Morgan stanley -Some Kind of Normal by riteshbhansali

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Some Kind of Normal

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									MORGAN STANLEY RESEARCH
                                                                                                                              GLOBAL EM M ACRO STRATEGY TEAM
July 15, 2013
                                                                                                                              For research analysts, please see contact list at the


Global EM Investor
                                                                                                                              back of this material.




Some Kind of Normal
                                                                                                                              Chart of the Week: China Curve
Our tactical market directional stance remains Hold. The medium-term                                                          Normalisation Supportive of EM Risk
outlook for EM assets is still challenging, but recent dovish comments
                                                                                                                                                                                         96
from Chairman Bernanke and a normalisation of the CNY interest rate                                                              55
curve are likely to sustain recent market stability, if not foster near-term                                                     35                                                      98
downside to USD/EM and credit spreads. Moreover, the technical backdrop
                                                                                                                                 15
for currencies and credit remains relatively healthy. We are mindful that
                                                                                                                                 -5                                                      100
credit issuance may pick up ahead of what is typically a quiet August.
                                                                                                                                -25
New Trades                                                                                                                                                                               102
                                                                                                                                -45
Rates: Receive CZK versus paying EUR 2y1y: Like the ECB, the CNB has
stated that interest rates will remain low over a longer horizon. Yet, CZK rates                                                -65                                                      104
have underperformed EUR rates sharply over the past two months, with the likes                                                    Jul-12     Oct-12     Jan-13      Apr-13     Jul-13
of 2y1y and 2y3y widening by over 50bp versus EUR forwards                                                                             CNY 1s5s (bp)            USD/EM* (RHS, inverted)
                                                                                                                              *A rise in USD/EM (inverted) reflects appreciation of EM
Comments of the Week                                                                                                          currencies versus the USD
                                                                                                                              Source: Morgan Stanley Research, Bloomberg
EM Credit – Primary Market to Pick Up: After a record start to the year, the
primary market has been very quiet. Given the relative stability in the markets
last week, we expect primary market activity to accelerate ahead of the seasonal
August lull. This is likely to cap some of the upside to current valuations, offsetting
in part the more favourable underweight positioning of EM debt-dedicated funds
– particularly if premiums offered on the new issuance are very generous.                                                     Rates: Receive CZK versus EUR2y1y
                                                                                                                                80
EMFX – TRYing Times: TRY has been one of the worst-performing currencies                                                              bp
                                                                                                                                60
recently, despite significant supply of USD from the CBT. The CBT saying that
discussion on a widening of the interest rate corridor will be on the agenda in the                                             40
next MPC meeting has brought about some near-term stability. We believe that                                                    20
without the CBT delivering on rate hikes and/or a meaningful improvement in the                                                   0
external environment, pressure on TRY will likely increase.                                                                     -20

Will Japanese Investors Continue to Allocate to EM? We surveyed 48 clients                                                      -40
on their views on EM investing, Fed QE and asset price expectations at our EM                                                   -60
Quantitative Strategy seminar held in Tokyo last week. 55% of investors expected                                                   A-11 N-11 F-12 M-12 A-12 N-12 F-13 M-13 A-13
an increase in investment to EM, though there was an expectation for                                                                  CZK 2y1y Receiver vs. EUR           Target         Stop
differentiation across currencies. Investors expected QE tapering to start in 4Q13                                            Source: Morgan Stanley Research, Bloomberg
and the Fed to start hiking in 1H15. Most believed that USD/JPY would head
higher, and the S&P 500 and Nikkei would reach lower levels by end-September.
Assessment Changes
Currencies: We downgrade INR to neutral from neutral/overweight.
Rates: We upgrade RUB and MXN to neutral/overweight from neutral, and COP
and ZAR to neutral from neutral/underweight. We also downgrade MYR and THB
                                                                                                                              Note: Due to the nature of the fixed income
to neutral/underweight.                                                                                                       market, the issuers or bonds of the issuers
Asset Class Stance                                                                                                            recommended or discussed in this report may
                                                                                                                              not be continuously followed. Accordingly,
       Currencies                   Local Rates              Sovereign Credit             Corporate Credit                    investors must regard this report as providing
           Hold                         Hold                         Hold                        Hold                         stand-alone analysis and should not expect
                                                                                                                              continuing analysis or additional reports relating
                                                                                                                              to such issuers or bonds of the issuers.
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider
Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with
a subject company, public appearances and trading securities held by a research analyst account.
                                                                    MORGAN STANLEY RESEARCH

                                                                    July 15, 2013
                                                                    Global EM Investor




Global EM Cross-Asset Compass
Rashique Rahman, James Lord                                         downturn. 2Q GDP came in at 7.5%, with the monthly activity
                                                                    data on the whole only marginally below expectations.
EMFX         Sell     Reduce       Hold      Accumulate      Buy
Rates        Sell     Reduce       Hold      Accumulate      Buy    Finally, recent official commentary has suggested that policy
Sov Credit   Sell     Reduce       Hold      Accumulate      Buy    steps could be taken to mitigate the pace of the slowdown in
Corp Credit Sell      Reduce       Hold      Accumulate      Buy    China. Crucially, China’s interest rate market is showing signs
                                                                    of normalisation following the significant volatility seen in
                                                                    May/June.
   We maintain our Hold stance for EM assets primarily on the
                                                                    Exhibit 1
    back of the stronger technical position of the market. Recent
    comments from the Fed and developments in China have            Normalisation of CNY Curve Supportive of EM Risk
    been supportive of this neutral position.                                                                                                  96
                                                                        55
   The prospect of greater issuance over the next 2-3 weeks
    poses a risk for the credit market, as does the overhang of         35                                                                     98
    positioning that remains in the local bond market.
                                                                        15
   We expect currencies exposed to external funding risks to
                                                                                                                                               100
    continue underperforming, given the medium-term trajectory           -5
    of FOMC policy against a backdrop of deteriorating
                                                                        -25
    underlying fundamentals.                                                                                                                   102
                                                                        -45


What We Think                                                           -65
                                                                          Jul-12          Oct-12          Jan-13         Apr-13       Jul-13
                                                                                                                                               104


We maintain our Hold stance across all EM asset classes, a                                 CNY 1s5s (bp)           USD/EM (RHS, inverted)
stance we have held since July 1 (see Global EM Investor:           Source: Bloomberg, Morgan Stanley Research
Taking Stock of the Sell-Off). Our decision to move to a more
                                                                    These factors should contribute to a further near-term
neutral position was driven primarily by technical
                                                                    consolidation within EM assets. However, we recommend that
considerations, with positioning reduced to a significant
                                                                    investors adopt a much more selective approach in exposure
degree (particularly in FX and credit). Given this healthier
                                                                    to EM.
technical backdrop, the market was likely to be more sensitive
to any positive fundamental developments, and we continue           First, despite the marginal softening of the Fed’s stance
to believe that this is the case.                                   recently, there remain concerns about the medium-term
                                                                    outlook in terms of the availability of external funding.
To be clear, we remain concerned about the medium-term
outlook for EM, with an ongoing deterioration in fundamentals       Second, one of the main risks we see for the market at
still likely to be the primary driver of performance over time,     present is the prospect of investors taking any periods of
rather than FOMC policy. We believe that EM currencies will         market stability to offload risk. Certainly, the large overhang of
need to weaken on the whole to absorb the brunt of macro            positioning in the local currency government bond market
adjustment in response to slower EM growth; and EM                  places the asset class in a difficult technical position.
creditworthiness will show signs of deterioration as a result.      While the positioning in hard currency bonds is more
Nevertheless, developments since our shift in stance to             favourable – given that investors are underexposed relative to
neutral have broadly supported our position, with Chairman          benchmark – we expect that the primary market is likely to be
Bernanke’s recent dovish comments prompting renewed USD             strong over the next few weeks as we head into the
weakness. If this tone is again reflected in Bernanke’s             traditionally quiet month of August.
testimony to Congress on Wednesday, then further near-term          A large amount of issuance has been delayed thanks to
downside to USD/EM is likely, in our view.                          recent market volatility and there is a high chance that current
Furthermore, data from China highlight that the growth              market stability will encourage more issuers to come to
slowdown is – thus far – occurring in a gradual fashion as          market. This could undermine the strong technicals behind
opposed to the prior market nervousness about a sharper             investors’ current positioning (see page 12 for details).


