Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

2010

VIEWS: 1,085 PAGES: 22

  • pg 1
									MORGAN STANLEY RESEARCH

Jason E. Todd, CFA jason.e.todd@morganstanley.com +1 212 761 7991

Global Equity Research

Global Equity Strategy
Investment Themes: 5 for ‘10
Our key stock selection themes aim to navigate through potential market volatility over the next 12-18 months while still providing some low-risk cyclical/growth exposure. Our selection criteria are based on a backdrop where equities trade within a large range (potentially 800-1200 on the S&P), but where the trend is not consistently higher. Leverage to improving growth is important, but we are looking for stocks and themes that are not just a play on the strength of recovery, which remains uncertain and likely to swing back and forth from periods of optimism to pessimism. 1. Large Cap Quality (stocks to own through the cycle) –The risk rally has driven a significant reduction in the valuation dispersion between “high” and “low” quality stocks. You can now buy high-quality franchise stocks at a discount to low growth/low quality stocks. We like Telcos, Food Beverage & Tobacco and Pharmaceuticals. (See pages 9-16 for details) 2. The World Makes what Asia and Emerging Markets Take (more than just buying a growth story) - Not a new theme but one that endures and runs deeper than simply buying companies that sell into these markets. We like Energy Equipment & Services, Healthcare Equipment and Services, Solar/Wind Energy, Resources, Branded Pharma and Software. 3. Buy Producer over Consumer (buy the drivers of growth and not growth itself) - The rotation in leadership towards global cyclicals, in particular Materials and Energy will continue to gather momentum as the market becomes increasingly confident on the strength of recovery, and the producer sectors are the first to feel the impact of tightening supply/inventory and stronger ROW demand. It is rare to see a repeat of sector leadership from one cycle to the next, but commodities may be the exception. We like bulk material and copper producers, E&P and Oil Services. 4. Buy Pricing Power (it still matters even when volume improves, particularly with excess capacity high) – Not the traditional time to seek pricing power when the cycle is turning, but in the context of a tepid end-demand recovery and with the prospect of a return to inflation concerns (input cost pressures) we continue to look for companies that have strong brand power, strong franchise value and/or strong cost offset ability. We like Household and Personal Products, Tobacco, big Energy and Transport (Rails). 5. Turnaround Stories with Operating Leverage (laggards but not necessarily highest quality) – These stocks have generally lagged the market or sector considerably due to concerns surrounding the underlying business but are in the first stages of a multi-year turnaround and will provide significant leverage if execution is successful. These stocks may not appear cheap on current fundamentals but maybe gaining market share, have large operating margin leverage and/or exposure to faster growing regions/products. We will be writing about each of the remaining four themes in more detail in coming weeks with specific stock, sector and regional recommendations.

Gerard Minack gerard.minack@morganstanley.com +61 2 9770-1529

Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, thirdparty research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800-6242063 to request a copy of this research.

For analyst certification and other important disclosures, refer to the Disclosure Section.

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Investment Outlook for 2010
We do not believe we have entered a multi-year cyclical bull market for developed equities. We think equities remain in a broad range trading environment (potentially between 850-1250 for the S&P500 and 600-1200 for MSCI Europe) that may persist for an extended period of time. Structural headwinds face developed-market equities. It is clear there will be a strong global profit recovery in 2010 - led by Asia where consensus earnings are already forecast to be 2% above their 2007 prior-cycle peak and followed by the US where forecasts are now approaching 95% of the 2007 peak. However, we believe developed-market equities will remain hampered by structural headwinds. For now these headwinds are more than offset by extreme policy actions that have made the current rally from trough look like the start of any “normal” cyclical cycle. Favor a tactical approach over “set and forget.” Sentiment is likely to swing from periods of excess optimism to excess pessimism, so we think a tactical strategy is best. We are trying to de-emphasize the directional call on the market and to be overweight themes that look through the volatility of the cycle. There is clarity on growth recovery but not on its strength. We want some exposure to the cycle but look for areas/industries which will stand to benefit even if growth disappoints. For this reason we are looking for cycle exposure via stocks and sectors that have operational leverage (not confined to cyclicals) and where supply constraints are helping to drive pricing power. Our five themes out to year-end 2010 are a mix of those which help determine “core” portfolio holdings (stocks to be held through the cycle) and those which are more growth leveraged. The Macro Backdrop: We expect the environment for equities to be characterized by the following factors as we head into 2010:
• •

Subtrend global growth with Asia and EM outstripping the US, which is likely to be stronger than Europe; Weak consumption growth, driven by continued consumer deleveraging, a weak labor market, and further declines in household wealth (house prices); Core inflation well behaved but a gradual increase in medium/long-term inflation expectations and a broad rise in risk premiums as volatility normalizes post the removal of volatility-dampening QE measures globally; Broad trend towards higher bond yields, which themselves will act as a self-regulating growth thermostat (bonds selling off when growth expectations rise and rallying when growth disappoints); Elevated political/policy uncertainty pertaining to tax, financial sector regulation, healthcare and energy initiatives, in particular, but not exclusively.

•

•

•

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

2

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Themes: 5 for ‘10
1. Buy Large-Cap Quality: Stocks to own through the cycle 2. Buy Asia/Emerging Markets: More than just buying a growth story 3. Buy Producer over Consumer: Buy the drivers of growth, not growth itself 4. Buy Pricing Power: Its still matters even when leverage improves 5. Buy Turnaround & Operating Leverage Potential: Laggards but not necessarily high quality

We acknowledge the contributions of Bijit Maji, Dipojjal Saha, Ankush Agrawal and Aishorjyo Ghosh in compiling this report
Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com
3

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Theme One: Buy Large-Cap ‘Quality (stocks to own through the cycle)
The convergence in the valuation distribution across the world (most prevalent in the US but also evident in Europe, Asia and Japan) has now removed much of the traditional premium paid for high-growth versus low-growth stocks. Historically this is rare, occurring only once before in the early 1990s. We think this signals one of two things: 1) Either the market is confident that earnings growth will raise valuations to more normalized levels for the low-growth/cyclical stocks; or 2) the market thinks high-growth stocks are not actually high growth and do not deserve their premium multiple. We suspect the outcome will sit somewhere in between, with earnings for some cyclicals surprising on the upside while some growth stocks – still priced as such – go ex-growth. While timing a rotation from low-quality to high-quality stocks is uncertain, we are much more comfortable doing this when the premium paid for the latter is low. We think the intensity of financial and credit market disruptions will continue to impact growth visibility, and a tight valuation distribution implies that you can now buy higher-quality, stable-growth names with low earnings risk, strong franchise values, dividend sanctity, and a strong balance sheet at similar valuation levels to lower-quality, more cyclical stocks. We think the former have the potential to be strong outperformers, not for the near term but over a number of years (see our report “Global Strategy: Buy Large Cap Quality: 18th August 2009”) A Global Low-Quality Rally…
YTD Performance by S&P Equity Quality Rating
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% A+ AA B+ B BNA C
5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

…Has Closed the Valuation Dispersion
43%
35

MSCI World: Average FY2 P/E by Long-Term Growth Estimate Quintile
36%

31% 24% 17% 10%

32%

30 25 20 15 10

Highest Growth Companies Lowest Growth Companies Valuation Convergence

1%

Source: Morgan Stanley Research, DataStream

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

4

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Theme Two: Buy Asia/Emerging Markets (more than just buying a growth story)
Buying Asia and Emerging Markets exposure is not a new theme, but it runs deeper than simply buying companies that sell into these markets. We are focused on the following four themes and attempt to avoid areas where Asian or EM companies compete aggressively on price or have similar cyclical leverage to developed counterparts, where it is simply cheaper to buy local stocks, and/or where local stocks are likely to give better operational leverage. We are looking for exposure to the following: 1) US/European companies that have a strong competitive advantage (Aerospace, Healthcare Equipment, high-end Automobiles, Oil Equipment, Dry Bulk Shipping, Solar Energy, Branded Pharmaceuticals and Technology - Enterprise Software); 2) Industries whose scale and location prevent local competition (Film/media; Machinery and transportation equipment & Multi-industry & Electrical Industrial equipment); 3) Structurally (and cyclically over coming years ) higher growth rates (Healthcare equipment; Branded alcoholic beverages; Household products & tobacco); and 4) Natural resources where Asia/EMs are structurally short (Industrial metals - copper, iron ore and nickel; Selected chemicals; Energy – oil and natural gas).

