In This Issue

United States Credit Losses, Deleveraging and Risks to the Outlook Asia Pacific AXJ Capex Cycle: Will it Be a Repeat of the 1997 Cycle? View GEF Archive

		The Global Economics Team

		Read about other GEF team members

Investors in risk assets seem to have embraced and anticipated the optimistic view wholeheartedly: Credit and CMBS spreads have tightened dramatically, near-term volatility has plunged and the 32% equity rally (measured by the S&P 500) since the bottom on March 9 is the sharpest since 1982.  And this improvement in financial conditions has the potential to create a virtuous circle: With credit markets materially less stressed, albeit still far from completely functional, the credit crunch poses less of a threat to the outlook than a month ago.  Results from the Fed’s April Senior Loan Officer Survey showed that fewer banks tightened lending standards for the second consecutive quarter, reinforcing the view that monetary policy has broken the back of the credit crunch. 

Three reasons to assess risks today. With a fair amount of good news now in the price, however, it’s now critically important to assess the potential strength of the ‘adverse feedback loop’ from the credit crunch to the economy and back to credit losses.  It’s widely accepted that this feedback loop promoted a deleveraging of the financial system, pushed the US economy into recession, and that the feedback from the recession to credit deepened the recession itself.  With the rally in risk assets since March 9, there seems to be less agreement that such a vicious circle still threatens the outlook.  But larger-than-expected loan losses would surely challenge market expectations about the path and sustainability of any incipient recovery.  The estimates of losses that we present in this report help dimension the potential for just such a challenge.

It’s also important to understand those risks today on the eve of the implementation of the Supervisory Capital Assessment Program (SCAP), better known as the ‘stress test’ for the top 19 US bank holding companies (BHCs).  “The SCAP is a forward-looking exercise designed to estimate losses, revenues and reserve needs for BHCs” under adverse macroeconomic scenarios “to help supervisors gauge the extent of additional capital needs across a range of potential economic outcomes.”  Regulators maintain that the need for a larger capital buffer or a change in its composition is not a measure of solvency for individual firms.  But there’s no doubt that those capital needs will be a barometer of the system’s financial strength and capacity to maintain or step up lending.  Especially in our bear case, which involves a much weaker economy, as discussed below, our estimates of capital needed by US lenders to provide a cushion for losses are likely to be somewhat higher than those implied by the SCAP’s ‘more adverse’ scenario. 

Finally, it’s important to look beyond the crisis. The legacy of the credit crunch will persist even after the process of repairing lenders’ balance sheets is fully in train, because it likely will continue to constrain their capacity and appetite to extend credit.  Moreover, the extent of the damage in this most severe financial crisis in 70 years will shape regulatory thinking about the new architecture for capital requirements − the amount, the composition, the assets/exposures to insure and the way that officials work to reduce their procyclicality.  Thus, we think the tension between policy tailwinds and financial headwinds implies that the recession will linger, that recovery will be slow and that the risks to the outlook remain roughly balanced around that sober baseline. 

Three scenarios that quantify the range of those risks.  In this note, we examine the deleveraging process for leveraged lenders under various circumstances, ensuring consistency between loss estimates and economic scenarios.  We believe that our baseline forecast of a deep recession with a peak-to trough decline in real output of 4.3% is consistent with cumulative US financial system losses of about $2.7 trillion, or 9% of total assets.  Taking securities and loans together, that estimate implies that investors and lenders have realized roughly one-third of the likely cumulative total loss through the end of 2008; in other words, of our 9% cum loss total, lenders have taken 3%, and 6% remains.  Those loss estimates are significantly larger than our past estimates, reflecting higher loss severities in both loans and securities. 