                                                                                                                                                    2
                                                                                 MORGAN STANLEY RESEARCH

                                                                                 July 15, 2013
                                                                                 Global EM Investor




What Has Changed                                                                 Indeed, the Central Bank of Turkey (CBT) has spent US$6.3
                                                                                 billion since it started foreign currency auctions in June, with
Could an increase in liquidity provision from other major
                                                                                 minimal effect. Today, the CBT indicated that it will be
central banks step up to fill the void? We do believe that the
                                                                                 considering whether to make a “measured” adjustment to the
European Central Bank will eventually step up with rate cuts
                                                                                 interest rate corridor at its next MPC meeting, and this verbal
and possible further balance sheet expansion.
                                                                                 intervention on its own has already had a notable market
Meanwhile, the Bank of Japan remains committed to a                              impact. See page 13 for further details on our TRY views.
significant increase in its balance sheet. While we believe that
                                                                                 We recommend that investors restrict exposure to EM
JPY will weaken over time, which could increase the
                                                                                 currencies to those supported by more robust domestic
attractiveness of the currency to fund longs elsewhere, we are
                                                                                 fundamentals and external positions.
not convinced that we will see significant flows from large real
money investors moving from Japan into EM assets as a
                                                                                 What We’re Watching
result.
Indeed, following a survey taken at a recent investor                            US Treasury yields remain a key driver of price action within
conference we held in Tokyo, only 55% of respondents felt                        EM, which means that Chairman Bernanke’s testimony to US
that there will be an increase in investment in EM. See page                     Congress on Wednesday will likely be the main risk event of
16 for a further discussion of these results.                                    this week. Following from the more dovish comments made
                                                                                 by Bernanke recently, we believe that markets will be
This means that assets in those economies that are more
                                                                                 expecting a similar message to be delivered.
dependent on external funding are likely to be under greater
pressure. We are uncomfortable taking on exposure to the                         Otherwise, it will be a relatively quiet week on the data front
likes of INR, IDR, ZAR, BRL and TRY – particularly where                         for EM, with the South African Reserve Bank’s Thursday MPC
currencies are not receiving much in the way of policy                           meeting the main policy announcement to watch out for.
support. TRY has spent much of the recent correction
                                                                                 Front-end rates in South Africa continue to price in a decent
underperforming peers, given the so far ineffective approach
                                                                                 chance of rate hikes in the next six months (around 30bp of
that the Central Bank of Turkey has taken in its attempt to
                                                                                 tightening), compared to our economists’ expectation for rates
shore up TRY.
                                                                                 to be left on hold until the end of 2014. Many investors
In what may turn out to be a sustained reversal in the FX                        highlight the SARB as one central bank within EM that might
reserves accumulated over the past decade, we are seeing a                       be forced to hike rates in order to prevent further currency
steady drawdown in EM FX reserves as central banks seek to                       weakness. We would fade any market pricing of hikes.
provide hard currency and mitigate currency weakness (see                        Indeed, so far there has not been any indication that the
Exhibit 2).                                                                      SARB is going to shift its focus away from growth and towards
Exhibit 2                                                                        inflation risks.
Central Bank FX Reserves Taking a Tumble                                         The BCB has continued to hike rates, raising the Selic rate by
   2%                                                                  10,000    50bp at the last meeting. Further colour on how the central
                                                                                 bank is viewing the balance of risks will be revealed on
   0%                                                                  5,000
                                                                                 Thursday with the released of the last Copom meeting
                                                                       0         minutes.
  -2%
                                                                       -5,000
  -4%                                                                            Peripheral European spreads also bear close attention. So far
                                                                       -10,000   the rise in bond yields within the European periphery has not
  -6%                                                                            had a meaningful impact on broader risk sentiment and EM
                                                                       -15,000
  -8%
                                                                                 assets. However, with growth in Europe still looking fairly
                                                                       -20,000
                                                                                 subdued, higher funding costs will not be welcome, and we
 -10%                                                                  -25,000   will be watching carefully for any signs of contagion.
            MYR
             TRY


             ARS



            RUB



             CZK




             CLP


              ILS
             IDR

            UAH
             ZAR



             INR



             PEN




            SGD

             PLN
             BRL
            HUF




             VEF
             THB




            MXN
            KRW



            TWD




        Change in FX reserves over May and June, %April stock   USDm (RHS)

Source: Haver Analytics, Morgan Stanley Research




                                                                                                                                                3
                                                                                                       MORGAN STANLEY RESEARCH

                                                                                                       July 15, 2013
                                                                                                       Global EM Investor




Risk Events of the Week
  Date (ET)         Time (ET)            Ccy          Event                                                                Ref period           MS Fcast   Market   Previous
  15-Jul            11:30                ILS          Consumer Prices (YoY)                                                    Jun               1.20%     1.80%     0.90%
  15-Jul                                 PEN          Unemployment                                                             Jun                                   5.70%
  15-Jul                                 PEN          Economic Activity Index YoY NSA                                          May               5.60%               7.70%
  15-Jul            22:00                KRW          South Korea FDI (YoY)                                                    2Q                                   44.70%
  15-16 Jul         19:00                RUB          Industrial Production (YoY)                                              Jun                0%       0.5%      -1.4%
  15-21 Jul         19:00                BRL          CAGED Formal Job Creation                                                Jun                                   72028
  15-19 Jul         19:00                ARS          Budget Balance                                                           May                                     --


  16-Jul            6:00                 ILS          GDP Annualized                                                          1Q F                                   2.70%
  16-Jul            7:00                 BRL          FGV Inflation IGP-10 (MoM)                                                Jul                                  0.63%
  16-Jul            7:00                 BRL          FGV CPI IPC-S                                                           Jul-15                                 0.23%
  16-Jul            8:00                 PLN          Avg Gross Wages (YoY)                                                    Jun                         2.10%     2.30%
  16-Jul            8:00                 PLN          Employment (YoY)                                                         Jun                         -0.90%   -0.90%
  16-Jul            8:00                 PLN          Core Inflation YoY                                                       Jun                         1.00%     1.00%
  16-Jul            17:00                KRW          Producer Price Index (YoY)                                               Jun                                  -2.60%
  16-Jul            20:30                SGD          Non-oil Domestic Exports (YoY)                                           Jun                         -5.00%   -4.60%
  16-17 Jul         19:00                RUB          Producer Prices (YoY)                                                    Jun                         3.50%     2.70%


  17-Jul            5:00                 MYR          CPI YoY                                                                  Jun                         1.90%     1.80%
  17-Jul            6:00                 ZAR          BER Consumer Confidence                                                  2Q                  -3                  -7
  17-Jul            7:00                 ZAR          Retail Sales Constant (YoY)                                              May               3.0%      2.40%     1.90%
  17-Jul            8:00                 PLN          Sold Industrial Output (YoY)                                             Jun                         1.30%    -1.80%
  17-Jul            8:00                 PLN          Producer Prices (YoY)                                                    Jun                         -1.80%   -2.50%
  17-Jul            17:00                COP          Trade Balance                                                            May                                   $36.8
  17-18 Jul         19:00                RUB          Real Wages (YoY)                                                         Jun               5.90%     5.70%     5.70%
  17-18 Jul         19:00                RUB          Retail Sales (Real) (YoY)                                                Jun               3.50%     3.50%     2.90%
  17-18 Jul         19:00                RUB          Unemployment Rate (%)                                                    Jun                         5.20%     5.20%
  17-Jul            21:30                CNY          China June Property Prices


  18-Jul            4:30                 HKD          Unemployment Rate SA                                                     Jun                         3.40%     3.40%
  18-Jul            5:00                 PLN          CEE ZEW Indicator for July
  18-Jul            7:00                 BRL          IGP-M Inflation 2nd Preview                                               Jul                                  0.74%
  18-Jul            7:30                 BRL          COPOM Monetary Policy Meeting Minutes
  18-Jul            9:00                 MXN          Unemployment Rate                                                        Jun               5.00%     4.97%     4.93%
  18-Jul                                 ILS          Inflation Forecast                                                       Jul                                   2.00%
  18-Jul                                 ILS          Leading 'S' Indicator (MoM)                                              Jun                                   0.10%
  18-Jul                                 ZAR          SARB Announce Interest Rate                                            Jul-18              5.00%     5.00%     5.00%


  19-Jul            3:30                 THB          Foreign Reserves                                                        Jul-12                                $168.8B
  19-Jul            8:00                 BRL          IBGE CPI IPCA-15 (MoM)                                                    Jul              0.24%               0.38%
  19-Jul            15:00                ARS          Economic Activity Index YoY NSA                                          May               4.30%     5.20%     7.00%
  19-Jul            17:00                COP          Retail Sales (YoY)                                                       May               5.30%     3.00%     5.70%
  19-Jul            17:00                COP          Industrial Production (YoY)                                              May               -1.30%    -1.50%    8.40%
  19-Jul                                 PHP          Balance of Payments                                                      Jun                                   $75M
Source: Morgan Stanley Research, Bloomberg; Note: Italics indicates earliest possible release date. Bold indicates a monetary policy meeting.
AXJ Weekly Publication, July 12; CEEMEA Weekly Publication, July 5; LatAm Weekly Publication, July 12




                                                                                                                                                                               4
                                                                                     MORGAN STANLEY RESEARCH

                                                                                     July 15, 2013
                                                                                     Global EM Investor




New Trade: Receive CZK versus                                                                                            CEEMEA RATES
EUR 2y1y
Mihail Bozinov

Rationale                                                                         Risks

We recommend receiving CZK versus paying EUR 2y1y                                 An improvement in Czech relative to eurozone inflation and
swaps as the spread has widened in recent weeks to multi-                         growth data, and/or a change in the CNB’s dovish stance
year highs, and the CNB remains as dovish as the ECB.                             towards a more balanced or hawkish posture.