Asia ex-Japan Households Far Less Levered
Household Debt % of GDP
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-2% -4% 2001 8% 6% 10%

Asian Consumption – A Strong Recovery
YoY Growth in Private Final Consumption Expenditure (PFCE) Dotted lines represent MS forecasts

Asia ex-Japan US

4% 2% 0%

Asia ex-Japan US
2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Morgan Stanley Research, Datastream

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

5

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Theme Three: Buy Producer over Consumer (buy the drivers of growth, not growth itself)
We expect the rotation in leadership away from interest rate sensitives / early-cycle cyclicals and towards global cyclicals, in particular the producer sectors - Materials (bulks), Energy (E&P, Oil Services) and selected Technology and Industrials, will continue to gather momentum as the market becomes increasingly confident in the strength of recovery, bond yields begin to rise, global yield curves flatten (the implied views out of bonds and equities becomes more aligned), and the broad trend of dollar weakness resumes. There is a timing element to this trade: It remains too early to shift into late-cycle cyclicals, despite our view that the big outperformance by the interest rate sensitives and early cyclicals in the West (US and Europe) has now played out. We think too much emphasis is being placed on the ISM as a guide for sector rotation (versus the yield curve, which we have traditionally followed). Global producers are the ultimate winners from dollar weakness, stronger ROW growth, and tight supplies that help drive pricing power. In comparison, ongoing consumer deleveraging / balance sheet repair and the prospect that a weaker dollar raises inflation risk and begins to erode real incomes improves the long-term growth outlook for the producer sectors over the consumer ones.
Stage I Risk Rally Financials Capital Markets Insurance Banks Discretionary Retail Homebuilders Hotels & Leisure Industrials Transportation Materials Metals & Mining Info Tech Semi Con Stage II Fundamental Rally Financials Banks
10-yr Yields Rising 10-yr Yields Declining 4. Slowdown / Recession Phase

Expansion Phase = Steepening Yield Curve = Global Cyclical Outperformance

Transitions to

Discretionary Media Industrials Captial Goods Materials Chemicals Bulks Energy

1. Recovery Phase

Yield Curve steepening (10-yr less 2-yr)

Overweight: Cyclicals (esp. Metals & Overweight: Non-Cyclicals (esp. NonMining, Retail & Tech Hardware) Cyclical Consumer Goods) Underweight: Non-Cyclicals (esp. Telecoms & Utilities) S&P 500 Avg Returns: 2.3% Underweight: Cyclicals (esp. Tech Hardware) S&P 500 Avg Returns: 4.9%

2. Expansion Phase

3. Overheating Phase Overweight: Non-Cyclicals (esp. NonCyclical Consumer Goods & Utilities), also Financials Underweight: Cyclicals (esp. Mining, Metals, & Cyclical Consumer Goods) S&P 500 Avg Returns: 2.9%

Info Tech Software/Services Hardware
Yield Curve flattening (10-yr less 2-yr)

Overweight: Cyclicals (esp. Info Tech, Industrials & Energy)

Deep Value Laggards

Healthcare Pharma Telecoms

Underweight: Non-Cyclicals (esp. Utilities) S&P 500 Avg Returns: 12.6%

Source: Morgan Stanley Research, DataStream

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

6

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Theme Four: Buy Pricing Power (it still matters even when volumes improve)
Generally the time to seek pricing power is when the economic and profit cycle is mature and other key earnings drivers such as restructuring and operating leverage have played out. When the cycle is turning and volumes and leverage are improving, pricing power is not as important. However, while strong cost control suggests leverage will be significant for many in the current upturn, we think end-demand will remain tepid. Given significant excess capacity in many industries, we think the ability to raise prices as input costs creep higher while demand remains uncertain will be rewarded. We expect the consumer areas (especially discretionary – Autos, Apparel) will continue to face greater pricing pressures than normal for this stage of the cycle. We do not expect to see significant improvements in pricing for Healthcare (Pharma, Managed Care), Telecoms (fixed and wireline), Technology (hardware, comm. equipment) and even parts of Financial services cards, where the UDAP/consumer legislation will likely impact both NIM and size of the book, but not necessarily profitability (ROA); balances will shrink as banks won't be able to risk-base-price lower-quality consumers). In fact, we are hard pressed to identify any areas with significant scope for pricing power outside of the commodity/producer sectors (Materials, Energy, and later-cycle Industrials) where inventory levels may already be relatively tight and where stronger demand out of Asia/EM will ultimately support higher pricing. We believe even the traditional price setters in Consumer Staples (HPC and Tobacco) have seen price leadership decline via private brand competition and a more price-conscious consumer. Spread between US Core CPI and US Core PPI (%)
4.0 3.0 2.0 1.0 (1.0) (2.0) (3.0) 1989
40 30 20 10 0 -10 -20 -30 1986 NFIB: Percent Raising Average Selling Prices, Net (SA, %) NFIB: Percent Planning to Raise Average Selling Prices, Net (SA, %)

US Selling Price Expectations

1991

1993

1995

1997

1999

2001

2003

2005

2007

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: Morgan Stanley Research, DataStream

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

7

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Theme Five: Turnaround Potential and Operating Leverage (the laggards)
Two themes are always prevalent at the turning point in every growth cycle: (1) Identify companies that have the greatest amount of operating leverage, and (2) find true laggards that offer longer-term turnaround potential. It is hard not to be impressed with the margin and profit performance of US and, to a lesser extent, European corporates through the recession (profit margins have bottomed well above prior-cycle lows). The willingness to right-size business and cut costs now provides the base for significant operating leverage. However, the leverage theme has an important caveat: Analysts are typically too optimistic about cost control during recoveries. We think the key to successfully playing stocks for operational leverage is to be comfortable that expectations of cost growth are commensurate with sales growth. Broadly speaking, we think the cost-out story is at least 70-80% done for the current cycle, and we are skeptical of buying stocks for large cost-saving potential from here. We are more focused on finding names where cost growth is reasonably well protected (i.e., not underestimated). This is more likely to be in the capital, not labor-intensive industries. The second area of focus is on turnaround stocks where underperformance has been driven by factors including a lack of restructuring success (poor cost-cutting efforts; lack of pricing power; and/or simply poor execution). We are looking for stocks that have the potential to capture market share, still have cost-cutting potential and hence margin upside, have favorable growth outlooks either offshore or via underpenetrated markets, and where upside is not just a cyclical but also a structural tailwind.
S&P 500 Earnings Growth - Revenue Growth

S&P 500

Consumer Discretionary Consumer Staples Energy Health Care Industrials Information Technology Materials Telecoms Utilities S&P ex-Financials

2009 Sales Earnings Growth Growth -9.8% -7.9% 0.4% -3.7% -34.5% -57.8% 3.3% -0.7% -9.5% -31.9% -9.4% -13.6% -29.9% -74.9% 2.8% -19.5% -2.3% -3.0% -11.0% -24.8%

2010 Sales Earnings Growth Growth 7.4% 55.6% 9.2% 13.8% 22.2% 46.7% 7.6% 15.9% 3.0% 9.7% 15.4% 39.2% 37.8% 196.3% 1.6% 4.6% 7.2% 5.8% 10.6% 27.0%

50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 1Q87 1Q89 1Q91 1Q93 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 SP500 ex-Fin (4q/4q) 17%

Source: Morgan Stanley Research, DataStream

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

8

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Theme One:
Buy Large-Cap Quality*

(see our report “Global Strategy: Buy Large Cap Quality: 18th August 2009”)

