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European Equity StrategyThe implications of QE for equity investors
M O R G A N S T A N L E Y R E S E A R C HEurope
Morgan Stanley & Co. International plc+European Equity Strategy
Graham Secker graham.secker@morganstanley.com +44 (0)207 425 6188
European Equity Strategy TeamGraham SeckerRonan Carr, CFAMatthew Garman, CFAKrupa PatelHanyi Lim
September 17, 2012
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.
We look at prior periods of monetary policy intervention to assess the tactical implications of QE3 for equity investors.The sustainability of this policy-induced rally depends on the economic outlook improving in the next month or two. While prior Fed intervention has often been followed by an uptick in economic indicators the evidence is far from conclusive.
Although the circumstances around QE3 are somewhat different to prior Fed interventions, we may see similar market responses initially – namely: a higher PE; rising investor sentiment; stronger commodity prices; falling bond yields; rising EUR; high beta outperformance; rotation from Defensives into Commodity sectors.
Commodities have been the best performers post prior Fed interventions
Source: MSCI, Datastream, Morgan Stanley Research
-4 -2 0 2 4 6 8
Materials
Energy
Industrials
Cons Stap
IT
Cons Disc
Financials
Health Care
Telecomms
Utilities
Median Relative Sector Performance 3M After Fed Bond Purchase / QE Announcements, %
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
SummaryPolicy-induced rally is only sustainable if growth outlook improves. Equity markets have closely tracked economic growth indicators in this cycle; however, over the last few months this relationship has started to break down as equities have rallied substantially despite continued weak macro data. Much of this divergence is likely due to investors’ hopes for monetary policy intervention, which has duly been delivered by the Fed and ECB. While the latter provides scope for a tactical rally, its sustainability depends on an improving economic growth outlook. Prior periods of monetary policy intervention have usually occurred against a backdrop of rising growth indicators – the one time this did not occur (2Q11) saw equity prices fall.
The timing of QE3 does not fit the historical precedent... Traditionally the Fed has increased monetary stimulus when equities have been falling, inflation expectations are low and financial conditions are tight. In this regard, the timing of QE3 is quite different as it has occurred after a period of sharply rising equity prices, (relatively) high inflation expectations and loose financial conditions. For example, MSCI Europe has fallen by a median reading of 13% in the 3m prior to previous Fed interventions but it is currently up 13% over the last 3m.
… however, implications of prior monetary policy intervention could still be important. While we should acknowledge the different circumstances around the start of QE3, human nature dictates that investors will still look at the implications of prior periods of monetary intervention for help in forming investment decisions today. In this report we highlight these prior implications and the summary is as follows:
#1 QE boosts PE but doesn’t impact EPS – Post the five Fed interventions we analysed we found that the median increase in the 12m PE over the next six months was 16% for US and 28% for Europe. Over the last year we also find that ECB policy is now driving equity valuations higher too. There is little evidence that prior monetary intervention has an impact on consensus 12m EPS estimates.
#2 QE is often followed by better macro growth data. We are generally sceptical that QE has any lasting impact on real GDP growth; however, the charts on page 9 do suggest that prior Fed interventions have often been followed by an improvement in indicators such as PMIs, weekly initial claims and US consumer confidence. It is hard to gauge how much of this is causal and how much is coincidence.
#3 QE boosts investor sentiment. Post prior Fed interventions we have consistently seen a quick improvement in investor optimism as measured by a higher AAII index, lower put-call ratio and a lower VIX.
#4 QE is bullish for commodity prices. Previous QE programs have been consistently bullish for commodity prices, although we note that gold’s best performance usually occurs ahead of the announcement. Brent oil has already risen to $117 – over the last five years MSCI Europe has always fallen in the 3m and 6m post a price of $125.
#5 QE is bearish for bonds, bullish for EUR. The start of previous QE programs has always prompted a sharp rise in core government bond yields while the end of such programs has always been followed by a fall in the same yields. QE is generally bullish for EUR versus USD.
#6 QE has few regional implications. Prior QE announcements have not given consistent signals as to the relative performance of European equities versus their global peers.
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
Summary#7 QE drives rotation into higher beta and (sometimes) value. In 4 of the 5 interventions analysed QE has driven a strong increase in the number of high beta stocks (i.e. breadth) that outperformed subsequently. Value outperformed growth post QE1 and Operation Twist but not post QE2.
#8 QE prompts commodity sectors to outperform; Defensives to underperform. Prior periods of Fed intervention have been the catalyst to prompt a sector rotation out of defensives and into commodities. While Financials outperformed strongly post QE1 in Mar-09, they have generally underperformed in the other periods analysed. Note that Financials were the best performers in 3m post LTRO announcement.
Implications for our European Model Portfolio. Recently we have been positioning our portfolio for the prospect of a rising PE multiple but where there is continued downward pressure on consensus earnings expectations (see our report ‘A lower risk premium but lower EPS too, September 10 2012’). Consequently we believe our portfolio is already relatively well positioned for this environment as we are OW Insurance, Materials and Utilities. We are UW Consumer Staples, Industrials and Consumer Discretionary.
Our European Model PortfolioBenchmark Portfolio
UNDERWEIGHTS Weight (%) OW / UW
Cons Discr (Autos SXAP & Media SXMP*) 8.7 -2.0SES, IHG, Reed, Home Retail, Volkswagen
Cons Staples (SX3P) 14.7 -2.0Imperial Tobacco, BAT, ABI, Nestle
Industrials (SXNP) 10.9 -2.0Schneider, AtlantiaRyanair*, AP Moller-Maersk
Benchmark PortfolioOVERWEIGHTS Weight (%) OW / UW
Insurance (SXIP) 5.1 +2.0Munich Re, Prudential, Aegon, Allianz
Materials (Basic Resources SXPP & Chemicals SX4P) 9.5 +2.0
Rio Tinto, Akzo Nobel, Lanxess, African Barrick Gold
Utilities (SX6P) 4.5 +2.0Iberdrola, RWE, Terna
Benchmark PortfolioNEUTRALS Weight (%) OW / UW
Banks (SX7P) 9.8 0.0Barclays, HSBC, Swedbank, BNP
Div Fin & Real Estate (SXFP & SX86P) 4.3 0.0ING, Unibail Rodamco, UBS
Energy (SXEP) 11.5 0.0BG, Tullow Oil, Saipem, RD Shell
Healthcare (SXDP) 12.1 0.0Sanofi, Roche, Novartis, UCB
Technology (SX8P) 2.9 0.0Dassault Systems, SAP
Telecoms (SXKP) 6.1 0.0BT, Vodafone, Deutsche Telekom
Note: *Although the shares of this company remain in the model portfolio, Morgan Stanley & Co. International plc policy precludes the exercise of investment management discretion or the rendering of investment advice on the shares at this time by the strategist and/or the Morgan Stanley analyst who follows the shares. **Please note that EADS is not currently included in the Model Portfolio due to applicable Morgan Stanley restrictions.