June Czech CPI came at 1.6%Y, above consensus                                     Levels
expectations and breaking a seven-month trend of declining
                                                                                  We enter the trade at 49bp, target a move to 15bp, and put a
year-on-year prints. However, the pick-up in inflation isn’t
                                                                                  stop at 60bp. Net roll down on the trade is neutral (+14 on the
likely to be sustained: the print was driven by food and
                                                                                  CZK leg and +12 on the EUR leg).
seasonal items, as CPI ex-seasonal goods and ex-food
were flat at 0.9% and 0.7%Y, respectively. In addition, the
CNB is forecasting below-target inflation for the next two
years and sees overall risks to its forecasts on the
downside.

Like the ECB, the CNB has stated that interest rates will
remain low over a longer horizon. And given the subdued
growth and inflation dynamics, the central bank is probably
the closest it has ever been to currency intervention, in our
view. Yet, CZK rates have underperformed EUR rates
sharply over the past two months, with the likes of 2y1y and
2y3y widening by over 50bp versus EUR forwards.


CZK versus EUR 2y1y IRS, %                                                        CNB Inflation Forecast, %
 4.00                                                                    0.80

 3.50
                                                                         0.60
 3.00
                                                                         0.40
 2.50

 2.00                                                                    0.20

 1.50
                                                                         0.00
 1.00
                                                                         -0.20
 0.50

 0.00                                                                     -0.40
    Jul-10     Jan-11      Jul-11     Jan-12     Jul-12    Jan-13   Jul-13

                  CZK 2y1y            EUR 2y1y            Spread (RHS)
Source: Morgan Stanley Research, Bloomberg                                        Source: Morgan Stanley Research, CNB




                                                                                                                                                    5
                                                                                                         MORGAN STANLEY RESEARCH

                                                                                                         July 15, 2013
                                                                                                         Global EM Investor




Trade Radar (All Open Trades)                                                                                                                         Cross-Asset
Robert Habib, Simon Waever


Local Markets
                                                                                       More Compelling    Recent Opened Trades

                                                                                                          Buy CZK 2y1y Receiver versus EUR

                                                                                                          CZK rates have underperformed EUR rates sharply despite the
                      Buy USD/PLN                    Buy USD/UAH 6m                                       CNB forecasting low rates over the next two years and very
                                                          NDF
 Trade Score




                                                                                                          low inflation. We see their spread tightening back in the
                                                            CZK 2y1y                                      coming weeks.
                        Buy USD/IDR 1m                   Receiver vs. EUR
                             NDF                                                                          Buy USD/PLN
               Buy 2015 BRL BE
                                                                                                          CEE currencies have outperformed on the back of EUR
                   Inflation
                                                                                                          strength, but we believe this is likely to reverse. PLN is most at
               Less Compelling                                                                            risk of all CEE FX from an unwinding of fixed income flows
                                                                                                          related to Fed tapering.
                                                   Reward / Risk
                                               Rates                           FX


Credit

                                                  Buy SOAF 2022
                                                                                                          Recent Opened Trades
                                                  vs. SOAF 2041**
                                                                                                          Buy MEX ’44 versus INDO ’43
                  Switch into KZOKZ
                   '43 from KZOKZ                                                More Compelling
                          '18**                                                                           Deteriorating fundamentals in Indonesia and high exposure to
                                      Buy Mex 2044 vs.
                                          Indo 2043                                                       a further slowdown in China provide the trade with a macro
 Trade Score




                            Buy Peru 2019 vs.
                             Brazil Jan-2019**                                                            backdrop. Additionally, 10-30s credit curves indicate that the
                                                                                                          long end is where the trade is best executed, with Mexico
                                                                                                          appearing too steep and Indonesia too flat.

                                                                                                          Switch into KZOKZ ’43 from KZOKZ ’18

               Less Compelling                                                                            After the sharp repricing and increase in volatility in EM
                                                                                                          corporate credit over the past couple of weeks, we look for
                                               Reward / Risk                                              opportunities within the quasi-sovereign space. We
                                      Sovereign Credit              Corporate Credit                      particularly like KZOKZ ’43 and therefore suggest that
                                                                                                          investors extend duration by switching out of the ’18.


*Trade score is a simple sum of four components, with the maximum score for each component given in parentheses. Conviction (4): This is
subjectively assigned based on the trade rationale, with four being the highest conviction level and zero the lowest. Directionality (2): Between
zero and two, with two indicating a non-directional trade and zero indicating a directional trade. Carry (2): A score is given depending on the
trade’s three-month carry. Negative carry gets a value of zero. Positive carry, which is less than the stop-loss of the trade, gets one. Carry in
excess of the stop-loss gets two. Z-Score (2): The difference of the current level of the trade and its mean, divided by the one-year standard
deviation of weekly changes. In any case where mean > current > target, or where mean < current < target, a score of zero is awarded.
Otherwise, a z-score above 4 is given a score of 2, one between 2 and 4 is given a score of 1 and one below 2 is given a zero. Trade Score is
represented below each recommended trade (except for Hedges).




                                                                                                                                                                           6
                                                                                                           MORGAN STANLEY RESEARCH

                                                                                                           July 15, 2013
                                                                                                           Global EM Investor




Trades We Recommend
                                                                                       Entry                                                                Notional        Gross P&L
                                                                                                             Current        Target         Stop
Trade                                                        Status             Date           Level                                                       ($m or DV01*)   bp      US$k
CREDIT
Sovereign Credit
Buy SOAF 2022 vs. SOAF 2041**                                                18-Feb-13          -26             -22            -51          -11                10x5        -7      (2)
Buy Peru 2019 vs. Brazil Jan-2019**                                          15-Apr-13           -4             -12            -44          16                10x10.5      +8      30
Buy Mex 2044 vs. Indo 2043                                                    8-Jul-13          -38             -48            -70          -15                9x10        +5      62
Corporate Credit
Switch into KZOKZ '43 from KZOKZ '18**                                        1-Jul-13          338             318            270          370                  10        +7     103

RATES
Buy 2015 BRL BE Inflation                                                    18-Apr-13         5.53             5.60           6.20        5.00                  10        +7     (201)
CZK 2y1y Receiver vs. EUR                                     NEW             9-Jul-13          49               51             15          60                   40        -2       9
CURRENCIES
Buy 1y USD/ CNY Put Spread (K = 6, 6.18)                                     26-Apr-13         6.22            6.17                                               10
Buy USD/IDR 1m NDF                                                           10-Jun-13        10,327          10,240          10,500      10,000                 -10              (235)
Buy USD/UAH 6m NDF                                                           14-Jun-13         8.81            8.83            9.50        8.65                  -10               (81)
Buy USD/PLN                                                                  20-Jun-13         3.29            3.30            3.40        3.14                  -10                9




Trades Closed This Week
                                                                                       Entry                           Exit                                 Notional        Gross P&L
Trade                                                        Status             Date           Level           Date           Level                        ($m or DV01*)   bp      US$k

CREDIT
Sovereign Credit

Corporate Credit


RATES


CURRENCIES



**Trade spreads (entry, current, target and stop) are displayed in z-spreads, all other credit trades are displayed in yield (bp). Gross P&L in always in yield terms
Gross P&L includes carry but excludes transaction costs. These are hypothetical, not actual, trades. Past performance is no guarantee of future results.
Source: Morgan Stanley Research


For a longer history of our recommended trades, see Recommended Trade Summary, July 12, 2013.




