Diversifiers are American,” Global Economic Forum, July 20, 2007). These factors weakening the dollar strengthen the oil-dollar link, in my view. Four developments are important for oil markets. First, as mentioned, strong global growth is lifting demand for both refined products and crude. The International Energy Agency’s just-released forecast for 2008 underscores the sustainability of that strength, with a return to normal weather and continued strong growth outside the OECD countries yielding an expected increase in demand of 2.2 mbpd (2.5%) to 88.2 mbpd. That will likely handily outstrip increases in non-OPEC plus OPEC supply growth, keeping markets taut. Second, while a record number of US refinery outages boosted the prices of refined products in relation to crude this spring and actually contained US crude demand, those outages have begun to ease. As a result, so-called crack spreads have narrowed from about $30/bbl at the beginning of the US summer driving season in May to about $10-12/bbl today. Thus, the backup in crude quotes now more fundamentally reflects the ongoing forces of supply and demand. Third, crude markets have gone from “contango” as recently as a month ago — in which spot crude quotes were $4-6/bbl below futures — to “backwardation,” where spot quotes are $4-6/bbl above futures. While we don’t think that futures markets reliably predict crude quotes, we do believe that the shape of the curve reflects market expectations and influences behavior. Specifically, with markets in contango, producers and refiners were willing to hold crude inventories, which might have served as a buffer against supply shocks. In contrast, in backwardated markets, the willingness to hold stocks declines. And the weaker dollar may accentuate that decline today: For example, Europeans contemplating whether to hold crude inventories priced in dollars may want to see the dollar stabilize before buying. For oil producers, backwardation provides a disincentive to step up production now. It’s worth noting that crude markets were backwardated during most of the long upward march in oil prices over the past five years, reinforcing the tight supply-demand balance. The final development at the margin that matters for oil markets is the response of oil producers to the step-up in oil prices and to dollar weakness. Traditionally, OPEC and gulf producers responded to tight markets and rising prices with some increase in crude supply, because they feared that too big a price increase would kill the global economy and thus undermine demand. No such behavior is evident today. Indeed, scheduled OPEC sailings have declined by about 3% from a year ago, with the biggest drop coming from the Middle East. That is consistent with our view that swing crude producers such as Saudi Arabia are responding to dollar weakness by maintaining a taut rein on production and shipping more conservatively (see “Oil: Revisiting $80?” and “A Higher Risk Premium on Oil Prices,” Global Economic Forum, July 9 and May 9, 2007, respectively). The portfolio behavior of oil producers also points to further strengthening of the circular oil-dollar linkage. The terms of trade improvement and the resulting gusher of oil revenues have created vast wealth and rapid income gains among the oil producers. IMF data show that oil producers hold some $777 billion of foreign exchange reserves, with perhaps 50-60% held in dollars. Stephen Jen estimates that the oil producers’ Sovereign Wealth Funds set up to preserve and manage that patrimony account for nearly three-fifths of the $2.4 trillion held in such funds globally. We believe that these fund managers will gradually diversify away from the dollar and US Treasuries and recycle funds into alternative, riskier assets. By driving the US dollar down further, this likely will reinforce the desire of OPEC to keep its supply strategy conservative. Japanese buyers may not accept Tehran’s recent proposal that they pay for oil in yen, but the idea underscores the Gulf producers’ desire to diversify into non-dollar currencies. In the case of Iran and some others, the fear of confiscation or freezing of certain assets may be behind the diversification strategy. Finally, the flood of liquidity is boosting oil producers’ markets and inflation and putting upward pressure on their currencies. Kuwait, which had pegged its currency to the dollar, recently broke the peg. More may follow. These developments are important for global financial markets, but the impact will differ by region. In the US, the oil-dollar link is currently far from investors’ concerns. A flight to safety is underway as market participants focus on the repricing of risk in credit, loan and mortgage markets. Consequently, they are ignoring the implications for US inflation, growth and monetary policy of higher oil prices and a weaker dollar. Higher oil prices would push up headline inflation by even more than the 3.8% we expect by year-end; a sustained increase of $10/bbl could add 50 bp annualized to US headline CPI inflation. That could also boost inflation expectations and add to Fed concerns that the improvement in core inflation has yet to be “convincingly demonstrated.” Such an energy price increase could also sap $25 billion from consumer purchasing power, marginally depressing real growth. Dollar weakness would take longer to boost US inflation and real growth, but markets might well anticipate those developments. TIPS and bear steepeners in bonds thus are beginning to look attractive again. In contrast, in Europe, higher oil prices are mild negatives for growth and inflation, but a stronger currency would add to the negatives for growth and mute the impact of higher dollar-denominated energy prices. Thus, the strength of the euro may well be a factor in monetary policy for the ECB (see Eric Chaney’s “Strong Euro: A Shield Against Higher Oil Price?” Global Economic Forum, July 17, 2007). The risks from these developments seem tilted towards another stagflation scare: As evident in collapsing crack spreads, we think that gasoline prices have peaked as refinery problems ease. But OPEC and Gulf oil producers may respond to higher crude prices cautiously, and with seasonal demands poised to rise, we can’t rule out a further surge in crude quotes that could hurt both US consumers and global growth.