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

9

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Screening for Large-Cap “Quality”
We screened for high-quality franchise stocks. Pages 13-16 show the top names across US, Europe and Asia (ex Japan). Clearly, a number of these stocks will not be consistent outperformers. However, they all share a number of characteristics which we believe will be important in driving outperformance over the medium term. Our ranking system is set out below. On pages 11-12. we also show overweight and underweight “Quality” baskets with their associated Bloomberg tickers (stocks in these baskets were equal-weighted at creation in mid-August). We used the following five parameters, with an equal weight placed on each. Among the MS rated stocks, we have then limited our universe to at least Equal-weight rated stocks. As a last cut, we screened for consistent ROE performance and, in the US and Europe, how these stocks rank on a valuation Z score, to come up with a final list. 1. Low EPS dispersion: To identify stocks with low earnings volatility, we calculated the coefficient of variation of EPS over the last 20 years, or as far back as available. All the stocks we chose have lower EPS dispersion than this; we are trying to eliminate stocks that may have very unpredictable earnings. 2. High Piotroski score: This measure uses nine criteria to evaluate the financial strength of a company. A stock is awarded 1 point for each criteria that is fulfilled. Our data are based on 2008 financials. The Piotroski score limits our results to stocks that have strong and improving fundamentals: The criteria include the following factors: 1) Positive net income; 2) Positive operating cash flow; 3) Operating cash flow exceeds net income; 4) Lower long-term debt-to-asset ratio than in 2007; 4) Higher working capital than in 2007; 5) Higher asset turnover than in 2007, as a measure of efficiency; 6) higher return on assets than in 2007, as a measure of profitability; 7) Less diluted shares outstanding than in 2007; 8) Higher gross margin than in 2007. 3. Industry leadership: We chose companies that make up a high portion of total net income and sales of their industry. As industry leaders, these companies will have greater buyer and supplier power, and usually benefit from economies of scale and scope. 4. High earnings growth: To identify stocks whose earnings are growing faster than their peers, we calculated the earnings growth rate relative to 20-year median of the industry, or as far back as available. 5. Low margin volatility: The coefficient of variation of EBIT margins going back to 1989, or as far back as available. This parameter eliminates stocks whose margins are very unpredictable.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

10

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

The Overweight “Quality” Portfolio

Company Name United States

Overweight Portfolio Baskets: US: Europe: Asia: MSMSQALO MSSTQALO MSNJQALO

Wal-Mart Stores Inc. Walt Disney Co. Medtronic Inc. Union Pacific Corp. EMC Corp. Europe Nestle S.A. Total S.A. Roche Holding AG RWE AG BP PLC Asia - Ex Japan China Mobile Ltd. CNOOC Ltd. Infosys Technologies Ltd. Tencent Holdings Ltd. Reliance Industries Ltd.

Kellogg Co. Honeywell International Inc. Home Depot Inc. Carnival Corp. Chevron Corp.

Compass Group PLC SAP AG Repsol YPF S.A. Novartis AG Imperial Tobacco Group PLC

China Shenhua Energy Co. Ltd. POSCO Taiwan Semiconductor Manufacturing Larsen & Toubro Ltd. Acer Inc.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

11

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

The Underweight “Quality” Portfolio

Company Name United S tates

Underweight Portfolio Baskets: US: Europe: Asia: MSMSQASH MSSTQASH MSNJQASH

Southwest Airlines Co. Nordstrom Inc. Teradyne Inc. ENSCO International Inc. Advanced M icro Devices Inc. Europe KOC Holding A.S. Volvo AB Tomkins PLC Unilever N.V. Belgacom S.A. Asia - Ex Japan PTT Aromatics & Refining Aluminum Corp. of China Dongkuk Steel M ill Co. Ltd. Hanwha Chemical Corp. Far Eastern Depart Stores

Western Digital Corp. Rockwell Automation Inc. Robert Half International Inc. M onster Worldwide Inc. Pioneer Natural Resources Co.

Acerinox S.A. M etso Corp. Swatch Group AG Anadolu Efes Biracilik ve M S Cintra Conc de Infra de Trans

Hynix Semiconductor Inc. Winbond Electronics Corp. Ranbaxy Laboratories Ltd. Korean Air Co. Ltd. Neptune Orient Lines Ltd.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

12

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

US “Quality” Stock Screen
Ticker Company Name Industry Group Price $ EPS % of Industry group S ales
48.4% 10.8% 7.8% 14.5% 58.8% 2.2% 9.1% 1.1% 3.0% 7.1% 5.8% 10.2% 6.4% 22.6% 10.0% 4.8% 34.4% 2.9% 15.3% 1.8% 7.5% 6.5% 3.0% 28.1% 3.5% 9.4% 4.4% 10.8% 3.3% 1.8% 13.5% 4.5% 20.3% 2.7% 2.4% 14.1% 10.1% 21.9% 5.3% 43.9% 17.6% 28.2% 22.6% 2.3% 8.7% 38.9% 10.8% 3.2%

Median Earnings

Piotroski S core 9 9 8 8 8 8 8 8 8 8 8 8 8 8 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 6 6 6 6 6 6 6 6 6 6 6 6 6

Margin Dispersion 0.06 0.39 0.29 0.24 0.22 0.15 0.21 0.15 0.08 0.37 0.10 0.22 0.29 0.12 0.17 0.08 0.11 0.51 0.22 0.40 0.11 0.12 0.08 0.17 0.17 0.07 0.21 0.24 0.30 0.21 0.14 0.18 0.30 0.46 0.09 0.14 0.19 0.09 0.14 0.16 0.28 0.34 0.36 0.28 0.11 0.28 0.30 0.07

MS Analysts Rating O/I O/I NC O/A NC E/A E/I E/A E/I E/I NC O/A O/A E/I E/I O/I E/A O/A O/I O/A NC E/I O/C O/I E/C O/A O/I NC O/A O/A E/I NC E/A O/A NC O/I O/A O/I NR / I O/A O/A E/A E/I NC O/I O/A O/I NC

ROE 2008 12% 23% 26% 12% 18% 28% 25% 23% 25% 29% 13% 15% 17% 30% 17% 23% 17% 12% 28% 32% 31% 28% 52% 40% 21% 29% 39% NM 24% 33% 17% 18% 87% 19% 49% 7% 17% 18% 12% 13% 26% 37% 19% 61% 14% 13% NM 32%

ROE 5yrs Composite > IG Y Y Y Y Y Y Y Z-S core -0.2 1.5 -0.9 -0.7 -0.1 -0.1 0.0 0.1 0.2 0.2 0.3 0.3 0.6 1.3 -1.4 -0.7 -0.4 -0.4 -0.4 -0.3 -0.3 -0.2 -0.2 -0.1 -0.1 -0.1 0.1 0.1 0.2 0.2 0.4 0.5 0.5 0.8 1.0 -1.3 -1.2 -0.6 -0.4 -0.4 -0.4 0.0 0.0 0.1 0.1 0.5 0.9 1.5