Bull case.  While higher-then-expected losses certainly imply a more prolonged process of deleveraging, associated strong financial headwinds and downside risks to the outlook, we think that the Fed’s recently more aggressive policy response is a powerful offset.  Thus, it’s important not to lose sight of upside risks around our baseline: The bull case involves cumulative losses of ‘only’ $1.7 trillion, meaning 51% have been realized.  The key difference between this scenario and our baseline is that policy gets more traction in this one.  As a result, it involves a V-shaped economic recovery, with the economy turning around decisively in the second half of this year and posting 5% growth in 2010.  As noted above, we think that the chances of the bull case are roughly equal to those of the bear case. 

Bear case.  In the bear case, policy gets traction slowly, the economy languishes and cumulative losses mount to $4 trillion.  The more intense deleveraging process associated with a further $3 trillion in losses beyond what has been realized so far will promote a much deeper recession: In that scenario the peak-trough GDP decline could be 5.8%, the unemployment rate might peak at 12%, and the risk of deflation would intensify.  And in that case, lenders have taken only 21% of the 15% cumulative loss total in that scenario.  We illustrate our loss estimates in the three scenarios by asset class.

How much capital?  How much capital will the banking system need to raise following the stress test?  For banks under her coverage, Betsy Graseck estimates that it will be in a range of $36-108 billion.  Extending the stress-test analysis to all banks increases required capital to $56-146 billion.  Betsy’s estimates include the basic components of the government’s stress test − bear case losses over the next two years, a provision for 2011 losses, two years of earnings, FAS-140 assets, etc. − but use our macro assumptions instead of theirs.

One key assumption, of course, is what minimum capital standard will apply.  Based on our read of the SCAP white paper, we assume that the regulators are looking for Core Tier 1 assets equal to 6-8% of total common equity. That's because they state several times in the white paper that they are using a Tier 1 framework and are focused on common equity.  We use 6% as a minimum, as that is currently the minimum capital ratio for well-capitalized banks; the 8% maximum assumes that regulators may require a 2 percentage-point cushion over the minimum capital standard.  This 6-8% desired Core Tier 1 ratio generally compares to a target 4-5% TCE/TA ratio.  If the regulators were to apply a different minimum capital standard, we would have to adjust our expected capital ratios accordingly.

Apples to apples.  It’s instructive to compare our loss estimates with others’, specifically with those from the upcoming SCAP exercise and with those from the International Monetary Fund.  To make the comparison apples-to-apples, we first note that the SCAP loss estimates expected this week are entirely forward looking, not ‘lifetime’ losses.  Specifically, those estimates will exclude losses realized in 2007-08, amounting to some $400 billion for the 19 BHCs participating and, according to Bloomberg data, $867.5 billion for the entire financial system.  So a comparison with our cum loss estimates requires adding those amounts to whatever the SCAP publishes.  In contrast, the IMF estimates are of cumulative losses from 2007 through 2010, just like ours.  And their loss estimates are very close to ours; for example, they expect US financial system losses of $2.7 trillion on US-originated assets. 

Any differences in loss estimates can be traced to several sources.  First, our economic forecasts are more pessimistic than those in the SCAP assumptions, so our estimates of loss severities may be larger.  We show the key assumptions for our economic scenarios and compare them with the SCAP baseline and its ‘more adverse’ alternative.  The SCAP economic assumptions are realistic, but not especially adverse, in our view.  The more adverse SCAP scenario involves weaker GDP growth in 2010 than in our base case (0.5% versus our 1.8%), but an unemployment rate that is only slightly higher than our baseline forecast (10.3% versus our 9.8%).  By contrast, GDP in our bear-case scenario contracts by -0.2% in 2010, after a 4.2% decline this year.  The second source of differences, as noted above, is that our losses are cumulative over 2008-10.  To compare our estimates with those from SCAP (if they are published) over the 2009-10 horizon, we would subtract losses taken in 2008 from our numbers, yielding remaining expected total losses of 3%, 6% and 12% in our bull, base and bear scenarios. 