Important Disclosure Information at the end of this Forum
Pension Agreement Reached, at Last. But at a Cost
July 23, 2007
By Vladimir Pillonca | London
Last week’s agreement reached between the government coalition and trade unions on pensions reinforces our concerns on the longer-term path of public finances. The new deal overrules the Maroni reform, which stipulated an abrupt rise in the retirement age from the current 57 years of age to 60 as of 2008 (with 35 years of contributions). Stern opposition to this small jump in the retirement age from trade unions and the more left-leaning forces within the government coalition led to a renegotiation of the pension system. Under the new agreement, the retirement age will now increase only very gradually, from the current level of 57 years of age to 58 in 2008 (with a minimum of 35 years of contributions) and it will reach 60 in 2011, subject to at least 36 years of contribution. This will ensure that Italy will continue to have one of the lowest retirement ages in Europe. The new agreement will ensure that Italy continues to have one of the lowest retirement ages in Europe. Moving to a quote-based system ... More specifically, under the new rules, from mid-2009, the pension system switch to a ‘quotes’-based system. Quotes are the sum of the age of retirement and the years of pension contributions. So from July 2009, the minimum retirement age will be 59 years (conditioned on at least 36 years of contributions), or a ‘quote’ of 95. The retirement age will then nudge up to 60 in 2011 (with at least 36 years of contributions) instead of 58 in 2008, as stipulated under the Maroni reform. In this sense, this agreement is a step down from the previous regime. Only in 2013 will the quote rise to 97 with a minimum retirement age of 61. But this last rise will only be enacted conditionally on the state of the public finances. ... at a cost. The government estimates that this agreement will cost €10 billion over the next ten years, and that resources will be obtained ‘internally’, by merging various social security bodies into a single entity. We are not convinced that this will turn out to be revenue-neutral. Rebalancing cannot be one-sided. The fundamental problem remains that overall Italian government expenditures continue to rise when instead they should be restrained significantly. As we have often argued, the rebalancing of Italy’s public finances cannot be a one-sided exercise. Italy spends more of its national income on public pensions than any other OECD country, and it experienced the fourth-highest increase in public pension spending between 1990 and 2003, behind only Japan, Poland and Portugal (which all had lower pension expenditures/GDP ratios). Transformation coefficients…next time Crucially, the discussion of the revision of the ‘transformation coefficients’ (the factors that transform worker contributions into pension payments) has been delayed to the end of next year. In addition, changes to the transformation coefficients, which will be studied by a dedicated commission, will not become effective until 2010. Hence the tackling of a crucial parameter on which the longer-term sustainability of the pension system hinges has been delayed yet again. Impact on public finances: We still think that the budget deficit will fall to 2.5% of GDP this year, and rise to 2.8% in 2008. We continue to expect the budget deficit to drift higher in coming years unless corrective actions on the expenditure side of the equation are implemented. Rebalancing cannot be done only on the revenue side of the equation. The one-sidedness of the fiscal adjustment entails risks. Risks: Given the over-reliance of the fiscal adjustment on the revenue side of the equation, while claims on the expenditure side continue to rise, Italy’s public finances could deteriorate significantly in the face of an economic slowdown, as tax revenues are highly sensitive to the economic cycle. Rising interest rates could compound this cyclical sensitivity, given Italy’s large stock of outstanding debt. Only curtailing the expenditure side of the balance sheet in a rigorous fashion will provide a less uncertain future for Italian public finances, as the future economic environment is likely to be less favourable than it is currently.
Important Disclosure Information at the end of this Forum
Disclosure Statement
The information and opinions in Morgan Stanley research were prepared or are disseminated by Morgan Stanley & Co. Incorporated and/or Morgan Stanley C.T.V.M. S.A. and/or Morgan Stanley & Co. International plc and/or Morgan Stanley Japan Securities 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) 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 licence No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley"). As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, Morgan Stanley & Co International plc and its affiliates.
Global Research
Conflict Management Policy
Morgan Stanley Research observes our conflict management policy, available at www.morganstanley.com/institutional/research/conflictpolicies.
Important Disclosures
Morgan Stanley Research 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. Morgan Stanley Research 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, research prepared by Morgan Stanley Research personnel is 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 Morgan Stanley Research change apart from when we intend to discontinue research coverage of a company. Facts and views 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.
To our readers in Taiwan: Morgan Stanley Research is distributed by Morgan Stanley Taiwan Limited; 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 Asia Limited as part of its regulated activities in Hong Kong; if you have any queries concerning it, contact our Hong Kong sales representatives.
Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; 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, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin);in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, supervised by the Spanish Securities Markets Commission(CNMV), which states that it is written and distributed in accordance with rules of conduct for financial research under Spanish regulations; in the US by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research it has prepared, and approves solely for purposes of section 21 of the Financial Services and Markets Act 2000, research prepared by any affiliates. Private UK investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. In Australia, Morgan Stanley Research and any access to it is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. RMB Morgan Stanley (Proprietary) Limited is a 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.
Trademarks and service marks in Morgan Stanley Research 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. 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 wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a 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.
|
![](/img/clear.gif"){kind=spacer}