Source: Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
Policy hopes have trumped growth concerns in recent months Equity prices have closely tracked economic growth indicators in this cycle. However, over the last few months this relationship has started to break down as equities have rallied substantially despite continued weak macro data.
Much of this divergence is likely due to investors’ hopes for central bank policy intervention which has duly been delivered by both the Fed and the ECB. However, for the rally to be sustainable we need to see these economic indicators start to improve over the next 1-2 months.
Source: S&P, Conference Board, Morgan Stanley Research
US consumer confidence has fallen to 2012 lows – SPX normally tracks this indicator closely
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Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12
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Con
sum
er C
onfid
ence
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S&P
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US Consumer Confidence
S&P 500 (RHS)
Eurozone economic climate continues to deteriorate – this series tends to correlate with equities and GDP
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Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
EC E
cono
mic
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timen
t Ind
icat
or fo
r Eur
ozon
e
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Eurozone Economic Climate
MSCI Europe - rhs
Source: MSCI, Bloomberg, Morgan Stanley Research
Source: ISM, Datastream, Morgan Stanley Research
MSCI Europe is pricing in a strong ISM rebound
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Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
MSC
I Eur
ope
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ISM
ISM (RHS)
MSCI Europe
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The implications of QE for equity investorsSeptember 17, 2012
In medium-term, growth is more important for equity price performance than policy
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Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12
ISM
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MS
CI E
urop
e
ISMMSCI Europe
Fed announces further purchase of
$850bn agency MBS and $300bn
USTs (QE1)
Fed announces $600bn purchase in
agency MBS Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
HoleQE1 ends QE2 ends
Source: MSCI, ISM, Morgan Stanley Research
While central bank policy intervention boosts equity valuations, we believe equity price performance is more closely correlated to growth expectations
The starting and stopping of previous QE programs has consistently coincided with troughs and peaks in the growth outlook (as measured by the ISM) – hence it is debatable as to whether equities went up during these periods because of QE or because the growth outlook was improving. Interestingly there has only been one occasion of note (2Q11) where the ISM started to decline while a QE program was ongoing – over that period MSCI Europe fell 7%.
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
The timing of QE3 does not fit the historical precedent
Source: Bloomberg, Morgan Stanley Research Source: S&P, Morgan Stanley Research
QE vs Inflation expectations
QE vs Financial Conditions
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-2
-1
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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
MS
Fina
ncia
l Con
ditio
ns In
dex
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
QE1 ended QE2 ended
QE vs S&P
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Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12
S&P
500
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
Source: Bloomberg, Morgan Stanley Research
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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
US
5yr B
reak
even
Infla
tion
(%)
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
As the charts on this page show, traditionally the Fed has increased monetary stimulus when equities have been falling, inflation expectations are low and financial conditions are tight.
In this regard, the timing of QE3 is quite different as it has occurred after a period of sharply rising equity prices, (relatively) high inflation expectations and loose financial conditions.
Investors could interpret this difference in two ways - either: i) it shows just how determined the Fed is to keep doing everything necessary and thus is more likely to increase confidence and has greater chance of success in driving a growth rebound.. or ii) that the "bang for the buck" will be smaller this time as markets are already elevated...perhaps concerns on the latter explains why the Fed sounded more aggressive this time.
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
The Fed’s QE has boosted US PE ratios – as rate cuts used to do in prior cycles…
Policy response has been very effective at lifting the 12m PE for MSCI USA (albeit temporarily)
Source: Datastream, MSCI, IBES, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research
In prior cycles conventional Fed policy stimulus used to prompt P/E expansion too
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12m
PE
for M
SC
I US
A
Fed announces further purchase of
$850bn agency MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
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US
Fed
Fund
s R
ate
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MSC
I US
Trai
ling
PE
Periods of US rate cuts Fed Funds Rate US PE - rhs
In prior economic cycles the PE ratio of US equities generally rose during periods when the Fed Funds rate was falling.
Despite ZIRP, this cycle is actually no different – periods of monetary policy intervention have again driven up the PE ratio for US equities. Post the 5 intervention events we flag in the chart below the median increase in the consensus 12m PE for MSCI USA has been 10% over the next 3 months and 16% over the next 6 months (with a hit ratio of 100%).
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
… and European policymakers are finally having a similar effect
In Europe, less aggressive/co-ordinated policymaking has meant that sovereign debt concerns have been a
key driver of equity valuations in this cycle…
Source: Datastream, MSCI, IBES, Bloomberg, Morgan Stanley Research Source: MSCI, Datastream, Morgan Stanley Research
… although the ECB’s more aggressive stance is now having some impact
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MSC
I Eur
ope
12m
PE
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ian
CDS
acro
ss E
urop
ean
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tries
- IN
VER
TED
Europe Median CDS - rhs - INVERTED
MSCI Europe 12m PE
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MSC
I Eur
ope
12m
PE
ECB announces LTRO (8/12)
EU summit (28/06)
Draghi bumblebee speech (26/07)
end of LTRO2
ECB announces OMT (06/09)
Post the Fed’s last 5 intervention events the average increase in the consensus 12m PE for MSCI Europe has been 12% over the next 3 months and 28% over the next 6 months (with a hit ratio of 80% and 100% respectively).
