February 20, 2015
AUSTRALIAN STRATEGY & ECONOMICS
Australia Macro+
Out of Sync, but are we Out of Time?
MORGAN STANLEY RESEARCH
Asia/Pacific
Morgan Stanley Australia Limited+
Secular bull market continues, as Australian bond yields hit new record lows
Chris Nicol
8000
18%
+225%
Daniel Blake
16%
7000
Chris.Nicol@morganstanley.com
+61 (3) 9256 8909
Secular equity bull markets
Daniel.Blake@morganstanley.com
+61 (2) 9770 1579
Antony Conte
Real All Ordinaries (lhs)
Australian 10yr Bond Yield (rhs)
14%
6000
Steven Ye, CFA
39%
12%
+327%
5000
Antony.Conte@morganstanley.com
+61 (2) 9770 1544
+197%
Steven.Ye@morganstanley.com
+61 (2) 9770 1513
10%
+292%
4000
-50%
8%
3000
6%
-54%
2000
+94%
4%
-57%
1000
0
1900
-75%
-39%
2%
0%
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Global Financial Data, Bloomberg, Morgan Stanley
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MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Table of Contents
1.
Global Strategy Outlook – Investing in the Long Cycle
3
2.
Global Macro Outlook – The Battle Against Lowflation
6
3.
Australian Growth Outlook – Lost in Transition
14
4.
Key Themes for 2015 – Out of Sync, but are we Out of Time?
23
5.
10 Surprises that Would Matter
33
6.
Private Wealth Manager – Model Portfolios & Asset Allocation
36
2
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Global Strategy Outlook - Investing in the Long Cycle
3
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Cross-Asset Strategy – “Melt Up” > “Melt Down”
4
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Cross-Asset Strategy – Detailed Markets Outlook
Source: Morgan Stanley Cross-Asset Strategy
5
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Global Macro Outlook – Battle Against Lowflation
6
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Global Macro Outlook – Set Up for Longest Expansion Post-1970
Global GDP growth – lower but longer: 3.5% in 2015, 3.9% in 2016
Unsynchronised growth outlook – MS’s cycle assessment
Headline inflation outlook slashed on lower oil prices
Core inflation pushing further away from CB targets near-term
Source: Morgan Stanley Research
7
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
US Growth – Balanced and on Track
Source: Morgan Stanley Research
8
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Europe – Growth and Inflation Bottoming
Note: Estimates are by Morgan Stanley Research
9
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
China – Expect More Easing
Source: Morgan Stanley Research
10
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
China – Expect More Easing
Real growth slowdown – deeper than headlines suggest?
Property slowdown – offset by some infrastructure & better exports
Index
40
40
30
30
20
20
10
10
0
0
-10
-10
Li Keqiang Index
MS-CHEX
Real GDP YoY
-20
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
-20
Real funding costs remain elevated in China
Source: Morgan Stanley Research
China Forecast Summary
11
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Global QEquation – ECB+BoJ = Fed?