                                                                                                                                                                                          7
                                                                        MORGAN STANLEY RESEARCH

                                                                        July 15, 2013
                                                                        Global EM Investor




Credit
 Sovereign      Sell     Reduce       Hold       Accumulate       Buy   Weaker technicals into the summer: The relative stability
 Corporate      Sell     Reduce       Hold       Accumulate       Buy   we have seen in EM credit markets has eased the outflows
                                                                        compared to June. However, retail outflows remain highly
   We maintain our Hold stance on EM sovereign and corporate
                                                                        sensitive to performance, and we expect this to be a source of
    credit. This stance signals our acknowledgement of an
    improved risk/reward profile for EM risky assets despite the        volatility. As highlighted above, we expect primary market
    challenging medium-term fundamentals.                               activity to accelerate significantly ahead of the summer lull. In
                                                                        fact, last week saw the reopening of the primary market,
   Technicals also look more balanced, with underweight
    positioning by EM debt-dedicated funds potentially offset by        catering for a diverse range of investors.
    increased supply over the next two weeks.                           Pemex raised US$3 billion across three tranches plus a tap of
   In corporate credit, we continue to selectively like high-quality   its PEMEX ’41 bond. Additionally, Russian Standard Bank
    IG credits which have sold off disproportionately over the          raised US$200 million in subordinated paper and Naspers, an
    past month, both quasi-sovereign and private issuers,               IG issuer from South Africa, raised US$750 million. Total
    especially in O&G and banks.
                                                                        issuance year-to-date amounts to US$188 billion, which
                                                                        represents 67% of total issuance from last year. July saw
                                                                        US$5.2 billion issuance so far and we expect the remaining
Sovereign Credit
                                                                        two weeks to be relatively busy before the quieter period of
We maintain our Hold stance in sovereign credit. The                    August. Last July, EM corporates issued US$29 billion.
risk/reward profile has improved following the repricing wider
in May and June. At the same time, we are not yet bullish as            Exhibit 1
risks do remain – namely the near-term outlook for China and            Relative Assessment and 3m Performance
the still-challenging fundamentals of EM.
Technicals look similarly balanced. On one hand, EM debt-
dedicated funds remain underweight according to our EMEI
(see EM Strategy Comment: Weekly Fund Flows &
Technicals, July 11, 2013). On the other hand, we also expect
increased activity in the primary market over the next two
weeks, with issuers taking advantage of the relatively calmer
markets before the seasonal August lull (see comment on
page 12).

We continue to prefer low-beta names, with our largest
overweight positions in Mexico and Colombia. While low-beta
countries are not isolated from both the fundamental EM
weakness and increasing core rates, we believe that an
increased focus on funding issues will see them being more
resilient. Should the US recovery disappoint and delay the
tapering of asset purchases, we are also inclined to extend
duration.

Corporate Credit
We maintain our Hold stance in corporate credit. Last week
saw tightening in both corporate and EM sovereign credit
spreads; however, sovereigns did slightly outperform
corporates. On a regional basis, CEEMEA corporates
outperformed, while Asia was the weakest. On a sector basis,
utilities outperformed, while M&M was the weakest.
                                                                        Source: Morgan Stanley Research; *We allocate all exposure to the Par bond.




                                                                                                                                                      8
                                                                                      MORGAN STANLEY RESEARCH

                                                                                      July 15, 2013
                                                                                      Global EM Investor




Local Rates
   Sell         Reduce             Hold           Accumulate                 Buy      Furthermore, we are changing the relative assessment of
                                                                                      local bond markets, adding risk selectively by upgrading a few
    We maintain our Hold stance in local rates, though risks are
                                                                                      select high-beta, high-yielding markets and downgrading a
     now more evenly balanced and markets might start to pay
                                                                                      few low-yielding, defensive ones.
     more attention to idiosyncratic factors.

    We change our relative assessment of local bonds to                              Exhibit 2
     selective add risk by upgrading a few high-beta, high-yielding                   Relative Assessment and Recent Performance
     markets (Mexico, Russia, Colombia, South Africa) and
                                                                                                     −      o     +     3m Perf of 5y Bonds, bp
     downgrading the most defensive ones (Malaysia, Thailand).
                                                                                      RUB                                                +29
                                                                                      MXN                                                +90
                                                                                      HUF                                                 -6
We maintain a Hold stance in EM local rates, though
                                                                                      PLN                                                +34
acknowledge that risks for rates are now more fairly balanced
                                                                                      ILS                                                -19
and that we could again start to see a divergence in
performance based on idiosyncratic drivers.                                           RON                                                -17
                                                                                      CZK                                                +45
DM rates have on the whole traded better this month, with                             COP                                               +100
USTs retracing some of their earlier losses while Bunds have                                                                         
                                                                                      KRW                                                                                       +42
outperformed. On the EM side, performance has been mixed
                                                                                      INR                                                 +11
but most markets have seen positive returns. We are starting
                                                                                      ZAR                                               +140
to see signs of divergence emerging, driven particularly by
                                                                                      NGN                                                +218
monetary policy. For example, just last week nine EM central
                                                                                      BRL                                               +189
banks met, of which two hiked and sounded hawkish and
seven were on hold (three of which sounded dovish).                                   TRY                                               +293
                                                                                      PHP                                                -37
Exhibit 1
                                                                                      CLP                                                 +1
Local Bond Cross-Market Correlations Dropping                                         PEN                                               +124
 90%                                                                                  MYR                                                 +23
 80%
                                                                                      THB                                                +31
                                                                                      IDR                                               +238
 70%                                                                                  Source: Morgan Stanley Research

 60%

 50%                                                                                  Assessment Changes
 40%
                                                                                      We downgrade Malaysia to neutral/underweight from neutral-
                                                                                      overweight and Thailand to neutral/underweight from neutral:
 30%
                                                                                      Thailand and Malaysia are defensive, low-yielding markets that
 20%                                                                                  outperformed throughout the sell-off in May and June but could start
   Jan-10     Jul-10    Jan-11     Jul-11    Jan-12      Jul-12    Jan-13    Jul-13
                                                                                      to underperform going forward as fixed income markets stabilise.
                       Pct variation in local bond yields explained by PC1
Source: Morgan Stanley Research, Bloomberg                                            We upgrade Mexico and Russia to neutral/overweight from
                                                                                      neutral, and South Africa and Colombia to neutral from
The South African central bank also meets this week. Our                              neutral/underweight: We see value in the belly of Mexico and
economists expect an on hold decision, and also see year-on-                          Colombia, given the high risk premium with respect to their central
year CPI breaching the upper end of the SARB’s target range                           banks’ stance and low inflationary dynamics. Russia should benefit
in 3Q. We think that the local bond market has stabilised and                         as inflation turns and the CBR starts to ease, while risk/reward in
priced in enough premium over the last two months so that                             South Africa is fairly balanced after the recent sell-off.
risk/reward is now fairly balanced. We therefore move SAGBs
to neutral from neutral-underweight.


                                                                                                                                                                                      9
                                                                      MORGAN STANLEY RESEARCH

                                                                      July 15, 2013
                                                                      Global EM Investor




Currencies
  Sell      Reduce           Hold        Accumulate            Buy    improvement in the external environment, pressure on TRY
                                                                      will increase. Meanwhile, in India both CPI and WPI inflation
   We maintain our Hold stance as better technicals have
                                                                      has remained high and, given persistently high oil prices, the
    supported EM currencies despite the continued slowdown in
                                                                      RBI’s ability to support growth will be limited. As such, we
    growth-related data.
                                                                      downgrade INR to neutral. Finally, in Indonesia we maintain
   However, not all currencies have benefitted from the brief        our long USD/IDR NDF position in the portfolio.
    period of stability for EMFX, and we stay bearish on externally
    vulnerable currencies such as TRY, INR and IDR.                   At the same time, we think that currencies that are supported by
   Meanwhile, we think that some currencies that have stronger       stronger external positions and/or have less policy risk
    external positions can do well.                                   associated with them are likely to outperform. We think that
                                                                      RUB and KRW can perform well in the near term versus USD.
                                                                      While the heavy long USD positioning could prevent ZAR from
Tentative signs of a recovery in currencies: EM currencies
                                                                      depreciating significantly in the near term, it remains exposed to
have shown further signs of stability over the last week or so,
                                                                      external risks. We do not think that the SARB will make any
as Bernanke’s dovish comments and some promising signs of
                                                                      major changes in policy at the SARB meeting on Thursday.
more growth-stabilising measures in China have given
support to the market. Also, while China’s growth momentum            Exhibit 2