The IMF’s baseline forecasts are closer to ours, with real GDP at -2.8% and zero in 2009 and 2010, respectively.  While their baseline net loss estimates are very close to ours, their cumulative loss estimates imply a cum loss rate of 10.2% compared with our 9% (see the Global Financial Stability Report, April 2009).  That exposes a second difference, in the estimate of needed capital.  The IMF projects that US banks will need to raise $275 billion in capital to reach a 4% TCE/TA capital ratio.  That is larger than what Betsy projects, because the IMF is more pessimistic about the ability of US banks to generate earnings; they appear to assume that return on assets will run well below 100bp in 2009-10, while Betsy believes that banks under her coverage will post ROAs closer to 110bp. 

Loss estimation methodology.  Given the scope of the macro exercise we have undertaken in this report, getting the details of the losses in each asset class right is critical.  In that spirit, we have distinguished between loans and securities, and for both we significantly disaggregated the several types of assets in each major asset grouping.  We then applied our estimates of default rate and loss severity assumptions over the duration of the loan (generally three years, but one year for credit cards) to the balance in each asset class under each of the three scenarios.  Our estimates are for cumulative losses in each asset class over the three-year period 2008-10.  Comparing our methodology with the SCAP’s and the IMF’s helps explain the differences between our loss estimates and theirs.

Securities loss benchmark.  We have used two approaches to determine loss severities.  For securities, we have the benefit of relatively more-observable price discovery as well as transparency of collateral performance compared with loans.  Thus, our estimates of losses for each asset class in securities serve as the benchmark for overall loss severities and help to inform our estimates for loans.  Within securities, our estimates reflect the view that losses to come will be higher than those realized to date.

Our securities default and loss severity assumptions reflect inputs from our fixed income research and business colleagues using disaggregated asset classes for as many subsectors as we could get outstanding balances with reasonable certainty and consistency.  Our baseline assumptions for defaults and loss severities are, in general, higher than the most recently updated rating agency expectations and reflect current market expectations. 

For example, an explanation of the subprime first lien cumulative losses helps illustrate our approach.  In our baseline scenario, we assumed that for securitizations of subprime first liens, 55% of the underlying pools would default and experience a loss severity of 75%, resulting in a cumulative loss of 41%. Adjusting these assumptions downward for subprime first liens held as loans results in a weighted average cumulative loss for subprime first lien exposures for the financial system of 36% in the baseline scenario.

Note that for corporate credit, our baseline loss severity assumptions of 70% and 50% for unsecured and secured corporate credit, respectively (i.e., recovery upon default of 30% and 50%) are above historical averages − more so for secured credit than unsecured credit, reflecting the limited sponsorship for leveraged loans relative to high yield bonds.  Under the bear case scenario, we further increase severities to 90% and 70% (or decrease recoveries to 10% and 30%) for unsecured and secured corporate credit to reflect the effect of lax lending terms in this cycle (e.g., PIK Toggle and ‘covenant-lite’ loans) relative to previous cycles.

Feedback from the economy to loan charge-offs.  For detailed loan loss estimates, we look to our securities estimates to cross-check our judgment about loss severities in each asset class.  However, we expect cumulative loan losses will be lower for loans than for securities.  This reflects tougher underwriting standards for held-for-investment loans than for originate-and-sell loans and a significantly higher percentage of direct origination over indirect origination. 

We also use a second, econometric approach to supplement our judgment for estimating cumulative loss severities for loans (this is actually quite close to the IMF’s approach; see the April 2009 GFSR, Box 1.7).  For each of four major categories of loans − mortgages, other consumer credit, corporate credit and commercial real estate − we estimated relationships between loan charge-off rates and key economic variables that are part of the output in our baseline forecast.  These include the unemployment rate, GDP growth, home prices, corporate profits, disposable income, capacity utilization, household and business debt and corporate bond yields.  We use the forecast values for those variables to derive annual charge-off rates over the forecast horizon.  Summing those up from 2008 over the rest of the forecast horizon produces forecasts of cumulative charge-off rates that are consistent with our baseline economic forecast.  We go through the same exercise to produce charge-off estimates for the bull and bear scenarios (see Appendix 2 in the report for details of the estimated equations). 