10/5/2009 Dispersion WM T ORCL CSCO DIS PG M DT KR BDX EM R UTX VFC UNP CSX M CD SBUX AM GN VZ EM C PFE SLB KO BM Y K M SFT GIS ABT HON CL M ON BAX HD M AT IBM ADI HNZ CCL GOOG GE FO T CVX XOM WM OI COST INTC YUM PX Wal-M art Stores Inc. Oracle Corp. Cisco Systems Inc. Walt Disney Co. Procter & Gamble Co. M edtronic Inc. Kroger Co. Becton Dickinson & Co. Emerson Electric Co. United Technologies Corp. VF Corp. Union Pacific Corp. CSX Corp. M cDonald's Corp. Starbucks Corp. Amgen Inc. Verizon Communications Inc. EM C Corp. Pfizer Inc. Schlumberger Ltd. Coca-Cola Co. Bristol-M yers Squibb Co. Kellogg Co. M icrosoft Corp. General M ills Inc. Abbott Laboratories Honeywell International Inc. Colgate-Palmolive Co. M onsanto Co. Baxter International Inc. Home Depot Inc. M attel Inc. International Business M achines Analog Devices Inc. H.J. Heinz Co. Carnival Corp. Google Inc. (Cl A) General Electric Co. Fortune Brands Inc. AT&T Inc. Chevron Corp. Exxon M obil Corp. Waste M anagement Inc. Owens-Illinois Inc. Costco Wholesale Corp. Intel Corp. Yum! Brands Inc. Praxair Inc. Food & Staples Retailing 49.14 Software & Services 20.63 Technology H/W & Equip 23.07 M edia 27.55 Household & Personal Products 56.30 Health Care Equipment & Srvc 36.08 Food & Staples Retailing 21.10 Health Care Equipment & Srvc 67.17 Capital Goods 38.47 Capital Goods 60.02 Consumer Durables & Apparel 69.90 Transportation 57.75 Transportation 42.25 Consumer Services 56.86 Consumer Services 20.07 Pharma Biotech & Life Sciences 58.45 Telecommunication Services 29.97 Technology H/W & Equip 16.86 Pharma Biotech & Life Sciences 16.33 Energy 58.03 Food Beverage & Tobacco 53.46 Pharma Biotech & Life Sciences 22.23 Food Beverage & Tobacco 48.55 Software & Services 24.77 Food Beverage & Tobacco 63.87 Pharma Biotech & Life Sciences 49.80 Capital Goods 35.89 Household & Personal Products 75.80 M aterials 74.70 Health Care Equipment & Srvc 56.56 Retailing 26.18 Consumer Durables & Apparel 17.93 Technology H/W & Equip 119.70 Semi & Semi Equipment 26.43 Food Beverage & Tobacco 38.81 Consumer Services 32.47 Software & Services 489.67 Capital Goods 15.76 Consumer Durables & Apparel 40.87 Telecommunication Services 26.68 Energy 68.96 Energy 67.24 Commercial & Professional Services 28.81 M aterials 36.05 Food & Staples Retailing 56.79 Semi & Semi Equipment 19.07 Consumer Services 34.54 M aterials 80.03 0.73 1.05 1.00 0.54 0.62 0.81 0.60 0.56 0.47 0.78 0.46 0.52 0.52 0.59 1.00 1.01 0.36 0.95 0.76 0.97 0.50 0.31 0.32 0.84 0.40 0.51 0.44 0.59 0.77 0.44 0.85 0.36 0.62 0.81 0.25 0.60 0.64 0.53 0.36 0.32 0.86 0.89 0.44 0.53 0.68 0.64 0.46 0.68

Net Income Growth Rel to IndGrp
41.2% 13.8% 17.9% 18.8% 70.8% 11.7% 6.8% 4.1% 3.6% 7.2% 28.0% 17.0% 10.2% 41.7% 4.5% 6.5% 31.7% 3.2% 23.0% 3.8% 16.8% 4.8% 2.0% 37.4% 3.5% 7.2% 4.4% 10.8% 9.5% 7.5% 16.9% 22.0% 23.9% 4.6% 2.5% 13.1% 12.2% 29.4% 33.3% 56.0% 16.2% 29.3% 22.9% 2.7% 7.0% 52.4% 9.1% 5.4% 2.0% 4.9% 7.0% -0.7% 0.6% 1.8% 2.4% -1.0% 0.6% 5.6% 2.4% -0.4% 5.8% 0.0% 22.2% 9.2% -0.5% 24.5% 3.2% 9.4% 2.5% -2.5% 0.5% 3.4% -1.0% -1.8% 5.3% 2.3% 17.6% -1.5% 1.1% 8.8% -8.5% 5.1% -1.7% 0.0% 48.0% 1.8% 5.8% 2.5% 3.1% -3.5% -1.8% 8.9% 4.6% 14.7% 2.6% 5.9%

Y

Y

Y Y Y

Y Y Y Y Y Y

Y Y

Y

Source: Factset, Morgan Stanley Research NC = Not covered NR = Not rated + = Rating for this company has been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information at this time.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

13

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

European “Quality” Stock Screen
Price $ Ticker
425304

Dispersion EPS 0.87 0.79 0.57 0.69 0.73 0.32 1.11 0.62 0.16 0.53 0.33 0.89 0.77 0.51 1.40 0.48 0.60 0.71 0.50 0.56 0.58 0.62 0.59 0.97 0.60 0.82 0.64 0.69 0.54 0.72 0.97 0.74 0.49 0.49 0.45 0.79 0.56 1.07 0.98 0.55 0.49 0.95 1.03 0.79

S ales

Net Income

Growth Rel to IndGrp Median Earnings
-9.1% -9.0% -0.3% -1.8% 4.4% -17.8% 3.9% -3.5% 2.1% -4.5% -5.6% -21.2% -12.2% 29.3% 8.3% -4.9% 1.8% 7.1% 2.9% 2.9% 8.5% -2.6% -0.6% 1.7% -8.3% 2.6% -18.3% 0.8% 43.5% -11.9% -3.5% -6.3% -27.4% -17.7% -19.0% 14.1% -1.8% -12.0% 7.8% -6.9% -7.4% -13.2% -14.7% -4.2%

S core Piotroski 7 7 5 7 5 6 8 6 7 7 5 7 6 8 8 5 4 6 7 6 5 7 5 8 6 9 6 6 8 6 4 7 5 7 8 8 8 6 6 5 5 5 6 5

Dispersion Margin 0.16 0.47 0.06 0.31 0.31 0.40 0.96 0.17 0.23 0.21 0.31 1.08 0.30 0.20 0.47 0.13 0.28 0.07 0.12 0.17 0.26 0.21 0.26 0.19 0.32 0.17 0.11 0.52 0.35 0.42 0.19 0.26 0.32 0.38 0.38 0.54 0.51 0.81 0.59 0.15 0.24 0.46 1.10 3.19

Rating MS Analysts O /I E/I O /I E/A O/A O/A O /I NC O /I O /I O /I O /I E/A O /I O/A E/A O/A O/C E/I NC E/C O /I O/A E/A O/C E/I O/A O/A O/A O /I O /I NC O /I E/A E/A O /I E/A O/A E/A E/I O /I O/A O /I O/A

2008 ROE 6.0% 28.6% 17.9% 47.1% 29.1% NM 12.0% 16.1% 16.1% 19.4% 32.9% 14.5% 25.2% 13.4% 20.3% 68.1% 18.5% 28.9% 16.4% 23.5% 16.9% 21.2% 19.1% 24.9% 9.3% 18.8% 11.8% 17.4% 32.6% 28.2% 31.7% 19.5% 10.9% 13.4% 33.6% 26.9% 15.8% 44.5% 16.5% 16.7% 38.0% 30.0% 19.1% 9.8%

ROE 5yrs > IG Y Y Y Y Y Y Y Y

Z-S core Composite -0.1 0.4 0.3 -0.6 0.0 -0.1 -0.2 -0.3 -0.2 0.4 0.3 -0.8 -0.9 0.1 -0.4 -0.3 -0.9 -0.3 0.0 -0.1 -0.6 0.4 -0.8 0.7 0.0 0.1 -0.4 0.3 -0.6 0.1 -0.3 0.0 0.0 -0.3 0.5 -0.6 0.4 -1.1 -0.4 -0.4 0.4 0.4 -0.1

Company Name A.P. M oller-M aersk A/S ABB Ltd. Air Liquide S.A. AstraZeneca PLC BP PLC BT Group PLC Capgemini Carrefour S.A. Compass Group PLC Danone S.A. Diageo PLC EADS ENI S.p.A. Eutelsat Communications Gazprom OAO GlaxoSmithKline PLC Imperial Tobacco Group PLC Industria de Diseno Textil S.A. Johnson M atthey PLC Kerry Group PLC Luxottica Group S.p.A. Nestle S.A. Novartis AG Novo Nordisk A/S PPR S.A. Publicis Groupe S.A. Repsol YPF S.A. Roche Holding AG Rosneft RWE AG SAP AG Schindler Holding AG Siemens AG Surgutneftegaz JSC Swisscom AG Syngenta AG Synthes Inc. Telefonica S.A. Telenor ASA Tesco PLC TNT N.V. Total S.A. Vinci S.A. Vodafone Group PLC