has remained weak, the latest data are more or less in line           Relative Assessments
with expectations. Thus, while the fundamental outlook for EM                       −     o     +      3m Perf vs USD*
currencies remains poor, bearish sentiment and improved               CNY                                             0.6%
positioning have allowed the market to be less sensitive to           MXN                                          -4.5%
weak data. This supports our recent change in stance on               ILS                                             0.8%
currencies from Reduce to Hold.                                       PEN                                          -6.9%
                                                                      RON                                          -1.3%
However, and importantly, while nearly all EM currencies
                                                                      COP                                          -3.7%
participated in the sell-off towards the end of 2Q13, it is clear
                                                                      PHP                                          -5.6%
that not all are participating in the currently slow-paced
                                                                      SGD                                          -2.0%
recovery. As such, we believe that investors should be more
                                                                      TWD                                          -0.3%
selective in choosing which currencies they will gain exposure
                                                                      INR                                          -10.5%
to. Indeed, in a recent survey on Asia-based investors (see
                                                                      CLP                                          -5.8%
page 16), we noted a great deal of dispersion on investors’
                                                                      KRW                                          -0.7%
views on currencies across EM. Most exhibited interest in
                                                                      BRL                                          -0.4%
MXN, while interest in AXJ was limited.
                                                                      CZK                                          -2.9%
There are several criteria which we use to rank currencies, but       RUB                                          -12.7%
the most relevant in recent weeks have been metrics that              PLN                                          -4.6%
measured external funding risks. Indeed, following the major          MYR                                          -4.7%
moves in currencies in May and June, we think concerns over           HUF                                            2.3%
the availability of external funding have prevailed as a driving      THB                                          -8.6%
force in the market. We maintain a bearish stance on                  TRY                                          -8.6%
currencies with weak external positions, and see TRY, IDR             IDR                                          -2.9%
and INR as particularly vulnerable in the very near term.             ZAR                                          -8.2%
                                                                      Source: Morgan Stanley Research; *CEE performance is versus EUR
TRY has gained the most market attention as the Central
Bank of Turkey has intensified its efforts to stabilise the lira,     Assessment Changes
having sold US$3.65 billion in auctions last week alone. In           We downgrade INR to neutral from overweight/neutral: Further
addition, the CBT has said that discussion on a widening of           increases in global oil prices are bearish for INR as the resulting
the corridor would be on the agenda at the MPC meeting next           increase in CPI and WPI inflation limits the RBI’s ability to support
week. In this week’s comment (see page 13), we look at how            growth going forward.
TRY has responded to what the CBT has done so far, and draw
comparisons in the price action to the 2011/12 experience.
Overall, we believe that without rate hikes or a meaningful


                                                                                                                                                                   10
        MORGAN STANLEY RESEARCH

        July 15, 2013
        Global EM Investor




Focus




                                  11
                                                                                                                                                                                   MORGAN STANLEY RESEARCH

                                                                                                                                                                                   July 15, 2013
                                                                                                                                                                                   Global EM Investor




EM Credit: Primary Market to Pick Up
Simon Waever                                                                                                                                                                       the market volatility. The time before August is therefore likely
                                                                                                                                                                                   to see an increase in activity. In fact, we already saw some
       After a record start to the year, the primary market has been                                                                                                              issuers come to the market, with Nigeria and Indonesia from
        exceptionally quiet. Given the relative stability in the markets                                                                                                           the sovereign side, each with US$1 billion. Of note is the high
        seen last week, we expect primary market activity to
                                                                                                                                                                                   premium of more than 50bp that was offered on the Indonesia
        accelerate ahead of the seasonal August lull.
                                                                                                                                                                                   issuance. While the pressure is indeed higher on Indonesia
       This is likely to cap some of the upside to current valuations,                                                                                                            due to fundamental problems, we believe that other deals will
        offsetting in part the more favourable underweight positioning
                                                                                                                                                                                   similarly need to have generous premiums to entice investors
        of EM debt-dedicated funds – particularly if premiums offered
                                                                                                                                                                                   in the current environment.
        on the new issuances are very generous.
                                                                                                                                                                                   Exhibit 2
                                                                                                                                                                                   August Tends to See a Less Active Primary Market
Primary market has seen very little activity recently: Since
the second half of May when EM spreads started widening,                                                                                                                                                          Average Monthly Issuance (2002-2013)
the primary market has been next to non-existent. In fact, no                                                                                                                                 Corp.
                                                                                                                                                                                              Sov .
sovereigns came to market in June and corporate issuance
was only US$3.6 billion. This is in stark contrast to the record-                                                                                                                       26
                                                                                                                                                                                                                   22                                    22
breaking start to the year, when average monthly volumes                                                                                                                                                   20                          19          19          20
                                                                                                                                                                                                                          18
were running at around US$50 billion.                                                                                                                                                   15       14                              14
                                                                                                                                                                                                                   15                                    16
                                                                                                                                                                                                           13                          14          13          14
Exhibit 1                                                                                                                                                                                                                 14                                          8
                                                                                                                                                                                                 10                              10          6
Primary Market Has Seen Next to No Activity Since                                                                                                                                       11
                                                                                                                                                                                                                                             4                        6
                                                                                                                                                                                                           7        7            4      5           6     6     6
Mid-May                                                                                                                                                                                           4                        4                 1                        1

                                                                                                                                                                                       Jan      Feb        Mar     Apr    May    Jun   Jul   Aug   Sep   Oct   Nov   Dec
 70
                                                                                                                             Sovereign issuance
 60                                                                                                                                                                                Source: Bond Radar, Morgan Stanley Research
                                                                                                                             Corporate issuance
 50
                                                                                                                                                                                   Strong supply likely to have negative impact on spreads:
 40                                                                                                                                                                                We believe that an increased primary market will put upward
 30                                                                                                                                                                                pressure on spreads, particularly if premiums offered on new
 20
                                                                                                                                                                                   deals are generous. This could in fact offset some of the
                                                                                                                                                                                   positive impact reduced positioning may have had on spreads
 10
                                                                                                                                                                                   in isolation (see Global EM Investor: Glimmers of Stability,
  0
                                                                                                                                                                                   July 8, 2013).
                                            May-12




                                                                                                                                                        May-13
                          Mar-12




                                                                       Aug-12




                                                                                                  Nov-12




                                                                                                                                      Mar-13
                                   Apr-12




                                                                                                                                               Apr-13
        Jan-12
                 Feb-12




                                                     Jun-12
                                                              Jul-12


                                                                                Sep-12
                                                                                         Oct-12


                                                                                                           Dec-12
                                                                                                                    Jan-13
                                                                                                                             Feb-13




                                                                                                                                                                 Jun-13
                                                                                                                                                                          Jul-13




                                                                                                                                                                                   Exhibit 3

Source: Bond Radar, Morgan Stanley Research
                                                                                                                                                                                   Record YTD Supply May Mitigate Some of the
                                                                                                                                                                                   Slowdown
August is historically very quiet, leaving a two-week
                                                                                                                                                                                                                                                               426
window of opportunity: August has historically seen roughly                                                                                                                                    Total of the y ear
only a third of the volumes compared to other months (see                                                                                                                                      YTD Issuance
                                                                                                                                                                                                                                                   300
Exhibit 2). The stability in both credit spreads and UST yields                                                                                                                                                                                          283
                                                                                                                                                                                                                                                                     260
over the past week is therefore likely to bring EM borrowers to                                                                                                                                                                              218
                                                                                                                                                                                                                                 189
                                                                                                                                                                                                                    165    171
the market in the two- or three-week window before the                                                                                                                                                      132
                                                                                                                                                                                                  108                                  94
summer lull.                                                                                                                                                                                                                                                   243   260
                                                                                                                                                                                         55                                                              201
                                                                                                                                                                                                                                 149               169
                                                                                                                                                                                                            82      102    85          89    107
We believe that supply will therefore be strong: Before the                                                                                                                              35           64

recent slowdown, the primary market was seeing record
                                                                                                                                                                                        2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
activity. In fact, year-to-date issuance is still ahead of 2012                                                                                                                                                                                                      YTD
(see Exhibit 3). However, we still see a significant amount of
                                                                                                                                                                                   Source: Bond Radar, Morgan Stanley Research
deals in the pipeline, many of which have been delayed due to

                                                                                                                                                                                                                                                                           12
                                                                            MORGAN STANLEY RESEARCH

                                                                            July 15, 2013
                                                                            Global EM Investor