In general, a less aggressive/co-ordinated approach to policymaking in Europe has meant that sovereign debt concerns have been a key driver of equity valuations (from a negative perspective) in this cycle. It is only relatively recently that European monetary policy is driving a similar re-rating in Europe’s 12m PE ratio.
Fed monetary intervention has also helped Europe’s 12m PE – though not around QE2
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12m
PE
for M
SC
I Eur
ope
Fed announces further purchase of
$850bn agency MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
Source: MSCI, IBES, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
9
The implications of QE for equity investorsSeptember 17, 2012
Monetary intervention has little impact on EPS (which is determined by growth) History suggests that Fed monetary intervention has little durable impact on the growth outlook in this cycle. Our thesis is that, in a deleveraging economy, fiscal policy is a more important driver of economic activity than monetary policy.
Effectively, while monetary intervention can tactically boost the PE ratio there is little evidence that it impacts the path of EPS.
Our global PMI series remains at a weak level of 48.3 – historically we have not seen an EPS upgrade cycle until this indicator has been in the range of 52-53 (this is equivalent to an ISM of around 55).
Source: MSCI, Datastream, IBES, Morgan Stanley Research
The link between Fed intervention and consensus 12m EPS is less obvious…
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Con
sens
us 1
2m E
PS
for M
SCI U
SA
further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
… even if we compare the changing growth rates of consensus EPS expectations
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Con
sens
us 1
2m E
PS g
row
th fo
r MS
CI U
SA
further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
Source: MSCI, Datastream, IBES, Morgan Stanley Research
Source: MSCI, Datastream, IBES, Morgan Stanley Research
European earnings revisions move with global PMIs – an upgrade cycle requires our PMI series to reach
52-53 (equivalent to ISM c. 55)
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65.0MSCI Europe FY2 Earnings Revisions Ratio (%)Global Weighted PMI (RHS)
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
The impact of US monetary intervention on macro growth indicators
Source: Institute of Supply Management, Haver Analytics, Morgan Stanley Research Source: Conference Board, Morgan Stanley Research
There is some evidence that QE has lifted Global PMIs
US labour market has tended to improve post QE
US consumer confidence has generally risen post QE
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Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12
US
Con
sum
er C
onfid
ence
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
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Glo
bal P
MI
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended QE2 ended
Source: Markit, Bloomberg, Morgan Stanley Research
Note: Global PMI = 30% China manufacturing PMI, 20% Euro Area manufacturing PMI, 30% Euro Area services PMI, 10% ISM manufacturing & 10% ISM services.
QE has tended to occur around turning points in Economic Surprise Indices
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G10
Eco
nom
ic S
urpr
ise
Inde
x
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
Source: Bloomberg, Morgan Stanley Research
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Wee
kly
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al C
laim
s, T
hous
ands
(SA)
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A
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation
Twist startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
The impact of US monetary intervention on sentiment
Source: Morgan Stanley International Prime Brokerage, Morgan Stanley Research Source: CBOE, Morgan Stanley Research
Fed intervention tends to boost hedge fund net exposure
AAII Net Bulls has tended to bounce post QEWhen we look across a number of our preferred sentiment indicators it is apparent that QE has historically driven a quick improvement in investor optimism.
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ge F
und
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Exp
osur
e, %
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QE2 Flagged at Jackson
Hole
Put-call ratio generally falls post QE
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CBO
E P
ut C
all R
atio
(3W
k A
vg)
Fed announces further purchase of
$850bn agency MBS and $300bn
USTs
Fed announces $600bn
purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
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AAI
I - N
et B
ullis
h, %
(3 W
eek
aver
age)
Fed announces further purchase of
$850bn agency MBS and $300bn
USTs
Fed announces $600bn
purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
Source: AAII, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
The impact of US monetary intervention on sentiment
Source: Bloomberg, Morgan Stanley Research Source: ICI, Morgan Stanley Research
QE vs VIX
QE vs MTIPrior episodes of QE were announced when the VIX was considerably higher than it is today – we’re unlikely to see a further sharp decline in volatility.
At prior QE announcements our MTI has been either in, or close to, buy territory – that remains the case today with our MTI at -0.28.
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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
VIX
(3W
k A
vg)
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation
Twist startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 endedQE2 ended
Little link between QE and equity mutual fund flows
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Com
bine
d M
arke
t Tim
ing
Indi
cato
r
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
Buy Below -0.5
Sell Above +0.5
QE1 endedQE2 ended
Source: Morgan Stanley Research
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US
Wee
kly
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s in
to E
quity
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ual F
unds
, $B
n - 4
WA Operation
Twist startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Gol
d ($
/Tro
y O
z.)
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
QE vs asset class performance – commodities
Source for all charts: Datastream, Morgan Stanley Research
QE is bullish for copper
QE is bullish for the oil pricePrevious QE programs have been consistently bullish for commodity prices, although we note that gold’s best performance usually occurs ahead of the announcement.
Brent oil has already risen to $117 – on the last 3 occasions it reached $125 the global economy (and equity prices) started to suffer. E.g. whenever the oil price has been above $125 over the last five years European equities have always fallen in value over the next 3 and 6 months and by an average of 12% and 23% respectively.
Gold’s best performance tends to occur in the run- up to a QE announcement
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60
80
100
120
140
160
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Cru
de O
il ($
/Bbl
)
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Cop
per (
$/M
T)
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
M O R G A N S T A N L E Y R E S E A R C H
14
The implications of QE for equity investorsSeptember 17, 2012
QE vs asset class performance – bonds & FX
Source for all charts: Datastream, Morgan Stanley Research
Core government bonds rose sharply after QE1 and QE2 – and then fell sharply when those programs
ended
Little historical link between QE and Peripheral bond spreadsQE tends to drive a period of significant outperformance of EUR over
USD – although this time it is a bit different as the ECB is looking to purchase bonds too.
The start of previous QE programs has always seen a sharp rise in core government bond yields.
The end of previous QE programs has always seen a sharp fall in core government bond yields.
There hasn’t historically been a strong link between QE and peripheral bond spreads.