Industry Group Transportation Capital Goods M aterials Pharma Biotech & Life Sciences Energy Telecommunication Services Software & Services Food & Staples Retailing Consumer Services Food Beverage & Tobacco Food Beverage & Tobacco Capital Goods Energy M edia Energy Pharma Biotech & Life Sciences Food Beverage & Tobacco Retailing M aterials Food Beverage & Tobacco Consumer Durables & Apparel Food Beverage & Tobacco Pharma Biotech & Life Sciences Pharma Biotech & Life Sciences Retailing M edia Energy Pharma Biotech & Life Sciences Energy Utilities Software & Services Capital Goods Capital Goods Energy Telecommunication Services M aterials Health Care Equipment & Serv Telecommunication Services Telecommunication Services Food & Staples Retailing Transportation Energy Capital Goods Telecommunication Services

10/5/09 6740.03 19.47 109.11 44.28 8.52 2.07 50.76 44.03 6.08 58.45 15.10 21.25 24.52 30.65 5.69 19.46 28.91 56.49 21.24 28.09 25.67 41.90 49.69 62.49 127.76 39.50 26.49 159.09 7.28 91.16 48.43 68.27 88.37 0.81 360.94 222.86 116.51 28.05 12.62 6.27 26.28 57.27 55.27 2.24

% of Industry group
16.5% 3.4% 2.1% 9.2% 13.5% 5.4% 25.7% 25.3% 13.3% 4.9% 3.7% 5.7% 7.2% 1.2% 5.5% 13.1% 4.2% 14.1% 1.3% 1.5% 6.1% 24.0% 15.8% 3.2% 29.6% 5.5% 3.9% 16.1% 1.8% 7.8% 34.1% 1.2% 10.4% 0.9% 2.0% 1.3% 3.4% 14.1% 2.4% 16.2% 4.3% 10.7% 4.5% 10.3% 15.1% 6.5% 1.9% 14.4% 14.2% 3.8% 12.1% 20.2% 12.2% 6.0% 5.9% 4.5% 8.5% 2.2% 16.7% 15.2% 5.3% 25.9% 0.3% 1.0% 6.7% 26.0% 18.6% 3.0% 18.1% 4.6% 2.1% 14.2% 6.6% 7.3% 58.6% 0.7% 8.3% 2.5% 2.8% 1.8% 15.6% 17.6% 3.2% 27.2% 8.2% 11.1% 4.6% 20.0%

710889
B1YXBJ 098952 079805 309135 416343 564156 053315 B1Y9T B 023740

401225
714505 B0M7KJ 436492 092528 045449 711131 047640 451957

Y Y Y

480065
712387 710306 707752 550507 438042 566935 711038 B17KP4 476896 484628 B11WWH

Y

Y Y

572797
485173 553397 435664 B01463 573252 473249 088470 548155 B15C55

Y Y Y Y Y Y Y Y

B1XH02
B16GWD

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

14

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Asia-Ex Japan “Quality” Stock Screen
Ticker Company Name Industry Group Price $ EPS % of Industry group S ales 6.6% 6.6% 1.6% 29.7% 0.6% 7.6% 5.6% 1.2% 2.9% 1.5% 6.3% 17.6% 8.1% 2.6% 5.4% 5.0% 17.0% 0.8% 1.5% 0.4% 2.8% 15.9% 2.2% 22.0% 2.4% 4.8% 4.0% 9.3% 19.3% 4.4% 1.6% 1.9% 1.3% 4.6% 2.2% 1.0% 1.9% 4.1% 3.0% 7.7% 3.8% 15.2% 0.3% 28.2% 6.7% 7.5% 10.7% 5.4% Median Earnings Piotroski S core 9 9 9 8 8 8 8 8 8 8 8 7 7 7 7 7 7 7 7 7 7 7 7 7 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 5 5 4 Margin Dispersion 0.42 0.17 0.20 0.31 0.07 0.38 0.31 0.10 0.20 0.12 0.72 0.14 0.62 0.13 0.13 0.43 0.53 0.28 0.71 0.17 0.72 0.23 0.36 0.10 0.30 0.34 0.37 0.42 0.44 0.63 0.62 0.44 0.38 0.15 0.26 0.41 0.11 0.18 0.10 0.52 0.21 0.24 0.28 0.10 0.17 0.30 0.34 0.51 MS Analysts Rating NC E/C E/A O/I O/I O/C NC NC E/I E/C E/A O/I O/I O/C O/A NC NC E/I E/I E/I E/I E/I E/I U/C O/I O/I O/I O/I O/I O/I O/I O/I O/I O/I O/A O/A O/A O/A O/A O/A E/I E/I E/I E/C E/A O/I O/I O/I 10/5/2009 Dispersion 629171 609701 B29TTR 607355 600550 B0PH5N B01CLC B233HS 613936 643532 B1TLR6 B01110 614101 B00G0S B01CT3 B2PFVH 624226 612952 621173 649091 612149 B0WGPZ B0WNLY 620512 617340 609962 609972 610115 643856 667248 680177 678204 638870 613340 B09N7M B1JNK8 B2Q14Z B1WJ4X 628784 650531 B0JGGP 658248 635425 B01NPJ 658653 688910 669323 600585 Astra International CLP Holdings Ltd. Sime Darby Bhd China M obile Ltd. Jiangsu Expressway Co. Ltd. Dongfeng M otor Group Co. Ltd. Noble Group Ltd Power Grid Corp. of India Ltd. Oil & Natural Gas Corp HongKong Electric Holdings China Agri-Industries Holdings Cipla Ltd. Quanta Computer Inc. CNOOC Ltd. Tencent Holdings Ltd. China Railway Construction Jardine Cycle & Carriage Ltd. Bharat Heavy Electricals Ltd. Daewoo Shipbuilding & M arine KCC Corp. Steel Authority of India Ltd. Lotte Shopping Co. Ltd. Reliance Communications Ltd. Infosys Technologies Ltd. Woongjin Coway Co. Ltd. Reliance Industries Ltd. Bharat Petroleum Corp. Ltd. Tata Steel Ltd. Hon Hai Precision Industry Co Wistron Corp. Foxconn Technology Co. Ltd. China Shipping Development Guangshen Railway Co. Ltd. GAIL (India) Ltd. China Shenhua Energy Co. Ltd. China Coal Energy Co. Ltd. Want Want China Holdings Belle International Holdings Chunghwa Telecom Co. Ltd. KT Corp. ITC Ltd. Sun Pharmaceutical Industries Cosco Pacific Ltd. Tata Consultancy Services Yue Yuen Industrial TSM C POSCO Acer Inc. Automobiles & Components Utilities Capital Goods Telecommunication Services Transportation Automobiles & Components Capital Goods Utilities Energy Utilities Food Beverage & Tobacco Phara Biotech & Life Sciences Technology Hardware & Equip Energy Software & Services Capital Goods Retailing Capital Goods Capital Goods Capital Goods M aterials Retailing Telecommunication Services Software & Services Consumer Durables & Apparel Energy Energy M aterials Technology Hardware & Equip Technology Hardware & Equip Technology Hardware & Equip Transportation Transportation Utilities Energy Energy Food Beverage & Tobacco Retailing Telecommunication Services Telecommunication Services Food Beverage & Tobacco Phara Biotech & Life Sciences Transportation Software & Services Consumer Dur & Apparel Semi & Semi Equip M aterials Technology Hardware & Equip 3.37 6.71 2.47 9.67 0.79 1.03 1.69 2.29 24.63 5.42 0.90 5.81 2.02 1.35 15.81 1.28 16.66 49.23 14.40 292.65 3.41 256.44 6.32 48.79 33.23 44.97 11.84 10.47 3.88 1.84 2.76 1.22 0.39 7.66 4.26 1.28 0.57 1.01 1.76 34.21 5.02 30.08 1.44 12.95 2.79 1.92 409.37 2.45 0.59 0.26 0.34 0.71 0.43 0.39 0.92 0.17 0.54 0.15 0.60 0.58 0.27 0.70 0.88 0.41 0.60 0.77 0.69 0.39 0.66 0.24 0.37 0.99 0.56 0.73 0.41 0.83 0.63 0.82 1.01 1.00 0.27 0.38 0.35 0.22 0.32 0.32 0.16 0.50 0.49 0.99 0.42 0.44 0.19 0.56 0.59 0.37 Net Income Growth Rel to IndGrp 18.2% 18.9% 5.6% 53.3% 2.8% 4.2% 4.1% 4.9% 17.1% 14.5% 4.8% 25.0% 7.8% 27.3% 9.8% 0.7% 13.2% 4.5% 2.3% 1.1% 7.6% 17.3% 3.8% 28.5% 8.1% 13.7% 0.8% 8.7% 21.7% 3.0% 2.4% 14.6% 1.7% 7.9% 2.8% 1.4% 3.8% 8.6% 4.4% 1.2% 9.5% 57.5% 13.3% 26.0% 35.2% -139.2% 19.9% 4.7% -10.4% -3.9% -23.8% -4.2% -63.0% -16.6% 9.1% 5.6% 2.2% -6.6% 55.7% -10.4% -38.1% 16.5% 12.8% 29.7% 13.9% -1.4% -1.0% -19.8% 1.0% -28.5% 29.0% -0.9% 46.8% 2.4% -12.8% -10.2% -13.4% -22.2% 11.1% -2.7% -65.7% -1.7% 8.7% 9.4% 15.9% 18.1% -23.7% 22.8% -4.4% 10.1% -67.3% -3.8% 2.8% -1.6% -17.6% -30.3%