EMFX: TRYing Times
Meena Bassily, James Lord                                                   However, not all currencies have found stability and some
                                                                            policy-makers are continuing to act aggressively against
     TRY has been one of the worst-performing currencies
                                                                            depreciation pressure. With fundamentals still poor, we expect
      recently, despite significant supply of USD from the CBT.             further weakness across EM currencies over the medium-term
                                                                            horizon.
     However, with the CBT saying that discussion on a widening
      of the interest rate corridor will be on the agenda at the next       CBT’s USD selling auctions are having a limited impact:
      MPC meeting, the currency has found near-term stability.              TRY has attracted a lot of market attention recently. The loss
                                                                            in FX reserves shown above over May-June includes the
     We believe that without the CBT delivering on rate hikes
      and/or a meaningful improvement in the external
                                                                            withdrawal of USD by local banks in Turkey as part of its
      environment, pressure on TRY will likely increase.                    Reserve Option Mechanism. This is an important tool through
                                                                            which USD liquidity is provided to the market.
     We continue to recommend buying USD on dips, and think
      that any moves in USD/TRY towards 1.92 would provide a                However, our Turkey economist, Tevfik Aksoy, points out that
      good opportunity to add to positions.                                 the net long FX position of the Central Bank of Turkey (CBT),
                                                                            after stripping out its FX liabilities, was US$44 billion at the
Declining FX reserves show the scale of recent                              end of June (see Turkey Economics: A Brief Macro
depreciation pressures on EMFX: There has been a                            Assessment and the CBT’s Active Policy, July 1, 2013).
significant decline in the USD value of reported FX reserves
                                                                            In July, the most aggressive action of EM central banks has
across EM central bank balance sheets following the
                                                                            been delivered by the CBT, as it has intensified its efforts to
correction in May and June (see Exhibit 1). Some of the
                                                                            stabilise the lira. The CBT has sold US$6.3 billion on the
change in FX reserves is related to valuation distortions –
                                                                            market in auctions since it started the auctions in June, with
from EUR/USD and gold price moves over the period, for
                                                                            US$3.65 billion sold last week alone. The CBT has also
example – though a significant portion of the change is
                                                                            announced that there will be one FX sale auction worth a
explained by central banks providing USD on the market. The
                                                                            minimum of US$50 million on each day of regular funding
extent of currency weakness despite the large stock of USD
                                                                            (whereby the CBT provides liquidity at the one-week repo rate
sold gives us an idea of how heavy the depreciation pressure
                                                                            of 4.5%) until the next MPC meeting on July 23. Therefore,
on the asset class has been. As the dust has settled and
                                                                            this drawdown represents a significant reduction compared to
positioning has reduced, a better technical backdrop has
                                                                            the outstanding level of USD at its disposal (see Exhibit 2).
allowed most EM currencies to stabilise against USD, albeit at
significantly weaker levels.                                                Exhibit 2
                                                                            CBT Net Reserve Assets Falling Fast
Exhibit 1
EMFX Reserves Have Declined                                                   60,000
                                                                                                 CBR Net FX Assets, USDm
   2%                                                             10,000
                                                                              50,000
                                                                                                                                                    44,131
   0%                                                             5,000
                                                                              40,000
                                                                  0
  -2%                                                                                                                                               39,581
                                                                  -5,000      30,000
  -4%                                                                                                                    Reported June level less total
                                                                  -10,000                                                CBT USD selling so far in July
  -6%                                                                         20,000
                                                                  -15,000
  -8%                                                             -20,000     10,000

 -10%                                                             -25,000
         MXN
           IDR


          ZAR




           INR
          TRY




          THB




          CZK




            ILS
         UAH




         MYR

         PEN




         SGD

          PLN
         TWD
          BRL




                                                                                    0
          HUF




          VEF
         ARS




         RUB




          CLP
         KRW




                                                                                    Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

   Change in FX reserves over May and June, %April stock      USDm (RHS)    Source: Bloomberg, Morgan Stanley Research

Source: Bloomberg, Haver Analytics, Morgan Stanley Research



                                                                                                                                                          13
                                                                                        MORGAN STANLEY RESEARCH

                                                                                        July 15, 2013
                                                                                        Global EM Investor




While the provision of USD liquidity has prompted brief                                 The higher carry helped TRY to strengthen against the basket
periods of currency outperformance, TRY is still among the                              and outperform other EM currencies through 1H12. High rates
worst-performing EM currencies since the correction started                             in Turkey (via the corridor mechanism) made TRY an
on May 8. Clearly, the current pace of reserve reduction will                           increasingly expensive currency to short, and eventually an
be difficult to maintain.                                                               attractive long as higher rates suppressed volatility. Indeed, a
                                                                                        peak in volatility-adjusted carry at around 0.9 (see Exhibit 4)
In light of past experience and the still shaky medium-term
                                                                                        was followed by a sustained period of stability in USD/TRY
backdrop for EM currencies, in our view, higher rates will be
                                                                                        through most of 2012. At the same time, Turkey’s bond
necessary to protect TRY or we would expect even more
                                                                                        market, along with other liquid EM bond markets, received a
currency adjustment, absent an improvement in the external
                                                                                        substantial inflow from foreign investors. Of course, this inflow
environment. The CBT has responded to these pressures and
                                                                                        can be linked to an environment of rising global central bank
announced that a widening of the rate corridor will be on the
                                                                                        liquidity, with US QE in full swing, for example.
agenda at the upcoming MPC meeting. This has brought
some near-term stability to the currency, but we warn that the                          As volatility-adjusted carry declined (with the CBT easing) in
market expectation for a hike will build as we approach the                             late 2012 and into 2013, the still stable external backdrop kept
meeting – building the risk of disappointment if the CBT does                           TRY stable. However, the reduced carry in Turkey left the
not deliver.                                                                            currency more exposed to an external shock, such as that
                                                                                        which has come with the Fed tapering debate.
What happened last year? The dynamics of TRY through
2011/12 provide some food for thought for our strategy going                            Exhibit 4
forward. In order to protect the currency towards the end of                            …as Volatility-Adjusted Carry Peaked
2011, the CBT sold US$12.66 billion in auctions (between
August 2011 and January 2012). The auctions had little impact                            1.0                                                                                 1.4
                                                                                                            Policy induced high vol
on TRY, which continued to weaken against the basket.                                    0.9                adj carry stabilised TRY
                                                                                                                                                                             1.5
By the end of 2011, the CBT took on a different approach and                             0.8
started lifting the effective funding rate aggressively by some                                                                                                              1.6
500-600bp, which lifted carry to a peak of 10.65% versus an                              0.7
                                                                                                                                                                             1.7
EM average of around 3.8%. This started to have a material
                                                                                         0.6
impact on TRY. At the same time, the external environment
                                                                                                                                                                             1.8
improved at the start of 2012 as other EM currencies rallied                             0.5
aggressively, also contributing to a recovery in TRY.                                                                                                                        1.9
                                                                                         0.4
Exhibit 3
                                                                                         0.3                                                                                 2.0
Higher Rates Supported TRY in 2012…
                                                                                            Jul-10       Jan-11     Jul-11      Jan-12       Jul-12      Jan-13       Jul-13
  12    %                                                                        1.4                Volatility adjusted carry* on TRY            USD/TRY (RHS, reversed)
  11                                                                                    Source: Bloomberg, Morgan Stanley Research; *3m implied carry / 3m implied volatility on
                                                                                 1.5    USD/TRY.
  10
   9                                                                                    Following the 2012 experience, the market has lifted TRY
                                                                                 1.6
   8                                                                                    carry, but there is room for disappointment: The first leg
   7                                                                             1.7    higher in carry has come with an underlying rise in the
   6                                                                                    effective funding rate, which is up 130bp from the trough of
                                                                                 1.8
   5                                                                                    4.52% in May to a current rate of 5.82%. However, the second
   4                                                                             1.9    leg higher can be attributed to the local rate market pricing in
   3         higher rates, stronger TRY
                                                                                        an adjustment in the interest rate corridor in upcoming MPC
   2                                                                             2.0    meetings. There is uncertainty around the market pricing of
    Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
                                                                                        policy rates in Turkey, but we estimate that around 100bp of
            3m Implied TRY yield                    Weighted avg cost of funding*       tightening has been priced in. It will be difficult for carry to
            USD/TRY (RHS, reversed)                 EM/TRY (RHS, reversed)
                                                                                        continue to rise without an adjustment of policy rates.
Source: Bloomberg, Morgan Stanley Research; *Before October 3, 2011, benchmark policy
rate used.




                                                                                                                                                                               14
                                                                      MORGAN STANLEY RESEARCH

                                                                      July 15, 2013
                                                                      Global EM Investor




As such, a decision not to hike could be met with renewed             As such, we remain biased toward buying USD on dips. We
pressure on TRY, absent an improvement in the external                think that any market recovery in USD/TRY towards 1.92
environment. Should we see a scenario in which volatility-            would present a good opportunity to buy USD again.
adjusted carry approaches previous market-stabilising levels
                                                                      Exhibit 5
(around 0.9), then we would be prepared to moderate our
                                                                      Can Carry Keep Rising?
bearish call. However, we do not see this scenario as likely
without a further tightening in policy from the CBT. Further           14
                                                                              %
USD selling auctions alone are unlikely to stabilise the
                                                                       12
currency on a sustained basis, and in our view will provide
opportunities to add to long USD positions.                            10

While we do believe that rate hikes from the CBT would help
                                                                         8
to stabilise the currency, there is some uncertainty
surrounding the efficacy of the interest rate tool in the current        6
global context. Back in 2012 there was significant liquidity
provision from the world’s major central banks, with significant         4

bond inflows into the Turkish market. In an environment where
                                                                         2
there is less certainty about capital flows into EM, the ability of      Oct-11    Jan-12     Apr-12       Jul-12   Oct-12    Jan-13    Apr-13     Jul-13
the interest rate tool to attract inflows into Turkey is more                     3m Implied TRY yield                       Overnight borrowing rate
uncertain, in our view.                                                           Overnight lending rate                     Benchmark repo rate

Higher carry will certainly make it expensive to short TRY,           Source: Bloomberg, Morgan Stanley Research

helping to keep speculators at bay. But the significant
overhang of long positioning in the Turkish bond market,
combined with a tougher external funding environment,
suggests to us that the ability to attract long-term investors
into the local market might be more challenging.