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
10yr
Gov
ernm
ent B
ond
Yie
ld, %
US
Germany
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency
MBSOperation
Twist startsQE2
StartsQE2 Flagged at Jackson Hole
QE1 endedQE2 ended
QE generally leads to a period of EUR strength vs USD
0
100
200
300
400
500
600
700
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Aver
age
of S
pani
sh a
nd It
alia
n Sp
read
s (v
s. G
erm
an Y
ield
), %
2yr
10yr
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency
MBSOperation
Twist startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
EUR
USD
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation
Twist startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
M O R G A N S T A N L E Y R E S E A R C H
15
The implications of QE for equity investorsSeptember 17, 2012
QE vs asset class performance – equities (regions)
Source for all charts: MSCI, Morgan Stanley Research
QE does not give a consistent signal for Europe vs UK relative performance
QE does not give a consistent signal for Europe vs UK relative performance
QE does not give a consistent signal for Europe vs EM relative performance
75
80
85
90
95
100
105
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
MSC
I Eur
ope
vs. M
SCI U
K - R
elat
ive
Pric
e In
dex
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
60
70
80
90
100
110
120
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
MSC
I Eur
ope
vs. M
SCI U
SA -
Rel
ativ
e P
rice
Inde
x
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
60
70
80
90
100
110
120
130
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
MSC
I Eur
ope
vs. M
SCI E
M -
Rel
ativ
e Pr
ice
Inde
x
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in
agency MBSOperation Twist
startsQE2
Starts
QE2 Flagged at Jackson
Hole
QE1 ended
QE2 ended
MSCI Europe generally reacts positively to Fed intervention
600
700
800
900
1000
1100
1200
1300
1400
1500
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
MS
CI E
urop
e - P
rice
Inde
x
Fed announces further purchase of $850bn agency
MBS and $300bn USTs
Fed announces $600bn purchase in agency MBS
Operation Twist starts
QE2 Starts
QE2 Flagged at Jackson
Hole
QE1 endedQE2 ended
M O R G A N S T A N L E Y R E S E A R C H
16
The implications of QE for equity investorsSeptember 17, 2012
60
65
70
75
80
85
90
95
100
105
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
MSC
I Eur
ope
- Val
ue v
s. G
row
th
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
QE vs asset class performance – Equity style
Source for all charts: MSCI, Datastream, Morgan Stanley Research
QE has tended to prompt a sharp rotation into higher beta areas of the market…
QE often drives a rotation into ‘Value’ (although it didn’t happen under QE2)
Prior QE programs have not given a consistent signal to rotate into Value stocks – e.g. Value did not outperform Growth post QE2.
QE does prompt a shift into higher beta stocks – in 4 of the 5 periods highlighted below, QE has driven a strong increase in the number of high beta stocks (i.e. breadth) that outperformed subsequently.
… and a corresponding rotation out of low beta names
0
10
20
30
40
50
60
70
80
90
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
3M A
vera
ge %
of H
igh
Beta
Sto
cks
Out
perf
orm
ing
Each
Mon
th Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
0
10
20
30
40
50
60
70
80
90
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
3M A
vera
ge %
of L
ow B
eta
Stoc
ks O
utpe
rfor
min
g Ea
ch M
onth
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
M O R G A N S T A N L E Y R E S E A R C H
17
The implications of QE for equity investorsSeptember 17, 2012
80
85
90
95
100
105
110
115
120
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Cyc
lical
s - R
elat
ive
Pric
e In
dex
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
The impact of US monetary intervention on equity group performance
Source for all charts: Datastream, Morgan Stanley Research
QE is usually bad for Defensives
Cyclicals outperformed around QE1 and QE2 but not Operation Twist
Previously QE hasn’t help Financials much
20
30
40
50
60
70
80
90
100
110
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Fina
ncia
ls -
Rel
ativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
95
100
105
110
115
120
125
130
135
140
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Def
ensi
ves
- Rel
ativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
Commodity stocks perform strongly after QE
90
95
100
105
110
115
120
125
130
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Com
mod
ities
- Re
lativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
M O R G A N S T A N L E Y R E S E A R C H
18
The implications of QE for equity investorsSeptember 17, 2012
Prior Fed interventions saw sharpest rotation out of Defensives and into Commodities
Source: Datastream, MSCI, Morgan Stanley Research
In the 3m before prior Fed interventions Defensives outperformed Financials and Materials…
We have looked at the relative performance of European sectors around the five periods of Fed intervention we highlighted earlier and the biggest change in performance can be seen in Materials that go from big laggards to the best leaders. Interestingly, Financials have not – on average – outperformed post Fed intervention.
-15 -10 -5 0 5 10
Telecomms
Cons Stap
Energy
Health Care
Cons Disc
Utilities
Industrials
IT
Materials
Financials
Median Relative Sector Performance 3M Before Fed Bond Purchase / QE Announcements, %
Source: Datastream, MSCI, Morgan Stanley Research
… in the 3m after prior Fed interventions most outperformance is concentrated in Commodities
-4 -2 0 2 4 6 8
Materials
Energy
Industrials
Cons Stap
IT
Cons Disc
Financials
Health Care
Telecomms
Utilities
Median Relative Sector Performance 3M After Fed Bond Purchase / QE Announcements, %
M O R G A N S T A N L E Y R E S E A R C H
19
The implications of QE for equity investorsSeptember 17, 2012
Previous Fed interventions have not been positive for Banks or Real Estate
Source: Datastream, MSCI, Morgan Stanley Research
In the 3m before prior Fed interventions the most successful pair trade would have been OW Retail
versus UW Banks
We also replicated the analysis for Industry Groups.