To reconcile those charge-off estimates with the cumulative losses that we use for loans requires another step.  Our estimates of cumulative charge-offs and losses are both expressed net of recoveries, but the losses include both realized charge-offs and provisioning for future losses.  To reconcile our estimates of cumulative charge-offs that do not include provisioning with cumulative loan losses over 2008-10 that do include provisioning, we extend the charge-off forecasts through 2012 and compare them with cum loan losses through 2010.  The forecast charge-offs over the extra two years should roughly capture the provisioning that lenders are doing in 2009 and will do in 2010 for future losses. 

We illustrate the forecast charge-off rates for each of the four loan categories for base, bull and bear scenarios.  The forecasts through 2010 are based on the estimated equations using the variables from the economic forecast scenarios.  The loan charge-off rates in 2011-12 are those that would make the forecasts over the five-year period 2008-12 consistent with cum loan losses, including provisioning between 2008 and 2010.

From losses to deleveraging.  Estimating losses based on economic scenarios is one of two steps in our effort to present estimates that are internally consistent.  The second step involves estimating the effect of credit losses on the supply of credit, and to trace that change in supply through to economic activity.  To do that, we update the analysis used in David Greenlaw, Jan Hatzius, Anil Kashyap and Hyun Song Shin, “Leveraged Losses: Lessons from the Mortgage Market Meltdown”, US Monetary Policy Forum Report No. 2, February 2008.  Briefly, three steps are involved: First, we lever the losses in each scenario into a contraction in lenders’ balance sheets.  Next we translate that into a decline in domestic nonfinancial debt − the key overall credit aggregate.  Finally, we use a relationship between that credit aggregate and GDP.  We cross check those results against the starting point for each economic and loss scenario, recognizing that there are lags involved from the economy to credit and from credit back to the economy.  We present details of these calculations in Appendix 3 in the report.

Using these relationships, we translate our base case of $2.7 trillion of cumulative losses into a cumulative decline of 12.8% in domestic nonfinancial debt, and a hit of six percentage points of nominal GDP spread out over three years, or about 2% per year starting in 2008.  There are, of course significant offsets from both fiscal and monetary policy, although they operate with a lag.  For example, we estimate that about 60% of the $787 billion fiscal stimulus package passed earlier this year will take effect by the end of F2010, amounting to an offset of nearly $475 billion, or about 1.7% of GDP annually in 2009 and 2010.  Given that we are expecting a peak-to-trough decline in real output of 4.3%, and a recovery in 2010, we think those estimates are internally consistent.  The bear case cumulative losses of $4.1 trillion would promote a massive cumulative hit to nominal GDP of 8.9 percentage points, resulting in GDP growth that is about one percentage point lower than the baseline over three years.  And the bull case cum loss total of $1.7 trillion would lever into a cumulative 4.1% blow to GDP over three years, with GDP growth about 0.6% higher per year than in the base case. 

Reconciling theory with reality.  These calculations are designed to assure consistency between losses, their influence on credit availability and the economy.  One might question their validity, because so far, deleveraging has not played out as acutely as theory suggests, at least judging by the assets held at all leveraged lenders.  Theory suggests that the $274 billion in losses beyond capital raised should have resulted in a sharp decline in those assets and in domestic nonfinancial debt.  We attribute the difference between theory and reality to lags in the process and support from fiscal and monetary policy.  But the lags are catching up, and the losses, now fueled by the deteriorating economy itself, continue to mount.  Our essential point is that the adverse feedback loop is not dead, and that investors should mind the risks.

There are two major potential offsets to these risks...  If, thanks to improving market conditions, lenders can raise equity capital and senior debt, relative to losses, even faster than the pace to date, that will significantly mitigate the deleveraging process.  If new policy initiatives like the TALF and PPIP – aimed at restarting securitization markets and cleaning up and recapitalizing lenders’ balance sheets – work well and quickly, they could also augment the incipient market improvement.  That’s part of the policy traction basis for the bull case. 