                                                                                                                                                        15
                                                                    MORGAN STANLEY RESEARCH

                                                                    July 15, 2013
                                                                    Global EM Investor




Will Japanese Investors Continue to Allocate to EM?
Rashique Rahman, Juha Seppala, Meena Bassily                         43% expect tapering of asset purchases by the FOMC to
                                                                      begin in 3Q13 and 50% in 4Q13 (see Exhibit 5); 55% of
     We surveyed 48 clients on their views on EM investing, Fed      participants expected the first FOMC rate hike in 1H15 (see
      QE and asset price expectations at our EM Quantitative          Exhibit 6);
      Strategy seminar held in Tokyo last week.
     55% of investors expected an increase in investment to EM,
                                                                     Average expectation for USD/JPY by end-September was
      though there was an expectation for differentiation across      104 (see Exhibit 7); average expectation for the S&P 500 by
      currencies – most attendees were interested in MXN, though      end-September was 1,648 (see Exhibit 8).
      outside of Indonesia there was limited interest in AXJ.
                                                                    Exhibit 2
     Investors expected QE tapering to start in 4Q13 and the Fed   Do You Believe That Japanese Investors Will
      to start hiking in 1H15. Most believed that USD/JPY would
                                                                    Increase Investment in EM? (% of Total)
      head higher, and the S&P 500 and Nikkei would reach lower
      levels by end-September.                                       60%

                                                                     50%
We held our EM Quantitative Strategies seminar on July 8 in
Tokyo, Japan. 48 clients were in attendance, the distribution        40%
of which is shown in Exhibit 1. We surveyed the clients on
                                                                     30%
their views on EM investing, Fed QE and asset price
expectations.                                                        20%

Exhibit 1                                                            10%
Client Type (% of Total)
                                                                      0%
                     4%
                                                                                             Yes                  No
                                                                    Source: Morgan Stanley Research
    23%                                       Asset Management      Exhibit 3
                                                                    How Do You Feel about Scope for Diverting
                                              Bank
                                                                    Investments from EM to DM? (% of Total)
                                      52%     Trust Bank             60%
   4%
                                              Life Insurance         50%

                                              Corporates             40%
        17%
                                                                     30%

Source: Morgan Stanley Research                                      20%

The conclusions of the survey reveal the following:                  10%

 55% of the investors surveyed expect an increase in                 0%
                                                                                     Agree            Disagree   Depends on the
  investment to EM (see Exhibit 2); but when asked about
                                                                                                                    currency
  potential diversion of investment from EM to DM, there
                                                                    Source: Morgan Stanley Research
  were expectations of differentiation across currencies (see
  Exhibit 3);

 76% of the seminar attendees exhibited interest in Mexico,
  51% in Turkey and 51% in South Africa. Outside of
  Indonesia (34%), interest in AXJ currencies was limited
  (see Exhibit 4);


                                                                                                                              16
                                                                          MORGAN STANLEY RESEARCH

                                                                          July 15, 2013
                                                                          Global EM Investor




Exhibit 4                                                                 Exhibit 7
Which EMs Are You Interested in? (Multiple                                Target for USD/JPY, End-September (% of Total)
Selections Allowed, % of Total Investors Surveyed)
                                                                           Above 110
     Mexico
 South Africa                                                               105 - 110
       Turkey
        Brazil                                                              100 - 105
       Poland
        China                                                                95 - 100
       Russia
                                                                               90 - 95
   Indonesia
     Hungary                                                                Below 90
     Malaysia
        India                                                                            0%     10%         20%     30%    40%    50%    60%    70%
   Singapore
                                                                          Source: Morgan Stanley Research

                 0%    10%    20%   30%   40%    50%   60%    70%   80%   Exhibit 8
Source: Morgan Stanley Research                                           Target for S&P 500, End-September (% of Total)
Exhibit 5
                                                                            Above 1,700
When Will Fed Start to Scale Back Asset Purchases?
(% of Total)                                                               1,650 - 1,700

            2013 Q3                                                        1,600 - 1,650

            2013 Q4                                                        1,550 - 1,600

            2014 Q1                                                        1,500 - 1,550

                                                                            Below 1,500
            2014 Q2

                                                                                           0%         10%           20%     30%         40%     50%
  2014 Q3 or later
                                                                          Source: Morgan Stanley Research

                      0%     10%    20%    30%     40%       50%    60%   Exhibit 9
Source: Morgan Stanley Research                                           Target for Nikkei, End-September (% of Total)
Exhibit 6
When Do You Expect the First Fed Rate Hike?                                  Above 18,000
(% of Total)
                                                                           15,000 - 18,000
       2014 2H or
         earlier
                                                                           12,500 - 15,000
            2015 1H
                                                                           10,000 - 12,500
            2015 2H
                                                                             Below 10,000
            2016 1H
                                                                                              0%    10%       20%    30%    40%    50%    60%   70%
  2016 2H or later                                                        Source: Morgan Stanley Research


                      0%     10%    20%    30%     40%       50%    60%
Source: Morgan Stanley Research



                                                                                                                                                 17
                                                                                                    MORGAN STANLEY RESEARCH

                                                                                                    July 15, 2013
                                                                                                    Global EM Investor




EM Strategy and Economics Teams
EM Fixed Income and Foreign Exchange Strategy
New York
Rashique Rahman                  Team Head, EM Macro Strategy                     Rashique.Rahman@morganstanley.com                                    +1 212 761 6533
Juha Seppala                     Global FXEM Quantitative Strategist              Juha.Seppala@morganstanley.com                                       +1 212 761 1949
Robert Habib                     EM Strategy                                      Robert.Habib@morganstanley.com                                       +1 212 761 1875
London
Paolo Batori, CFA                European Head of EM Strategy                     Paolo.Batori@morganstanley.com                                       +44 (0)20 7677 7971
                                 & Global Head of Sovereign
                                 Credit Strategy
Vanessa Barrett                  Chief EM Credit Strategist                       Vanessa.Barrett@morganstanley.com                                    +44 (0)20 7677 9569
Mihail Bozinov                   CEEMEA Rates Strategy                            Mihail.Bozinov@morganstanley.com                                     +44 (0)20 7677 1150
James Lord                       CEEMEA Macro Strategy                            James.Lord@morganstanley.com                                         +44 (0)20 7677 3254             +44 (
Kristina Obrtacova               EM Corporate Credit Strategy                     Kristina.Obrtacova@morganstanley.com                                 +44 (0)20 7677 7597
Robert Tancsa                    Sovereign Credit Strategy                        Robert.Tancsa@morganstanley.com                                      +44 (0)20 7677 6671
Simon Waever                     Credit Relative Value, EM Analytics              Simon.Waever@morganstanley.com                                       +44 (0)20 7425 1640
Meena Bassily                    CEEMEA Macro Strategy                            Meena.Bassily@morganstanley.com                                      +44 (0)20 7677 0031
Hong Kong
Viktor Hjort                     Head of AXJ Credit Strategy/                     Viktor.Hjort@morganstanley.com                                       +852 2848 7479
                                 Fixed Income Research
Nishant Sood                     AXJ Credit Strategy                              Nishant.Sood@morganstanley.com                                       +852 2239 1597
Kritika Kashyap                  AXJ Rates Strategy                               Kritika.Kashyap@morganstanley.com                                    +852 2239 7179
EM Economics
Manoj Pradhan                    Global                                           Manoj.Pradhan@morganstanley.com                                      +44 (0)20 7425 3805
Tevfik Aksoy                     Head of CEEMEA Economics                         Tevfik.Aksoy@morganstanley.com                                       +44 (0)20 7677 6917
                                 / Turkey, Israel
Michael Kafe                     South Africa, Nigeria, Ghana, Kenya              Michael.Kafe@morganstanley.com                                       +27 11 587 0806
Andrea Masia                     South Africa, Nigeria, Kenya                     Andrea.Masia@rmbmorganstanley.com                                    +27 11 282 1593
Pasquale Diana                   Poland, Hungary, Czech, Romania                  Pasquale.Diana@morganstanley.com                                     +44 (0)20 7677 4183
Jacob Nell                       Russia, Kazakhstan, Ukraine                      Jacob.Nell@morganstanley.com                                         +7 495 287 2134
Alina Slyusarchuk                Russia, Kazakhstan, Ukraine, Baltics             Alina.Slyusarchuk@morganstanley.com                                  +44 (0)20 7677 6869
Gray Newman                      LatAm                                            Gray.Newman@morganstanley.com                                        +1 212 761-6510
Luis Arcentales                  Chile, Mexico                                    Luis.Arcentales@morganstanley.com                                    +1 212 761-4913
Arthur Carvalho                  Brazil                                           Arthur.Carvalho@morganstanley.com                                    +55 11 3048 6272
Daniel Volberg                   Argentina, Colombia, Peru, Venezuela             Daniel.Volberg@morganstanley.com                                     +1 212 761-0124
Helen Qiao                       China                                            Helen.Qiao@morganstanley.com                                         +852 2848 6511
Sharon Lam                       Korea, Taiwan                                    Sharon.Lam@morganstanley.com                                         +852 2848 8927
Yuande Zhu                       China, Hong Kong                                 Yuande.Zhu@morganstanley.com                                         +852 2239 7820
Jason Liu                        Korea, Taiwan                                    Jason.JL.Liu@morganstanley.com                                       +852 2848 6882
Chetan Ahya                      Asia ex-Japan, India                             Chetan.Ahya@morganstanley.com                                        +852 2239 7812
Deyi Tan                         ASEAN                                            Deyi.Tan@morganstanley.com                                           +65 6834 6703
Derrick Kam                      Asia ex-Japan                                    Derrick.Kam@morganstanley.com                                        +852 2239 7826
Jenny Zheng                      Asia ex-Japan                                    Jenny.L.Zheng@morganstanley.com                                      +852 3963 4015
Upasana Chachra                  India                                            Upasana.Chachra@morganstanley.com                                    +91 22 6118 2246