-15 -10 -5 0 5 10 15
RetailingHealth CareComm ServTelecomms
Household ProdCons Dur
EnergyFood & Bev
MediaPharma
Food RetailCons Serv
SoftwareUtilities
SemisCap GoodsReal Estate
MaterialsTech Hardware
TransportInsurance
AutosDiv FinBanks
Median Relative Industry Group Performance 3M Before Fed Bond Purchase / QE Announcements, %
Source: Datastream, MSCI, Morgan Stanley Research
In the 3m after prior Fed interventions Banks and Real Estate have underperformed most, then Defensives
-6 -4 -2 0 2 4 6 8 10
MaterialsAutos
EnergySemis
Cons ServInsurance
Cap GoodsCons DurSoftware
Food & BevRetailing
MediaTransport
Food RetailDiv Fin
Health CareComm Serv
PharmaTech Hardware
HouseholdTelecomms
UtilitiesBanks
Real Estate
Median Relative Industry Group Performance 3M After Fed Bond Purchase / QE Announcements, %
M O R G A N S T A N L E Y R E S E A R C H
20
The implications of QE for equity investorsSeptember 17, 2012
Sector backtest post prior Fed intervention
-6M -3M -1M +1M +3M +6M -6M -3M -1M +1M +3M +6MMSCI Europe (Abs) -15.0 -13.3 2.6 6.0 5.0 15.3 40 40 60 100 80 100Industry Groups (Relative)Automobiles & Components -0.6 -6.1 0.7 9.0 6.0 7.1 40 40 60 80 60 80Banks -21.9 -12.3 -4.8 -1.3 -3.8 2.8 0 20 20 40 20 60Capital Goods -3.9 -2.4 0.2 3.3 3.2 6.5 40 40 60 80 60 100Commercial & Professional Services 10.0 8.3 1.0 1.1 -1.7 2.2 100 80 60 60 40 60Consumer Durables & Apparel 15.0 5.5 3.4 5.2 1.5 6.5 60 80 80 80 60 60Consumer Services -0.7 0.7 1.1 1.3 4.7 -0.5 40 60 60 80 60 40Diversified Financials -22.6 -10.8 -2.1 -2.1 -1.5 7.1 20 20 20 40 40 60Energy 3.1 5.2 0.7 -0.7 5.6 1.7 60 80 80 40 80 60Food & Staples Retailing 4.3 2.2 1.0 1.6 -1.5 -10.7 80 80 60 60 40 20Food Beverage & Tobacco 10.9 4.1 0.5 -0.6 0.1 -3.4 100 100 60 40 60 20Health Care Equipment & Services 4.0 9.5 -3.8 -3.4 -1.6 -4.9 60 60 40 20 40 20Household & Personal Products 11.3 5.6 0.5 0.2 -2.5 -7.5 80 80 60 60 20 20Insurance -6.0 -5.8 -2.3 7.3 4.5 6.2 0 0 40 60 60 80Materials -5.2 -4.7 -1.7 5.9 7.4 13.0 20 40 40 80 80 80Media 8.6 3.6 2.1 -1.1 -0.9 -2.3 100 100 80 20 20 0Pharmaceuticals Biotechnology & Life Sciences 18.5 3.5 -1.0 -2.0 -2.1 -7.7 60 80 40 20 40 0Real Estate 2.7 -4.3 -0.3 2.6 -5.3 2.9 60 40 40 60 0 60Retailing 13.3 13.1 5.5 3.1 -0.1 1.0 100 100 80 80 40 60Semiconductors & Semiconductor Equipment 0.2 -0.9 -0.4 4.4 5.1 11.6 60 40 40 60 60 80Software & Services 4.7 0.6 1.3 -2.3 0.7 5.4 80 60 80 40 60 80Technology Hardware & Equipment -7.1 -5.2 -2.3 0.9 -2.4 -5.5 20 20 40 60 20 20Telecommunication Services 13.4 7.7 3.6 -3.2 -3.4 -11.2 100 100 80 40 20 0Transportation -8.9 -5.5 -2.2 0.2 -1.2 -2.6 40 20 20 60 40 40Utilities 0.8 -0.1 1.7 -3.5 -3.5 -7.4 60 40 80 0 0 0Sectors (Relative)Consumer Discretionary 8.4 2.6 1.6 4.3 -0.3 1.6 100 100 100 80 40 80Consumer Staples 13.3 5.8 -0.1 -0.1 0.2 -3.4 100 100 40 40 60 0Energy 3.1 5.2 0.7 -0.7 5.6 1.7 60 80 80 40 80 60Financials -19.8 -12.7 -3.5 -1.6 -1.6 4.5 0 20 20 40 40 60Health Care 17.1 4.0 -1.4 -1.5 -2.0 -7.2 60 80 40 20 40 0Industrials -4.2 -2.2 0.2 3.0 1.9 4.5 40 20 60 80 60 100Information Technology -1.4 -2.3 -2.7 1.2 -0.3 0.6 40 40 40 60 40 60Materials -5.2 -4.7 -1.7 5.9 7.4 13.0 20 40 40 80 80 80Telecommunication Services 13.4 7.7 3.6 -3.2 -3.4 -11.2 100 100 80 40 20 0Utilities 0.8 -0.1 1.7 -3.5 -3.5 -7.4 60 40 80 0 0 0
Median Hit Ratio, %MSCI Europe - Relative Total Returns (%)
Here’s the backtest in more detail.
Source: MSCI, Factset, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
21
The implications of QE for equity investorsSeptember 17, 2012
Sector performance around the LTRO
Source: Datastream, MSCI, Morgan Stanley Research
Here we also show the relative sector performance trends post the announcement of the LTRO – in this situation Financials were the best performers while defensives lagged badly.
