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: The Final Cut - Downgrading EPS Estimates & Target
Abhijit Chakrabortti, Jason Todd
We reduced our 2008 S&P 500 operating EPS estimate to $78 (from $86) and year-end S&P 500 index target to 1300 (from 1400). We also introduced our 2009 S&P 500 operating EPS estimate of $84. Our outlook for earnings improvement in 2009 is based almost entirely on some improvement by Financials from virtually zero earnings in 2008 — plus moderate growth in Healthcare and Staples earnings, compensating for a sizeable deterioration in global cyclical sectors.
Global Strategy: UnCommercial Real Estate - Downunder Daily
Gerard Minack
Residential mortgages are likely to be only the first wave of credit loss in the current cycle. Markets are priced for significant losses in commercial real estate, and hence in commercial mortgage-backed securities (CMBS). Losses on CMBS are largely driven by tenants' ability to pay rent, and that can be undermined at any stage by a deteriorating economic cycle. In short, CMBS carry a long tail risk.
US Credit Strategy: Greenback Comeback
Hussain, Peters, Richmond, Chu
From tailwind to headwind. It's time to push back more forcefully against the safety bid for credits heavily exposed to non-US revenues. Many would liken the US to a supertanker, as it takes much time and effort to turn. However, the same can now be said of other regions around the world, particularly as they have grown in importance to the overall global macro picture. Single names won't turn on a dime, but we believe this theme has staying power into 2009.
UK Equity Strategy: Looking for High and Secure Dividend Yields
Graham Secker, Charlotte Swing
Narrowing gap between dividend yield and gilt yield. Over the last few months the dividend yield on UK equities has risen by around 60 basis points from 3.6% to 4.2%. At the same time the 10-year gilt yield has fallen 70 bp from 5.3% to 4.6%. Over the next year we believe stocks that offer a high and secure dividend yield are likely to perform well as concerns over the sustainability of banks' dividends encourage income-oriented investors to look for yield in other areas.
Japan Equity Strategy: China's Post-Olympics Slowdown May Be Modest
Naoki Kamiyama, Li Luo
Favorable outlook for the post-Olympics economy. The Chinese economy might only experience a modest slowdown, not a hard landing, in contrast to the consensus view. We expect a rebound for machinery and other China-related sectors in this case. We think the outlook will improve once global inflation concerns and credit market disruptions subside — and we have compiled a list of Japanese companies generating more than 5% of their F2007 revenue from China.
China Equity Strategy: Still Tough Roads Ahead - Replacing Growth with Value
Jerry Lou, Allen Gui
For China investors, we suggest a shift to value from growth in near-term portfolio strategy. Although we are still strategically bullish on Chinese consumption in the long term, we see a potential de-rating in high-valuation sectors as a threat to our model portfolio in the near future. We are picking up signs of slowdown in auto sales, white goods sales, tourism arrivals, air travel and hotel occupancy, etc.
India Equity Strategy: Screening for Long Ideas in a Falling Market
Ridham Desai, Sheela Rathi
We identified Indian stocks that investors may want to overweight in a falling market, based on seven quantitative screens. These screens can be put into three buckets: (1) strong fundamentals versus inexpensive valuations; (2) sentiment too bearish; and (3) out-of-favor stocks gaining steam. In our sector model portfolio, we increased the Materials underweight and reduced the Consumer Discretionary underweight (each by 150 bp).
Commodity Strategy: Agriculture - Back from the Midwest and Still Bullish
H. Allidina, J. Friesen, M. Pape
Good, not great, crops — maintaining corn and soybean estimates. Drier weather following the June floods in the US Midwest has likely prevented this year's crop from suffering the same fate as the crop of 1993. However, both corn and soybean yields remain acutely sensitive to weather, and we believe that the USDA's current yield estimates are too aggressive. We are maintaining our 2008/09 forecasts of $7.00/bu for corn and $15.00/bu for soybeans.
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.
US Economics: The Message from Jackson Hole
Richard Berner
Discussions at the annual Monetary Policy Symposium focused on the origins of the financial crisis, what comes next, and what to do about it. New approaches to capital regulation and infrastructure are emerging to ensure financial stabilization. But the risk of a prolonged economic and credit downturn probably is not in the price of risky assets, nor are the full implications of coming regulatory changes aimed at ensuring financial stability.
Global Economics: Rates Roundup - Less than Meets the Eye
Joachim Fels
Hopes for rate cuts likely to be disappointed. While stagflation still rules, many now hope that central banks will shift from fighting 'flation' toward easing policy to fight 'stag'. But rate hikers are still likely to outnumber rate cutters around the globe by 16 to 2 in the remainder of 2008, we believe. Even next year, there should still be more hikers than cutters, despite our relatively downbeat growth forecasts. In many countries, real rates are negative, limiting room for easing.
Currencies: Post-Olympics China and the AXJ Currencies
Stephen Jen, Spyros Andreopoulos
Risk of a growth scare. Back in February, we argued that China should not suffer a post-Olympics curse. While we still believe that, we now feel that there is a risk of a growth scare in China following the Olympics. However modest this economic slowdown turns out to be, it is likely that investor discomfort might become rather acute, with meaningful implications for the region. This will add to our bearish attitude towards the Asia-Pacific currencies.
Japan Economics: Recession - Short and Shallow, or Long and Deep?
Takehiro Sato
Japan could face a long, deep recession — rather than the short, shallow version the consensus expects. Manufacturing output is already dropping at a rate comparable with the average in the past recessions. We argue that the recession could be sharper and more protracted if there is (1) further credit tightening in Japan and abroad, (2) a hard landing for emerging economies, and (3) more income outflow to resource-rich nations.
Currencies: On the Link Between the Dollar and Oil
Stephen Jen, Spyros Andreopoulos
US dollar and oil likely to remain negatively correlated for some time. The performance of the USD will continue to be partly determined by the evolution of oil prices. For the global economy, a strong dollar/low oil price combination is much better than a cheap dollar/high oil price combination. Calmer commodity prices should also temper the hawkish bias some inflation-targeting central banks have had.
Argentina Economics: Default Fears - This Week in Latin America
Daniel Volberg
Pessimism misplaced? Investors are increasingly jittery about Argentina servicing debt payments next year. If the reason behind this pessimism is a perception of Argentina's inability to meet the rising debt obligations in a challenging economic environment, then that pessimism may be misplaced. With deep pockets from the last five years of abundance and with a fiscal surplus likely intact, Argentina should be able to meet its debt service obligations in the next 12-18 months.
Vietnam Economics: Still Too Early for Meaningful Rate Cuts
D. Tan, C. Ahya, S. Singh
We do not expect meaningful rate cuts this year from the State Bank of Vietnam. Two goal posts are important in our view: Inflation has to fall to levels that restore positive real interest rate, i.e. around 20% YoY or 1.5% MoM for a quarter or so. And banking sector liquidity conditions have to improve, with the gap between credit growth and deposit growth narrowing and interbank rates normalising. We believe this could happen in 1Q09 at the earliest.
Malaysia Economics: Coming Inter-Bank Liquidity Squeeze
Chetan Ahya, Deyi Tan, Shweta Singh
Low real rates appear to be discouraging depositors and encouraging borrowing by consumers as well as companies. In June 2008, total commercial bank credit grew by 33.6%, while deposits grew by 15.1%. Bank credit-deposit ratio has reached close to full capacity level of 72.7% as of June 2008. We believe that 3-month JIBOR will rise by 150 bp over next 3-4 months from the current level of 9.9%.
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