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

15

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Australia “Quality” Stock Screen*

Ticker AGK-AU BSL-AU BXB-AU CSL-AU FGL-AU FXJ-AU HVN-AU NCM -AU ORG-AU OSH-AU OST-AU QAN-AU SHL-AU TOL-AU WOW-AU WPL-AU

Company Name AGL Energy Ltd. BlueScope Steel Ltd. Brambles Ltd. CSL Ltd. Foster's Group Ltd. Fairfax M edia Ltd. Harvey Norman Holdings Ltd. Newcrest M ining Ltd. Origin Energy Ltd. Oil Search Ltd. OneSteel Ltd. Qantas Airways Ltd. Sonic Healthcare Ltd. Toll Holdings Ltd. Woolworths Ltd. Woodside Petroleum Ltd.

Industry Group Utilities M aterials Commercial & Professional Services Health Care Equipment & Services Food Beverage & Tobacco M edia Retailing M aterials Energy Energy M aterials Transportation Health Care Equipment & Services Transportation Food & Staples Retailing Energy

Price $ EPS 10/5/2009 Dispersion 13.57 0.37 2.86 0.43 7.65 0.38 33.04 0.95 5.51 0.29 1.59 0.34 4.24 0.48 32.17 0.88 15.97 0.55 6.21 0.75 2.98 0.56 2.81 0.32 13.79 0.62 8.38 0.71 29.08 0.59 51.33 0.55

% of Industry group Medain Earnings S ales Net Income Growth Rel to IndGrp 86.0% 81.9% 0.0% 5.5% 3.2% -20.5% 36.4% 58.6% -15.1% 42.5% 68.1% 14.0% 32.8% 47.7% -5.0% 85.9% 20.6% -1.2% 29.7% 44.6% 7.1% 1.2% 2.3% -3.0% 17.3% 18.5% -4.4% 2.0% 13.3% 36.3% 3.9% 1.6% -14.2% 58.3% 46.7% -31.0% 27.9% 15.7% 6.8% 20.5% 44.0% -14.6% 50.3% 39.8% 0.6% 11.2% 39.6% -1.9%

Piotroski S core 6 4 6 8 6 6 6 8 5 7 5 8 5 6 6 4

Margin Dispersion 0.50 0.56 0.42 0.33 0.57 0.19 0.21 1.06 0.25 0.33 0.37 0.39 0.18 0.38 0.26 0.29

MS Analysts Rating O/A O/A E/I E/I O/A O/I O/C O/A E/I O/I O/A O/A E/C E/I E/C O/I

* See Australian Strategy: Quality Downunder – Toby Walker, Antony Conte, Gerard Minack September 8, 2009 for more detail

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

16

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Disclosures
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Jason Todd. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of August 31, 2009, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Acer Inc., BP plc, China Shenhua Energy, EMC Corp., Honeywell International, Imperial Holdings Ltd, Kellogg Co., Medtronic Inc., Nestle, Novartis, POSCO, Repsol-YPF, Roche, RWE AG, SAP AG, Tencent Holdings Ltd, Anadolu Efes, Metso, Monster Worldwide Inc., Pioneer Natural Resources, Ranbaxy Laboratories, Swatch, Tomkins Plc, Unilever PLC.Abbott Laboratories, Acer Inc., Amgen, AT&T, Inc., Becton Dickinson, BP plc, China Shenhua Energy, Cisco Systems, Inc., CSX Corporation, EMC Corp., Emerson Electric, SYNGENTA AG, CADBURY PLC, REPSOL S.A. SPONS AD, TNT N V SPONS ADR, QUANTA STORAGE NON-, WOONGJINCOWAYKRW500, TATA STEEL LIMITED, WISTRON CORPORATION, KEPPEL CORPORATION Fortune Brands Inc, General Mills, Google, Honeywell International, Imperial Holdings Ltd, Infosys Technologies, Intel Corporation, Kellogg Co., Kraft Foods Inc., Medtronic Inc., Monsanto Company, Nestle, Novartis, Repsol-YPF, Roche, RWE AG, SAP AG, Schlumberger, Starbucks Corp., Tencent Holdings Ltd., TSMC, Verizon Communications, VF Corporation. As of September 30, 2009, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): BP plc, Carnival Corp., Chevron Corporation, China Mobile Limited, CNOOC, Compass, EMC Corp., Honeywell International, Kellogg Co., Medtronic Inc., Nestle, Novartis, POSCO, Reliance Industries, RepsolYPF, Roche, RWE AG, SAP AG, TOTAL, Union Pacific Corp., Wal-Mart, Walt Disney Co Advanced Micro Devices, Belgacom, Cintra, Hynix Semiconductor, Metso, Nordstrom, Pioneer Natural Resources, PTT PCL, Ranbaxy Laboratories, Rockwell Automation Inc., Southwest Airlines, Tomkins Plc, Unilever PLC, Volvo Abbott Laboratories, Amgen, Analog Devices, PUBLICIS GROUPE SA, SYNGENTA AG, EUTELSAT COMMUNICATIONS, LVMH MOET HENNESSY LOUIS VUITTON, NOVO NORDISK A/S, SWISSCOM AG, CADBURY PLC, ADECCO FINANCIAL SERVICES BERMUDA LTD, ABB LTD., ASTRAZENECA PLC, VINCI SA, TELEFONICA SA, BT GROUP PLC, CARREFOUR SA, KERRY GROUP LIMITED, ENI S.P.A., BP PLC, STATOILHYDRO ASA, AIR LIQUIDE FINANCE, GLAXOSMITHKLINE PLC, CLP HOLDINGS LIMITED, NOBLE GROUP LIMITED, KCC CORPORATION, LOTTE ENGINEERING & CONSTRUCTION CO. LTD., ITC HOLDINGS CORP, LI & FUNG (1937) LIMITED, AT&T, Inc., Baxter International, Becton Dickinson, BP plc, Carnival Corp., Chevron Corporation, China Mobile Limited, Cisco Systems, Inc., CNOOC, Coca-Cola Co., Colgate-Palmolive Co, Compass, Costco Wholesale Corp., CSX Corporation, EMC Corp., Emerson Electric, Fortune Brands Inc, General Electric, General Mills, Honeywell International, IBM, Intel Corporation, Kellogg Co., Kraft Foods Inc., Kroger Co., Mattel Inc., McDonald's Corporation, Medtronic Inc., Microsoft, Monsanto Company, Nestle, Novartis, Oracle Corporation, Owens Corning, Pfizer Inc, POSCO, Praxair Inc., Procter & Gamble Co., Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, Schlumberger, TOTAL, Union Pacific Corp., United Technologies, Verizon Communications, VF Corporation, Wal-Mart, Walt Disney Co, Waste Management, Inc., Yum! Brands, IncMETSO CORPORATION, PTT AROMATICS AND REFINING PUBLIC COMPANY LIMITED. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of BP plc, Chevron Corporation, Novartis, Roche, Union Pacific Corp., Wal-Mart .Abbott Laboratories, Amgen, Analog Devices, Becton Dickinson, BP plc, Chevron Corporation, Cisco Systems, Inc., CAPGEMINI SA, EADS FINANCE BV, VINCI SA, STATOILHYDRO ASA EURASIAN NATURAL RESOURCES CORPORATION (, Eutelsat, Rosneft, China Agri-Industries Holdings Limited (, KT Corp Colgate-Palmolive Co, CSX Corporation, Emerson Electric, General Electric, General Mills, IBM, McDonald's Corporation, Microsoft, Novartis, Oracle Corporation, Owens Corning, Procter & Gamble Co., Roche, Union Pacific Corp., Verizon Communications, Wal-Mart UNILEVER CAPITAL CORP