-15 -10 -5 0 5 10
Financials
Cons Disc
IT
Industrials
Materials
Cons Stap
Energy
Utilities
Health Care
Telecomms
Relative Sector Performance in Europe 3M After ECB Announced LTRO (%)
Post the LTRO we saw a rotation out of Defensives and into Financials, IT and Consumer Discretionary -6M -3M -1M +1M +3M +6M
MSCI Europe (Abs) -12.3 4.0 4.2 7.3 13.2 5.7Automobiles & Components -15.4 -5.0 1.1 11.1 12.7 5.1Banks -21.2 -3.8 1.8 4.8 7.2 -0.9Capital Goods -8.7 -1.9 1.9 4.3 3.2 0.3Commercial & Professional Services 6.4 -1.7 1.3 0.1 4.0 9.5Consumer Durables & Apparel 0.3 -9.7 -3.0 6.2 10.3 10.7Consumer Services 2.4 -2.8 0.0 0.0 2.3 12.6Diversified Financials -19.0 -1.5 1.7 6.5 8.7 -4.8Energy 14.4 6.0 -0.1 -2.8 -4.1 -7.9Food & Staples Retailing 3.9 1.6 -5.6 -10.9 -12.9 -15.0Food Beverage & Tobacco 19.1 3.7 0.0 -5.3 -2.8 4.8Health Care Equipment & Services 13.3 -2.3 -1.3 -1.9 -2.6 9.2Household & Personal Products 6.1 -1.5 -0.1 -1.1 2.1 9.7Insurance -6.1 4.5 1.4 3.9 8.6 6.6Materials -9.2 -2.8 1.0 5.8 2.3 -2.3Media 2.6 -0.9 -0.2 -1.0 -0.9 0.0Pharmaceuticals Biotechnology & Life Sciences 18.5 6.0 3.8 -3.9 -6.0 3.0Real Estate -13.1 -9.3 -2.1 3.4 6.2 10.5Retailing 11.3 -3.0 -2.4 -0.7 4.2 12.7Semiconductors & Semiconductor Equipment 10.2 -2.9 -0.6 2.3 5.7 9.0Software & Services 7.6 0.7 -8.7 2.4 14.1 12.1Technology Hardware & Equipment -17.3 -15.2 -10.5 3.5 -4.8 -16.6Telecommunication Services 7.4 -0.2 -3.5 -5.2 -11.0 -6.4Transportation -7.1 -1.2 0.4 1.8 6.1 6.3Utilities -5.3 -6.4 -4.4 -4.7 -4.1 -2.8Consumer Discretionary -2.3 -4.8 -0.9 4.3 6.8 7.3Consumer Staples 15.6 2.9 -0.8 -5.7 -3.8 2.5Energy 14.4 6.0 -0.1 -2.8 -4.1 -7.9Financials -16.9 -1.6 1.5 4.8 7.8 0.8Health Care 18.0 5.1 3.2 -3.7 -5.7 3.7Industrials -6.9 -1.8 1.7 3.6 3.6 2.1Information Technology -1.3 -5.9 -7.5 2.7 5.8 1.8Materials -9.2 -2.8 1.0 5.8 2.3 -2.3Telecommunication Services 7.4 -0.2 -3.5 -5.2 -11.0 -6.4Utilities -5.3 -6.4 -4.4 -4.7 -4.1 -2.8
Relative Total Returns vs. Market
Relative sector performance around the LTRO announcement
Source: Datastream, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
22
The implications of QE for equity investorsSeptember 17, 2012
Recent Sector performance
Source: MSCI, Factset, Morgan Stanley Research
Its not too late to buy commodity sectorsMaterials remains the worst performer over the last 6m while Energy has underperformed over every time frame shown bar 1 week.
USD % Europe$bn Total 1W 1M 3M 6M 12M YTD
Europe 6,818 100.0 0.0 0.0 0.0 0.0 0.0 0.0
Automobiles & Components 168 2.5 1.7 -1.2 3.7 -7.4 8.0 12.6Banks 680 10.0 3.1 8.1 6.7 -2.0 -0.9 5.3Capital Goods 567 8.3 0.8 0.4 2.2 -2.8 0.2 0.0Commercial & Professional Service 94 1.4 -1.6 -1.0 -4.1 3.4 7.9 7.7Consumer Durables & Apparel 137 2.0 -5.3 -6.2 -4.7 -5.2 0.4 8.0Consumer Services 59 0.9 -0.5 -0.3 1.0 8.3 8.4 10.4Diversified Financials 227 3.3 5.1 11.0 3.4 -7.5 -3.8 -1.0Energy 790 11.6 0.5 -1.6 -1.5 -4.9 -2.9 -8.7Food & Staples Retailing 114 1.7 -2.0 0.6 1.3 -0.2 -13.8 -15.4Food Beverage & Tobacco 768 11.3 -3.9 -5.1 -5.8 4.0 5.4 1.6Health Care Equipment & Services 84 1.2 -1.2 0.1 -4.6 9.2 5.5 6.0Household & Personal Products 109 1.6 -2.2 -1.8 -2.9 8.4 10.9 12.7Insurance 352 5.2 1.8 4.5 10.8 5.9 18.8 13.4Materials 648 9.5 1.7 -0.5 -1.8 -6.2 -7.6 -2.2Media 119 1.7 -0.8 -0.4 2.5 2.4 2.7 1.9Pharmaceuticals Biotechnology & 735 10.8 -1.9 -2.9 -1.0 9.3 7.3 1.2Real Estate 67 1.0 -0.7 -2.1 0.8 2.9 -3.4 7.3Retailing 100 1.5 -3.9 -3.6 -0.9 6.0 10.7 8.0Semiconductors & Semiconductor 48 0.7 -0.8 -5.9 -4.6 1.2 3.6 3.7Software & Services 96 1.4 0.5 3.2 5.5 5.1 21.9 20.3Technology Hardware & Equipmen 54 0.8 4.0 -1.5 -8.6 -18.3 -34.1 -22.8Telecommunication Services 419 6.1 0.0 -1.4 -3.0 1.2 -12.7 -10.6Transportation 75 1.1 0.4 0.7 1.0 -1.0 5.8 7.0Utilities 307 4.5 1.4 5.0 1.2 1.5 -7.4 -4.3
Consumer Discretionary 583 8.6 -1.7 -2.6 0.3 -1.4 5.5 8.2Consumer Staples 991 14.5 -3.5 -4.2 -4.7 3.9 3.2 0.2Energy 790 11.6 0.5 -1.6 -1.5 -4.9 -2.9 -8.7Financials 1,327 19.5 2.9 7.0 6.9 -0.7 3.2 6.3Health Care 819 12.0 -1.8 -2.6 -1.4 9.3 7.1 1.7Industrials 736 10.8 0.4 0.3 1.2 -1.8 1.7 1.7Information Technology 198 2.9 1.1 -0.4 -1.1 -3.0 -3.1 1.7Materials 648 9.5 1.7 -0.5 -1.8 -6.2 -7.6 -2.2Telecommunication Services 419 6.1 0.0 -1.4 -3.0 1.2 -12.7 -10.6Utilities 307 4.5 1.4 5.0 1.2 1.5 -7.4 -4.3
Price Return Relative to Europe - Local Currency %
Market Cap
Defensives remain outperformers on 6m viewThe best performers over the last 6m are Healthcare, Consumer Staples, Utilities and Telecoms.