Morgan Stanley entities: London/South Africa – Morgan Stanley & Co. International plc; RMB Morgan Stanley (Proprietary) Limited; New York – Morgan Stanley & Co. LLC; Hong Kong/Shanghai –
Morgan Stanley Asia Limited.; Singapore – Morgan Stanley Asia (Singapore) Pte.; Japan – Morgan Stanley MUFG Securities Co., Ltd.; India – Morgan Stanley India Company Private Limited; Brazil
– Morgan Stanley C.T.V.M. S.A.; Russia – OOO Morgan Stanley Bank.




                                                                                                                                                                                         18
                                                                                MORGAN STANLEY RESEARCH

                                                                                July 15, 2013
                                                                                Global EM Investor




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Important US Regulatory Disclosures on Subject Companies
Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of FEDERATIVE REPUBLIC
OF BRAZIL, REPUBLIC OF THE PHILIPPINES, UKRAINE.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from FEDERATIVE REPUBLIC OF BRAZIL,
GOVERNMENT OF MALAYSIA, REPUBLIC OF COLOMBIA, REPUBLIC OF INDIA, REPUBLIC OF TURKEY, RUSSIAN FEDERATION, UKRAINE.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from ARAB REPUBLIC
OF EGYPT, ARGENTINE REPUBLIC, CZECH REPUBLIC, FEDERAL REPUBLIC OF NIGERIA, FEDERATIVE REPUBLIC OF BRAZIL,
GOVERNMENT OF MALAYSIA, HUNGARY, REPUBLIC OF CHILE, REPUBLIC OF COLOMBIA, REPUBLIC OF CROATIA, REPUBLIC OF
INDONESIA, REPUBLIC OF PERU, REPUBLIC OF POLAND, REPUBLIC OF SOUTH AFRICA, REPUBLIC OF TURKEY, ROMANIA, RUSSIAN
FEDERATION, UKRAINE, UNITED MEXICAN STATES, NATIONAL COMPANY KAZMUNAYGAS JSC.
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from
ARAB REPUBLIC OF EGYPT, CZECH REPUBLIC, FEDERATIVE REPUBLIC OF BRAZIL, GOVERNMENT OF MALAYSIA, REPUBLIC OF
INDONESIA, REPUBLIC OF POLAND, RUSSIAN FEDERATION, NATIONAL COMPANY KAZMUNAYGAS JSC.
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client
relationship with, the following company: ARAB REPUBLIC OF EGYPT, ARGENTINE REPUBLIC, CZECH REPUBLIC, FEDERAL REPUBLIC OF
NIGERIA, FEDERATIVE REPUBLIC OF BRAZIL, GOVERNMENT OF MALAYSIA, HUNGARY, REPUBLIC OF CHILE, REPUBLIC OF COLOMBIA,
REPUBLIC OF CROATIA, REPUBLIC OF INDIA, REPUBLIC OF INDONESIA, REPUBLIC OF PERU, REPUBLIC OF POLAND, REPUBLIC OF
SOUTH AFRICA, REPUBLIC OF THE PHILIPPINES, REPUBLIC OF TURKEY, ROMANIA, RUSSIAN FEDERATION, UKRAINE, UNITED
MEXICAN STATES, NATIONAL COMPANY KAZMUNAYGAS JSC.
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the
past has entered into an agreement to provide services or has a client relationship with the following company: ARAB REPUBLIC OF EGYPT,
CZECH REPUBLIC, FEDERATIVE REPUBLIC OF BRAZIL, GOVERNMENT OF MALAYSIA, HUNGARY, REPUBLIC OF INDONESIA, REPUBLIC
OF POLAND, REPUBLIC OF SOUTH AFRICA, RUSSIAN FEDERATION, STATE OF ISRAEL, UNITED MEXICAN STATES.
Morgan Stanley & Co. LLC makes a market in the securities of FEDERATIVE REPUBLIC OF BRAZIL, NATIONAL COMPANY KAZMUNAYGAS
JSC.
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Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below).
Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not
the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since
Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley
Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as
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and other considerations.
Global Stock Ratings Distribution
(as of June 30, 2013)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell
alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the
stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended
relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy
recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.




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                                                                                              Global EM Investor




                              Coverage Universe    Investment Banking Clients (IBC)
                                             % of                   % of % of Rating
Stock Rating Category            Count       Total     Count Total IBC Category
Overweight/Buy                   1020           36%           410          39%           40%
Equal-weight/Hold                1263           44%           485          47%           38%
Not-Rated/Hold                    109            4%            24           2%           22%
Underweight/Sell                  469           16%           123          12%           26%
Total                           2,861                        1042
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual
circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan
Stanley received investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index or the average total return
of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months.
Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index or the average
total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months.
Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index
or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index or the average total
return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the
relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant
broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant
broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index;
Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
Important Disclosures for Morgan Stanley Smith Barney LLC Customers
Citi Research publications may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use
Research Center to view any available Citi Research publications in addition to Morgan Stanley research reports.
Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or
Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at
www.morganstanley.com/online/researchdisclosures.
For Morgan Stanley specific disclosures, you may refer to www.morganstanley.com/researchdisclosures.
Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the
same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.
Other Important Disclosures
Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of ARAB REPUBLIC OF EGYPT, ARGENTINE
REPUBLIC, BOLIVARIAN REPUBLIC OF VENEZUELA, CZECH REPUBLIC, FEDERAL REPUBLIC OF NIGERIA, FEDERATIVE REPUBLIC OF BRAZIL,
GOVERNMENT OF MALAYSIA, HUNGARY, REPUBLIC OF CHILE, REPUBLIC OF COLOMBIA, REPUBLIC OF CROATIA, REPUBLIC OF INDIA, REPUBLIC OF
INDONESIA, REPUBLIC OF KAZAKHSTAN, REPUBLIC OF KOREA, REPUBLIC OF LITHUANIA, REPUBLIC OF PERU, REPUBLIC OF POLAND, REPUBLIC OF
SOUTH AFRICA, REPUBLIC OF THE PHILIPPINES, REPUBLIC OF TURKEY, ROMANIA, RUSSIAN FEDERATION, STATE OF ISRAEL, THAILAND, UKRAINE,
UNITED MEXICAN STATES, NATIONAL COMPANY KAZMUNAYGAS JSC.
Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning
of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley




                                                                                                                                                                             20
                                                                                            MORGAN STANLEY RESEARCH

                                                                                            July 15, 2013
                                                                                            Global EM Investor




Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking
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Cc1507




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                                                         MORGAN STANLEY RESEARCH




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