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

17

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Disclosures
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from BP plc, Carnival Corp., Chevron Corporation, Compass, EMC Corp., Honeywell International, Kellogg Co., Medtronic Inc., Nestle, Novartis, Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, Union Pacific Corp., Wal-Mart, Walt Disney Co Advanced Micro Devices, Neptune Orient Lines, Nordstrom, Southwest Airlines, Unilever PLC. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from BP plc, Carnival Corp., Chevron Corporation, China Mobile Limited, CNOOC, Compass, EMC Corp., Honeywell International, Kellogg Co., Larsen & Toubro, Medtronic Inc., Nestle, Novartis, POSCO, Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, Tencent Holdings Ltd., TOTAL, Union Pacific Corp., Wal-Mart, Walt Disney CoAcerinox, Advanced Micro Devices, Anadolu Efes, Belgacom, Cintra, ENSCO, Metso, Monster Worldwide Inc., Nordstrom, Pioneer Natural Resources, PTT PCL, Ranbaxy Laboratories, Rockwell Automation Inc., Southwest Airlines, Tomkins Plc, Unilever PLC, Volvo. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from BP plc, Chevron Corporation, Compass, EMC Corp., Honeywell International, Kellogg Co., Medtronic Inc., Novartis, Reliance Industries, Repsol-YPF, Roche, RWE AG, TOTAL, Wal-Mart Advanced Micro Devices, Pioneer Natural Resources, PTT PCL, Southwest Airlines, Unilever PLC Abbott Laboratories, Amgen, GAZPROM, JOHNSON MATTHEY, AP MOLLER GRUPPEN, SIEMENS, VODAFONE, DIAGEO, RIO TINTO, ASTRA OIL COMPANY PTE, BHARAT PETROLEUM AT&T, Inc., BP plc, Chevron Corporation, Cisco Systems, Inc., Colgate-Palmolive Co, Compass, EMC Corp., Emerson Electric, General Electric, General Mills, Google, Honeywell International, IBM, Intel Corporation, Kellogg Co., McDonald's Corporation, Medtronic Inc., Microsoft, Monsanto Company, Novartis, Oracle Corporation, Pfizer Inc, Procter & Gamble Co., Reliance Industries, Repsol-YPF, Roche, RWE AG, Starbucks Corp., TOTAL, Verizon Communications, Wal-Mart Koc Holding, Tomkins plc, Belgacom De Droit Public SA, Acerinox, HANWHA CORP.. 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: BP plc, Carnival Corp., Chevron Corporation, China Mobile Limited, CNOOC, Compass, EMC Corp., Honeywell International, Kellogg Co., Larsen & Toubro, Medtronic Inc., Nestle, Novartis, POSCO, Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, Tencent Holdings Ltd., TOTAL, Union Pacific Corp., Wal-Mart, Walt Disney Co Acerinox, Advanced Micro Devices, Anadolu Efes, Belgacom, Cintra, ENSCO, Metso, Monster Worldwide Inc., Neptune Orient Lines, Nordstrom, Pioneer Natural Resources, PTT PCL, Ranbaxy Laboratories, Rockwell Automation Inc., Southwest Airlines, Tomkins Plc, Unilever PLC, Volvo Abbott Laboratories, Amgen, Analog Devices, AT&T, Inc., Baxter International, Becton Dickinson, BP plc, Carnival Corp., EURASIAN NATURAL RESOURCES CORPORATION (, Eutelsat, Rosneft, Surgutneftegaz, Associated British Foods plc, Luxottica Group, Sime Darby-berhad (MALAYSIA), JIANGSU EXPRESSWAY COMPANY LIMITED (Nanj, DONGFENG MOTOR CORPORATION (Wuhan), Oil and Natural Gas Corporation Limited, China Agri-Industries Holdings Limited (, Cipla Ltd, BHARAT HEAVY ELECRICALS LTD (NEW DELHI), Hon Hai Precision Industry Co. Ltd., China Coal Energy Co Ltd, Chunghwa Telecom Co Ltd, KT Corp, JINDAL STEEL & POWER LTD. (New Delhi), Sun Pharmaceutical Industries, Tata Consultancy Services. Chevron Corporation, China Mobile Limited, Cisco Systems, Inc., CNOOC, Coca-Cola Co., Colgate-Palmolive Co, Compass, Costco Wholesale Corp., CSX Corporation, EMC Corp., Emerson Electric, Fortune Brands Inc, General Electric, General Mills, Google, Honeywell International, IBM, Infosys Technologies, Intel Corporation, Kellogg Co., Kraft Foods Inc., Kroger Co., Larsen & Toubro, Mattel Inc., McDonald's Corporation, Medtronic Inc., Microsoft, Monsanto Company, Nestle, Novartis, Oracle Corporation, Owens Corning, Pfizer Inc, POSCO, Praxair Inc., Procter & Gamble Co., Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, Schlumberger, Starbucks Corp., Tencent Holdings Ltd., TOTAL, Union Pacific Corp., United Technologies, Verizon Communications, VF Corporation, Wal-Mart, Walt Disney Co, Waste Management, Inc., Yum! Brands, Inc ADVANCED MICRO DEVICES, ROBERT HALF INTERNATIONAL, PIONEER NATURAL RESOURCES, VOLVO, WINBOND ELECTRONICS, , NEPTUNE ORIENT LINES, FAR EASTERN INTERNATIONAL BANK. 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: Acer Inc., BP plc, Chevron Corporation, Compass, EMC Corp., Honeywell International, Kellogg Co., Medtronic Inc., Nestle, Novartis, POSCO, Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, TOTAL, Union Pacific Corp., Wal-Mart, Walt Disney Co Advanced Micro Devices, Neptune Orient Lines, Nordstrom, Pioneer Natural Resources, PTT PCL, Rockwell Automation Inc., Southwest Airlines, Unilever PLC, Volvo Abbott Laboratories, Acer Inc., Amgen, Analog Devices, GAZPROM, BHP BILLITON, JOHNSON MATTHEY, AP MOLLER GRUPPEN, TELENOR AS, SIEMENS, VODAFONE, TESCO, DIAGEO, RIO TINTO, ASTRA OIL COMPANY PTE, HONGKONG ELECTRIC CO LTD, THE, JARDINE MATHESON, DAEWOO SHIPBUILDING & MARINE ENGINEERING, BHARAT PETROLEUM, CHINA NATIONAL BUILDING MATERIAL, HON HAI PRECISION INDUSTRY CO., BELLE INTERNATIONAL HOLDINGS.AT&T, Inc., BP plc, Chevron Corporation, Cisco Systems, Inc., Colgate-Palmolive Co, Compass, CSX Corporation, EMC Corp., Emerson Electric, Fortune Brands Inc, General Electric, General Mills, Google, Honeywell International, IBM, Intel Corporation, Kellogg Co., Kraft Foods Inc., Kroger Co., Mattel Inc., McDonald's Corporation, Medtronic Inc., Microsoft, Monsanto Company, Nestle, Novartis, Oracle Corporation, Owens Corning, Pfizer Inc, POSCO, Praxair Inc., Procter & Gamble Co., Reliance Industries, Repsol-YPF, Roche, RWE AG, SAP AG, Schlumberger, Starbucks Corp., TOTAL, Union Pacific Corp., United Technologies, Verizon Communications, VF Corporation, Wal-Mart, Walt Disney Co, Waste Management, Inc., Yum! Brands, Inc.. Morgan Stanley & Co. Incorporated makes a market in the securities of Carnival Corp., Chevron Corporation, EMC Corp., Honeywell International, Kellogg Co., Medtronic Inc., Union Pacific Corp., Wal-Mart, Walt Disney Co. Advanced Micro Devices, ENSCO, Monster Worldwide Inc., Nordstrom, Pioneer Natural Resources, Rockwell Automation Inc., Southwest Airlines, Western Digital. Morgan Stanley & Co. International plc is a corporate broker to Compass. 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 investment advice. 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.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