M O R G A N S T A N L E Y R E S E A R C H
23
The implications of QE for equity investorsSeptember 17, 2012
The impact of US monetary intervention on sector performance
Source for all charts: Datastream, MSCI, Morgan Stanley Research
With the exception of QE1, Fed intervention is bullish for Energy
QE is bullish for Materials
80
90
100
110
120
130
140
150
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Ener
gy -
Rela
tive
Pric
e In
dex
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
Industrials outperformed post QE but not Operation Twist
75
80
85
90
95
100
105
110
115
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Indu
stria
ls -
Rel
ativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
60
70
80
90
100
110
120
130
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Mat
eria
ls -
Rela
tive
Pric
e In
dex
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
QE has mixed influence on Consumer Discretionary
80
90
100
110
120
130
140
150
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Con
sum
er D
iscr
etio
nary
- Re
lativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
The impact of US monetary intervention on sector performance
QE is bearish for Telecoms
Health Care usually underperforms post QE
70
80
90
100
110
120
130
140
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Tele
com
mun
icat
ion
Serv
ices
- Re
lativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
QE is bearish for Utilities
40
50
60
70
80
90
100
110
120
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Util
ities
- R
elat
ive
Pric
e In
dex
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
90
100
110
120
130
140
150
160
170
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Hea
lth C
are
- Rel
ativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
QE has not been a bullish signal for Financials
20
30
40
50
60
70
80
90
100
110
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Fina
ncia
ls -
Rel
ativ
e Pr
ice
Inde
x
Nov-08 Mar-09 Aug-10 Nov-10 Sep-11
Nov-08 = Fed announces purchase of agency MBSMar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson HoleNov-10 = QE2 startsSep-11 = Operation Twist starts
Source for all charts: Datastream, MSCI, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
Appendix – QE and sector 12m PE and EPS trendsQE vs 12m PE and EPS for Energy
QE vs 12m PE and EPS for Consumer DiscretionaryIndustrials
6
8
10
12
14
16
18
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-126
7
8
9
10
11
12
13
14
15
16Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
Consumer Discretionary
6
8
10
12
14
16
18
20
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-122
3
4
5
6
7
8
9
10Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
QE vs 12m PE and EPS for Industrials
Energy
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-1210
12
14
16
18
20
22
24Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
QE vs 12m PE and EPS for MaterialsMaterials
0
2
4
6
8
10
12
14
16
18
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-120
5
10
15
20
25
30
35
40Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
Source for all charts: Datastream, MSCI, IBES, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
Appendix – QE and sector 12m PE and EPS trendsQE vs 12m PE and EPS for Health Care
QE vs 12m PE and EPS for Consumer StaplesInformation Technology
6
8
10
12
14
16
18
20
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-122.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
Consumer Staples
10
11
12
13
14
15
16
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-128.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
QE vs 12m PE and EPS for IT
Health Care
8
9
10
11
12
13
14
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-126.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
QE vs 12m PE and EPS for FinancialsFinancials
0
2
4
6
8
10
12
14
16
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-122
3
4
5
6
7
8
9
10
11
12Nov-08
Nov-08 = Fed announces purchase of agency MBS Mar-09 = Further purchase of agency MBS and USTs announcedAug-10 = QE2 flagged at Jackson Hole Nov-10 = QE2 starts Sep-11 = Operation Twist starts
Mar-09 Aug-10 Nov-10 Sep-11
N12M PE
N12M EPS (RHS)
Source for all charts: Datastream, MSCI, IBES, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
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The implications of QE for equity investorsSeptember 17, 2012
Disclosures
Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as financial advisor to BAE Systems plc ("BAE Systems") in relation to discussions with European Aeronautic Defence and Space Company EADS N.V. regarding a possible combination of their businesses through the creation of a dual listed company structure, as announced on 12 September 2012. BAE Systems has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report.
Morgan Stanley & Co. Limited is acting as financial advisor to Groupama SA ("Groupama") in relation to the agreed disposal of Gan Eurocourtage to Allianz SE ("Allianz") as announced on 8 June 2012. Groupama has agreed to pay fees to Morgan Stanley & Co. Limited for its financial services. Please refer to the notes at the end of the report.
Morgan Stanley is acting as financial advisor to Ariba, Inc. ("Ariba") in connection with its definitive agreement to be acquired by SAP America, Inc., a subsidiary of SAP AG, as announced on May 22, 2012. The proposed transaction is subject to customary closing conditions, including a shareholder vote for Ariba, and regulatory approvals. Ariba has agreed to pay fees to Morgan Stanley for its financial services that are contingent upon the consummation of the proposed transaction. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. Please refer to the notes at the end of the report.
Morgan Stanley & Co. Limited is acting as financial adviser to Ryanair Holdings plc in relation to the proposed cash offer for Aer Lingus Group plc. Morgan Stanley & Co International plc acts as corporate broker to Ryanair Holdings plc. Please refer to the notes at the end of the report.
Prices as of 14 September 2012: BT GROUP (£ 2.31) VODAFONE GROUP (£ 1.74) TULLOW OIL (£ 14.50) SAIPEM ORD (€ 39.92) NOVARTIS (SFr 55.70) ROCHE HOLDING GENUSS (SFr 175.80) SANOFI (€ 67.16) IMPERIAL TOBACCO GROUP (£ 23.06) BRITISH AMERICAN TOBACCO (£ 31.70) ING GROEP (€ 6.89) SAP STAMM (€ 54.77) DASSAULT SYSTEMES (€ 79.07) MUENCHENER RUECKVERSICH. (€ 124.45) PRUDENTIAL (£ 8.54) RIO TINTO PLC (£ 32.44) EADS (€ 25.81) RYANAIR HOLDINGS (€ 4.33) AP MOLLER MAERSK B (DKK 41440.00) HSBC HOLDINGS (GB) (£ 5.84) SWEDBANK (SEK 122.50) BARCLAYS (£ 2.29) REED ELSEVIER (GB) (£ 6.03) INTERCONTINENTAL HOTELS (£ 16.46) VOLKSWAGEN STAMM (€ 151.50) ANHEUSER-BUSCH INBEV (€ 64.97) AFRICAN BARRICK GOLD (£ 4.67) UNIBAIL-RODAMCO (€ 163.65) ROYAL DUTCH SHELL B (£ 23.20) SCHNEIDER ELECTRIC (€ 52.39) LANXESS (€ 67.31) UBS NAMEN (SFr 12.57) BNP PARIBAS (€ 40.19) AEGON (€ 4.50) ALLIANZ (€ 96.47) NESTLE (SFr 58.65) DEUTSCHE TELEKOM (€ 9.69) TERNA (€ 2.92) IBERDROLA (€ 3.81) ATLANTIA (€ 12.38) RWE STAMM (€ 35.68) UCB (GROUPE) (€ 43.73) BG GROUP (£ 12.95) AKZO NOBEL (€ 48.64) HOME RETAIL GROUP (£ 0.95) SES A-FDR (€ 20.71)
Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.