…but also additional hurdles.  But if capital raising proves more problematic or the fear of political involvement in the new initiatives limits participation and policy traction, these efforts may be insufficient to offset the impact of deleveraging.  And if the capital hole proves to be bigger than expected, requiring more injections of capital from the government, the TARP budget constraint may also come into play.  Indeed, our colleague David Greenlaw believes that $590 of the original $700 billion in TARP funds are spoken for; even with some repayment of TARP funds, that would leave a little more than $100 billion to fill the hole.

For more details and the Appendices, please see the full report, Credit Losses, Deleveraging and Risks to the Outlook, May 4, 2009.

Asia Pacific
AXJ Capex Cycle: Will it Be a Repeat of the 1997 Cycle?
May 07, 2009

By Chetan Ahya | Singapore & Sumeet Kariwala | Mumbai

Recent Capex Boom – Much Bigger Than in Mid-1990s

Over the last few years, gross fixed capital investments (GFCF) in the Asia ex Japan (AXJ) region has had a huge increase from US$920 billion (28.5% of GDP) in 2001 to US$2,900 billion (35.3% of GDP) in 2008, as per our estimates. Indeed, the trough-to-peak increase in GFCF was significantly higher in the current cycle than it was in the mid-1990s. An unprecedented increase in foreign trade (from 67.3% of GDP in 2002 to 82.5% of GDP in 2008) kept fueling the demand for manufacturing-related investments. Moreover, easy access to risk capital from international and domestic capital markets also played a key role in boosting capex. Strong growth in job creation and acceleration in income revived private consumption too, fueling the virtuous growth cycle.

China and India – The Key Drivers in This Cycle

As opposed to the mid-1990s, when ASEAN and North Asia ex China were big contributors to the investment boom, China’s and India’s share increased to 75.6% in 2008E (percentage of total AXJ GFCF) as compared with 40.8% in 1996. While China emerged as a leader almost immediately post the Asian financial crisis (Asian crisis), India’s share began to increase meaningfully starting in 2004. At the peak in 1996, while ASEAN accounted for 23.5% of the total GFCF in the region, North Asia ex China accounted for 34.4%. In the current cycle, the share of these economies combined has reduced to just 24.2% from 58% then. The North Asia ex-China region has already achieved a very high level of per capita income, explaining the slower pace of investment growth.

The ASEAN economies excluding Singapore have taken much longer to recover post the Asian crisis. Indonesia and Thailand – two of the largest economies in the region – have clearly lagged. Per capita and demographics trends in these economies warrant a much stronger growth trend. While Thailand did see improvement in 2003-05, political problems after that have meant a persistent weak growth environment. Similarly, the change in the political environment in Indonesia has resulted in a weak pace of investments since the Asian crisis. However, going forward, we do see signs of improvement in the business environment and investments in Indonesia with an improving political environment.

Collapse in Exports Hurts Manufacturing Capex Badly

The export-led growth model has now suffered a setback. Over the last six months, AXJ exports have recorded a continuous decline on a year-on-year basis, falling by 25.7% during January-February 2009 and 4.8% in the quarter ended December 2008. Indeed, the current decline in exports has been much worse than in the 2001 and 1997-98 cycles. The severe contraction in exports, decelerating income growth and rising unemployment have also affected private consumption. The direct and indirect impact of the collapse in exports is now reflected in the AXJ GFCF growth. GFCF in AXJ ex China declined by 2%Y in December 2008 versus a growth of 7.8% in September 2008 and 6.4% in June 2008.