18

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Disclosures
Global Stock Ratings Distribution (as of September 30, 2009) 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.
Coverage Universe Stock Rating Category Overweight/B uy Equalweight/Hold NotRated/Hold Underweight/ Sell Total % of Total 36% Investment Banking Clients (IBC) % of Total IBC 39% % of Rating Category 31%

Count 843

Count 259

1062

45%

314

47%

30%

26 412 2,343

1.00% 18%

3 89 665

1.00% 13%

12.00% 22%

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 or an affiliate received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed 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). The stock's total return is expected to be in line with 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 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). The stock's total return is expected to be below 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. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies that are the subject of this Morgan Stanley research report. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. In addition to the disclosures on this research report and on the Morgan Stanley disclosure website (www.morganstanley.com/researchdisclosures), important disclosures regarding the relationship between the companies that are the subject of this report and Morgan Stanley Smith Barney LLC, Citigroup Global Markets Inc. or any of its affiliates, are available at https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. This Morgan Stanley research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval was conducted by the same person who reviewed this research report on behalf of Morgan Stanley. This could create a conflict of interest. : 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.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

19

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Disclosures
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 With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Unless otherwise stated, the cover page provides the closing price on the primary exchange for the subject company's securities/instruments. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to “wholesale clients” and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research in Canada; in Germany by Morgan Stanley

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

20

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Disclosures
Bank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request.

Ticker

Company

LUV JWN TER ESV
AMD

Southwest Airlines Co. Nordstrom Inc. Teradyne Inc. ENSCO International Inc.
Advanced M icro Devices Inc.

WDC ROK RHI MWW PXD

Western Digital Corp. Rockwell Automation Inc. Robert Half International Inc. Monster Worldwide Inc. Pioneer Natural Resources Co.

Price US $ 10/5/2009 9.08 31.71 9.23 41.43 5.54 36.50 41.29 24.90 16.86 36.11

Ticker

B03MVJ B1QH83 089626 UNA-NL BELG-BE B01ZVZ 571342 718472 B03MNV B03851

Price US $ 10/5/2009 2.61 KOC Holding A.S. 8.73 Volvo AB 2.85 Tomkins PLC 28.28 Unilever N.V. 39.34 Belgacom S.A. 20.21 Acerinox S.A. 27.06 Metso Corp. 224.31 Swatch Group AG Anadolu Efes Biracilik ve Malt S 10.85 Cintra Concesiones de Infraestru 11.23

Company

Ticker

B2B332 642539 627611 640776 633137 645026 696651 B0CMCH 649676 662885

Price US $ 10/5/2009 0.72 PTT Aromatics & Refining PCL 1.05 Aluminum Corp. of China Ltd. 22.96 Dongkuk Steel Mill Co. Ltd. 10.05 Hanwha Chemical Corp. Far Eastern Department Stores L 1.04 16.02 Hynix Semiconductor Inc. 0.19 Winbond Electronics Corp. 8.45 Ranbaxy Laboratories Ltd. 38.47 Korean Air Co. Ltd. 1.15 Neptune Orient Lines Ltd.

Company

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

21

MORGAN STANLEY RESEARCH

October 6, 2009 Global Strategy

Options Disclosures
Options are not for everyone. Before engaging in the purchasing or writing of options, investors should understand the nature and extent of their rights and obligations and be aware of the risks involved, including the risks pertaining to the business and financial condition of the issuer and the underlying stock. A secondary market may not exist for these securities. For customers of Morgan Stanley & Co. Incorporated who are purchasing or writing exchange-traded options, your attention is called to the publication “Characteristics and Risks of Standardized Options;” in particular, the statement entitled “Risks of Option Writers.” That publication, which you should have read and understood prior to investing in options, can be viewed on the Web at the following address: http://www.optionsclearing.com/publications/risks/riskchap1.jsp. Spreading may also entail substantial commissions, because it involves at least twice the number of contracts as a long or short position and because spreads are almost invariably closed out prior to expiration. Potential investors should be advised that the tax treatment applicable to spread transactions should be carefully reviewed prior to entering into any transaction. Also, it should be pointed out that while the investor who engages in spread transactions may be reducing risk, he is also reducing his profit potential. The risk/ reward ratio, hence, is an important consideration. The risk of exercise in a spread position is the same as that in a short position. Certain investors may be able to anticipate exercise and execute a "rollover" transaction. However, should exercise occur, it would clearly mark the end of the spread position and thereby change the risk/reward ratio. Due to early assignments of the short side of the spread, what appears to be a limited risk spread may have more risk than initially perceived. An investor with a spread position in index options that is assigned an exercise is at risk for any adverse movement in the current level between the time the settlement value is determined on the date when the exercise notice is filed with OCC and the time when such investor sells or exercises the long leg of the spread. Other multiple-option strategies involving cash settled options, including combinations and straddles, present similar risk. Important Information: • Examples within are indicative only, please call your local Morgan Stanley Sales representative for current levels. • By selling an option, the seller receives a premium from the option purchaser, and the purchase receives the right to exercise the option at the strike price. If the option purchaser elects to exercise the option, the option seller is obligated to deliver/purchase the underlying shares to/from the option buyer at the strike price. If the option seller does not own the underlying security while maintaining the short option position (naked), the option seller is exposed to unlimited market risk. • Spreading may entail substantial commissions, because it involves at least twice the number of contracts as a long or short position and because spreads are almost invariably closed out prior to expiration. Potential investors should carefully review tax treatment applicable to spread transactions prior to entering into any transactions. • Multi-legged strategies are only effective if all components of a suggested trade are implemented. • Investors in long option strategies are at risk of losing all of their option premiums. Investors in short option strategies are at risk of unlimited losses. There are special risks associated with uncovered option writing which expose the investor to potentially significant loss. Therefore, this type of strategy may not be suitable for all customers approved for options transactions. The potential loss of uncovered call writing is unlimited. The writer of an uncovered call is in an extremely risky position, and may incur large losses if the value of the underlying instrument increases above the exercise price. • As with writing uncovered calls, the risk of writing uncovered put options is substantial. The writer of an uncovered put option bears a risk of loss if the value of the underlying instrument declines below the exercise price. Such loss could be substantial if there is a significant decline in the value of the underlying instrument. • Uncovered option writing is thus suitable only for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer’s options position, the investor’s broker may request significant additional margin payments. If an investor does not make such margin payments, the broker may liquidate stock or options positions in the investor’s account, with little or no prior notice in accordance with the investor’s margin agreement. • For combination writing, where the investor writes both a put and a call on the same underlying instrument, the potential risk is unlimited. • If a secondary market in options were to become unavailable, investors could not engage in closing transactions, and an option writer would remain obligated until expiration or assignment. • The writer of an American-style option is subject to being assigned an exercise at any time after he has written the option until the option expires. By contrast, the writer of a European-style option is subject to exercise assignment only during the exercise period.

Jason Todd +1 212 761 7991 jason.e.todd@morganstanley.com

22


								
To top