A synopsis of the major reports issued globally by Morgan Stanley strategists in the past week. Please see full versions of these articles on our Client Link Website. Please contact your Morgan Stanley representative for access if needed.
US Equity Strategy: Cat on a Hot Tin Roof - Balancing Headwinds and Supports
Abhijit Chakrabortti, Jason Todd
We don't think the market will look through substantial 2H earnings downgrades (i.e., in excess of 10%), despite the growing claim that it is already focused on 2009. Similarly, further strong increases in energy prices or worsening inflation data that alter the view of a supportive Fed would clearly damage stocks. In our view, for the market to make further material progress, a number of the headwinds it faces must change.
US Credit Strategy: Movement at the Border
R. Hussain, G. Peters, A. Richmond
Opportunities at the border between investment grade and high yield. Credit markets across the curve undeniably feel better, but headwinds persist in an investing backdrop that is far from fully recovered. As systemic trades take a back seat to those with a more idiosyncratic focus, we expect more attention to be paid to valuation differences at the seams of the investment-grade and high-yield markets, much as we saw during 2002–03.
Europe Equity Strategy: Valuation Factors to Win Again - Frequently Asked Questions
Edmund Ng, Teun Draaisma
Valuation factors will be key stock picking factors again in 2008. Using low valuations as a stock-picking strategy, while very successful in the long run, has lost money over the last year or so. Our analysis suggests it should lead to outperformance again, given that valuation spreads in Europe and the US are more than two standard deviations wider than normal. Focus on stocks with low valuations, positive EPS revision, strong cash flow and low leverage.
Asia-Pacific Equity Strategy: The Weakest Link
R. Tsai, M. Wood, C. Ng
Elevated oil prices will uncover the 'weakest links' – which we think are the US consumer and countries with unsustainable oil subsidies, particularly Indonesia. This should provide some relief to energy prices in the short term, but over the medium term the 'higher for longer' theme appears intact. We have trimmed our energy exposure in the short term back to equal-weight, and we continue to avoid transport stocks and US consumer plays.
Asia-Pacific Equity Strategy: Asia #1; China The Engine!
R. Tsai, M. Wood, C. Ng
Asian domestic demand is now larger than the US, based on thirteen volume indicators. Asian dollar GDP is 59% of the US, but its true size is masked by cheap currencies and labour costs. This large domestic market reinforces our view that Asia is less dependent on the US and capable of a soft decoupling. Commodity markets reflect this shift, but domestic-focused Asian equities do not. We like select banks, property, consumer, telecom, and infrastructure stocks.
Japan Equity Strategy: Sustainable Opportunities in China
N. Kamiyama, A. Kuwahara, Y. Komiya
Chinese energy conservation and environmental markets offer abundant sustainable opportunities to Japanese firms. We now expect rapid growth in the Chinese environmental conservation market starting in 2008-12. Nevertheless, progress in this area may be hindered by political risks, competition from the US and Europe, and potential instability of Chinese economic development.
China Equity Strategy: Fortnight in Focus - China Investment Perspectives
Jerry Lou, Allen Gui
Producers face mounting inflation pressure. Consumer inflation appears to have peaked out, easing anxiety over imminent aggressive policy action, but cost inflation continues to head upwards amid rising energy and raw materials costs. PPI jumped 8% YoY in March, and raw material PPI soared 11%. Places to avoid this risk: producers with strong pricing power (e.g., premium liquor), and service industries (e.g., Internet and gaming).
Commodity Strategy: Sugar Rush
H. Allidina, J. Friesen, M. Pape
We remain bullish on long-dated sugar — as higher grain prices take acreage from sugar, growing ethanol demand in Brazil limits the availability of sugarcane, and a rising cost of production discourages expansion. In our view, the global sugar balance will move into a deficit of nearly 6.1 million tonnes in marketing year 2009/10 (Oct. 1 through Sept. 30). Thus, we now forecast an average sugar price of 18.6 cents/lb in 2010/11 (previous forecast 17.1 cents/lb).
A synopsis of the major reports issued globally by Morgan Stanley economists in the past week. Please see full versions of these articles on our Client Link Website. Please contact your Morgan Stanley representative for access if needed.
Global Economics: The Inflation Conundrum
Joachim Fels, Manoj Pradhan
Everybody talks about inflation, but market-based measures of inflation expectations are still very low. This is what we call the inflation conundrum. We think investors are still too confident in central banks' willingness and ability to achieve their inflation targets. Central banks are likely to keep missing their targets, and we expect the debate about raising the targets to pick up. Look for both true inflation expectations and breakeven inflation rates to rise over time.
US Economics: The Fed Moves Towards Balanced Risks
Richard Berner, David Greenlaw
We expect the Fed to keep policy on hold for the balance of 2008, following the recent 25 bp cut. This reflects the view that upside risks to inflation are now nearly as important as downside risks to growth. If the economy weakens significantly again, the FOMC could certainly cut rates further. However, our base case is that the economy does not double dip. A renormalization of monetary policy — i.e., tightening — is likely to begin around mid-2009. in our view.
Europe Economics: Manufacturers Facing an Imminent Slowdown
Carlos Caceres, Eric Chaney
Serious, but not catastrophic. The April round of manufacturing surveys in Europe showed that the headline indices in each of the surveyed countries posted a significant correction. This is even more remarkable when considering the relative resilience exhibited by these surveys in recent months. Will these signals be enough to alter the hawkish posture expressed by the European Central Bank? In our view, probably not.
Japan Economics: First Steps Back to Reform
Robert Feldman
Japan is beginning to return toward aggressive economic reform. This move is shown by election returns, public opinion polls, and recent policy outcomes. Despite the uncertain policy outlook, Japan could outperform if more news suggests a return to reform. There are three strategies to deal with the current policy uncertainty — avoid Japan entirely, compile a buy-list, and use optimistic options positions.
Japan Economics: Modest Inflation Alert
Takehiro Sato, Takeshi Yamaguchi
Reversing course from bears on inflation to bulls. Our stance on Japan's inflation to date has been steadfastly cautious. But recent growth in food and energy prices has surpassed the range in which companies can stomach the cost on their own, forcing us to raise our outlook on prices. Going forward, the core inflation rate is set to hover in the +1% range from May, and could temporally hit +2% during 2009.
China Economics: China Chartbook - Imported Soft Landing in Sight
Q. Wang, D. Yam, K. Tai
China's GDP growth would decline to 10% in 2008 with an imported soft landing, according to our forecast, with CPI inflation remaining above 7% in 1H before starting to drop in 2H, averaging 6.5%. The global downturn, attributable to a recession in the US, should help the Chinese economy to cool off without forcing the government to take aggressive tightening action by resorting to blunt policy instruments.
India Economics: RBI Maintains Status Quo
Chetan Ahya, Tanvee Gupta
The central bank made a 25 bp hike in its cash reserve ratio (CRR) but left policy rates unchanged. The decision to leave repo rate unchanged was in line with our expectations, while the consensus was looking for a 25 bp policy rate hike. We believe the central bank could hike the CRR further if capital inflows continue and headline inflation remains above 5.5%, but that decision will likely be data-dependent.
Korea Economics: Resilient Growth in 1Q08 Amidst Global Slowdown
Sharon Lam, Catherine Tai
Positive 1Q08 GDP enhances solid fundaments. Korea economic growth sustained its momentum at +5.7% YoY in 1Q08, the same pace as in the previous quarter. The central bank may consider cutting policy rates in 2H08 to stimulate economic growth. Government policies will be the future growth catalysts, in our view. We believe that intact fundamentals and ample domestic liquidity will likely allow Korea to achieve moderate growth in 2008.
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