Funding Environment Also Takes Time to Normalize

The strong external demand trend during 2003-07 was accompanied by an extremely favorable environment for capex funding. As per IIF estimates, capital inflows into EM increased to US$782 billion in 2007 from US$113 billion in 2002. The trend in Asia has been very similar. Capital inflows into Asia increased to US$212 billion in 2007 from US$59 billion in 2002. Even domestic risk capital allocation and price behavior tend to follow the direction of the capital inflows, increasing the importance of these flows. Within the region, we believe that India has benefited the most from this improvement in the availability of risk capital. However, a systemic sudden stop in capital inflows since September 2008 has changed the funding environment completely. One measure of the funding environment is the trend in credit default swap rates for Asian paper. While the AXJ IG CDS rates have declined to 244bp currently from the peak of 663bp in October 2008, they remain significantly higher than the low of 35bp in late 2007.

Capex Decline as Severe as the Asian Crisis Period?

We believe the capex retrenchment is likely to last for a while, considering the collapse in exports. In our view, the capex decline in this cycle will be sharper than in 2001 and that AXJ ex China will be affected much more than China. However, we believe that the trough of the current capex cycle will likely not be as severe as in 1997. The concern in this cycle is that the pace of the recovery from the low will also not be as vigorous as in the previous two cycles. Below, we cite two key reasons why the capex retrenchment may not be as severe this time as compared to the Asian crisis period.

Domestic balance sheet strength is different this time. Although export demand this time has collapsed much more than in the 1997-98 cycle, AXJ balance sheets have been in much better shape prior to the current downturn. First, the AXJ external debt to GDP ratio at 20% in September 2008 is lower than the 25.7% in 1996 (except for Hong Kong). Similarly, the current account (CA) balance for the countries that experienced a capex boom has been at comfortable levels. In 1996, six out of nine AXJ economies had a CA deficit, with the combined deficit at 3.7% of GDP. However, in the current cycle, six of the nine countries have large CA surpluses. China, which has been the largest contributor to the capex growth, still ran a huge CA surplus of 9.9% in 2008. While India’s CA has been in deficit, it has remained within the manageable limit of 3%. Further, at the micro level, regional corporate balance sheets are also in a much better position. The AXJ non-financial corporate net debt to equity ratio is much lower in 2007 (at 32%) compared with 65% in 1996.

Aggressive fiscal policy response to cushion downside. Post the Asian crisis, most Asian governments were forced to use their balance sheets to bail out their banking systems. Public debt to GDP shot up in the aftermath. However, since the banking sector’s balance sheet is in better shape in this cycle, governments have greater leeway to initiate public spending programs. The Asian governments are increasing their spending on infrastructure and social welfare and cutting taxes to cushion the downside from deleveraging of the private sector and the decline in manufacturing capex. The fiscal policy response has been strongest in China. Our China economist, Qing Wang, estimates that manufacturing investment growth will slow sharply to 0%Y in 2009 (versus estimated 12% in 2008), but expects infrastructure investments to grow at 40%Y (versus estimated 9.2% in 2008). The aggregate fiscal deficit in AXJ is estimated to widen to 1.6% in 2008 and further to 3.9% in 2009 from a surplus of 0.1% in 2007.

Medium-Term Outlook for Exports − A Challenge for Strength of Recovery

We believe that the pace and strength of the capex recovery will depend on the outlook for G7 demand for imports. While the region’s dependence on external demand has continued to rise, the share of private consumption has been declining. Not surprising, swings in G7 growth tend to be the key driver for the region’s export demand and manufacturing output. AXJ’s fixed investments are made with an eye to potential future global demand. Hence, fixed investments, which are the most important part of domestic demand, tend to be highly influenced by external demand. Morgan Stanley’s economics team expects a tepid global recovery. Indeed, our G7 GDP growth estimate improves to -2.2%Y in 4Q09 from -4.3% in 3Q09. We do not expect positive year-on-year GDP growth until 2Q10. We think the outlook for domestic demand in the US and Europe is the most critical for AXJ’s external demand. In the previous two down cycles, the US and European financial systems were largely intact. As a result, consumption recovery quickly supported Asian exports. However, to the extent that financial system impairments make the structural growth environment look less promising in the US and Europe in this cycle, we are less optimistic on the strength and pace of the recovery for AXJ.

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.