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The implications of QE for equity investorsSeptember 17, 2012
DisclosuresMorgan 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. As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, Morgan Stanley & Co International plc and its affiliates.For important disclosures, stock price charts and equity 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: Research Management), New York, NY, 10036 USA.For valuation methodology and risks associated with any price targets referenced in this research report, please email morganstanley.research@morganstanley.com with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.
Analyst CertificationThe 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: Graham Secker.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
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Important US Regulatory Disclosures on Subject CompaniesThe following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Ronan Carr - Vodafone Group(common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.As of August 31, 2012, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Akzo Nobel, Allianz, British American Tobacco Plc, Deutsche Telekom, EADS, Imperial Tobacco, InterContinental Hotels Group, Munich Re, Nestle, Novartis, Prudential plc, Reed Elsevier NV, Roche, Royal Dutch Shell, Ryanair, Sanofi SA, SAP AG, SES, Unibail-Rodamco.Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of AEGON, Akzo Nobel, BNP Paribas, Deutsche Telekom, HSBC, Iberdrola SA, Royal Dutch Shell, RWE AG, UBS, Unibail-Rodamco, Vodafone Group, Volkswagen.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, Atlantia S.p.A., Barclays Bank, BNP Paribas, BT Group plc, Deutsche Telekom, EADS, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Nestle, Novartis, Prudential plc, Roche, Royal Dutch Shell, RWE AG, Ryanair, Sanofi SA, SAP AG, SES, UBS, Unibail-Rodamco, Vodafone Group, Volkswagen.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk, Atlantia S.p.A., Barclays Bank, BG Group, BNP Paribas, British American Tobacco Plc, BT Group plc, Dassault Systemes SA, Deutsche Telekom, EADS, Home Retail Group, HSBC, Iberdrola SA, Imperial Tobacco, ING, InterContinental Hotels Group, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Ryanair, Saipem, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, Barclays Bank, BG Group, BNP Paribas, BT Group plc, Deutsche Telekom, EADS, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Ryanair, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.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: AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk, Atlantia S.p.A., Barclays Bank, BG Group, BNP Paribas, British American Tobacco Plc, BT Group plc, Dassault Systemes SA, Deutsche Telekom, EADS, Home Retail Group, HSBC, Iberdrola SA, Imperial Tobacco, ING, InterContinental Hotels Group, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Ryanair, Saipem, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.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: AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk, Barclays Bank, BG Group, BNP Paribas, British American Tobacco Plc, BT Group plc, Deutsche Telekom, EADS, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Ryanair, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, Terna, Tullow Oil, UBS, UCB S.A., Unibail-Rodamco, Vodafone Group, Volkswagen.
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The implications of QE for equity investorsSeptember 17, 2012
DisclosuresAn employee, director or consultant of Morgan Stanley is a director of Prudential plc. This person is not a research analyst or a member of a research analyst's household.Morgan Stanley & Co. LLC makes a market in the securities of AEGON, Anheuser-Busch InBev, Barclays Bank, British American Tobacco Plc, BT Group plc, HSBC, ING, InterContinental Hotels Group, Novartis, Prudential plc, Reed Elsevier NV, Roche, Royal Dutch Shell, Ryanair, Sanofi SA, SAP AG, UBS, Vodafone Group.Morgan Stanley & Co. International plc is a corporate broker to BG Group, Imperial Tobacco, Ryanair, Tullow Oil.The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
STOCK RATINGSMorgan 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.
Global Stock Ratings Distribution (as of August 31, 2012)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 Investment Banking Clients (IBC)Stock Rating % of % of % of Category Count Total Count Total IBC Rating Category Overweight/Buy 1108 37% 445 41% 40%Equal-weight/Hold 1283 43% 499 46% 39%Not-Rated/Hold 109 4% 34 3% 31%Underweight/Sell 469 16% 115 11% 25%Total 2,969 1093
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 RatingsOverweight (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.
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The implications of QE for equity investorsSeptember 17, 2012
DisclosuresAnalyst Industry ViewsAttractive (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 CustomersCiti Investment Research & Analysis (CIRA) research reports 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 CIRA research reports 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, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures.For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html.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 DisclosuresMorgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of AEGON, African Barrick Gold Plc, Akzo Nobel, Allianz, Anheuser-Busch InBev, AP Moller-Maersk, Atlantia S.p.A., Barclays Bank, BNP Paribas, British American Tobacco Plc, Deutsche Telekom, EADS, Home Retail Group, HSBC, Iberdrola SA, Imperial Tobacco, ING, LANXESS, Munich Re, Nestle, Novartis, Prudential plc, Rio Tinto Ltd, Roche, Royal Dutch Shell, RWE AG, Sanofi SA, SAP AG, Schneider Electric, SES, Swedbank, UBS, Unibail-Rodamco, Vodafone Group, Volkswagen.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.Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell any security/instrument or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, 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 securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons.With the exception of information regarding Morgan Stanley, Morgan Stanley Research is 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 equity research coverage
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The implications of QE for equity investorsSeptember 17, 2012
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The implications of QE for equity investorsSeptember 17, 2012
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The implications of QE for equity investorsSeptember 17, 2012
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