ECB & BoJ to inject similar liquidity to Fed’s QE3 program
Aggressive QQE2 program from BoJ – unprecedented in scale
G3 central bank balance sheets still growing relative to GDP
EUR expected to increase in role as cross-border funding currency
Source: BIS, Haver Analytics, Morgan Stanley Global Economics Team Estimates
12
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Oil markets backdrop
Global oil demand has been resilient, and should pick up
Growth in US liquids sees falling world demand on OPEC
Without OPEC cuts, price support relies on cash cost in US$40’s
Marginal breakeven cost (10% hurdle) on 2014-20 liquids additions
Source: IEA, Rystad Energy, Wood Mackenzie Estimates, Morgan Stanley Commodity Research
13
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australian Growth Outlook: Lost in Transition
14
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australia transitioning from resources boom – weak growth outlook for 2015
Delivering Australia an ‘income recession’ on our forecasts
Commodity price boom unwinding; gauging depth of correction
120
yoy % pt
Index
20%
f/cast
100
15%
80
10%
60
8%
% yoy
% yoy
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
5%
40
0%
20
1990
-5%
1994
1998
2002
2006
2010
2014
-4%
1988
-4%
1991
1994
1997
GDP
Impact on real income
Terms of trade
MS forecast
2000
2003
Domestic Demand
2006
2009
2012
2015
Gross Domestic Income
RBA f/cast (Nov)
Policy strategy: Housing-Led, Infrastructure-Enabled Recovery
Near-recessionary outlook for domestic demand in 2015
% of GDP
7%
9%
% yoy
6%
6%
5%
4%
3%
3%
2%
0%
1%
0%
1980
1985
Residential
1990
Non-residential
1995
2000
Engineering - private
Source: ABS, RBA, Morgan Stanley Research
2005
2010
Engineering - for public
-3%
1986
1990
1994
1998
GDP growth
2002
2006
2010
2014
Domestic demand growth
15
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Housing market has taken up the baton - key driver of East Coast Recovery
RBA has taken cash rate to record lows, and real rates to zero
House price & activity lift-off from 2013, initially boosted confidence
90%
8%
National Clearance Rate
Index
Housing-Led
Recovery
7%
115
Budget, 13 May
80%
110
70%
105
60%
100
50%
95
40%
90
30%
Mar-2011 Sep-2011 Mar-2012 Sep-2012 Mar-2013 Sep-2013 Mar-2014 Sep-2014
85
6%
5%
4%
3%
2%
1%
0%
1993
1995
1997
1999
RBA target band
2001
2003
2005
Headline inflation
2007
2009
Underlying inflation
2011
2013
2015
Nominal cash rate
Lower for longer rates expected to support ‘long cycle’ in resi
Auction Clearance Rate (lhs)
Dwelling Prices (rhs)
Consumer sentiment (rhs)
Wealth effect crucial for consumers to tap into high savings
% yoy, nominal
'000s, trend
14%
'000s, trend
210
210
Long cycles
f/cast
12%
190
190
170
170
150
150
10%
8%
6%
4%
130
110
1985
130
110
1989
1993
1997
RBA trough cycle
2001
2005
RBA easing cycle
2009
2013
Building approvals
Source: ABS, RBA, RP Data, Rismark, Morgan Stanley Research Forecasts
2%
0%
1996
1998
2000
2002
Savings rate
2004
2006
Income growth
2008
2010
2012
2014
2016
Consumption growth
16
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
But after a solid start to the year, four shocks: Commodity, Income, Housing & Fiscal
Commodity: Weaker ToT on supply shock and China rebalancing
US$/t
Income: Household income growth to slow even more in 2015
% yoy
US$/t
200
400
160
320
12%
10%
Mix boost
8%
120
240
6%
Mix drag
4%
80
160
2%
40
80
0
2000
0
2002
2004
2006
Iron Ore (lhs)
2008
2010
Thermal Coal (lhs)
2012
2014
-2%
1999
2001
Hours worked
Hard Coking Coal (rhs)
3m/3m ann.
2003
2005
2007
2009
2011
2013
2015
2016
Housing: Macro-prudential warnings impact price expectations
20%
0%
Index
200
Wage Inflation
Total Compensation of Employees
Fiscal: Alarmist Budget narrative has hit animal spirits
3
z-score
2
15%
180
1
10%
160
0
140
-1
5%
0%
-2
120
-5%
-3
100
-10%
-15%
2009
80
2010
2011
Australian median house prices (lhs)
2012
2013
2014
House price expectations index (rhs)
Source: ABS, RBA, RP Data, Rismark, Morgan Stanley Research Forecasts
-4
-5
2000
2002
2004
Consumer Sentiment
2006
2008
2010
Family Finances - Year Ahead
2012
2014
Business confidence
17
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
RBA reacts to deeper slowdown and higher unemployment than expected
We see ~200k jobs (2% of employment) still at risk from capex cliff
Weak domestic demand outlook sees unemployment peak near 7%
8
% yoy
12%
6
10%
4
8%
2
6%
0
4%
-2
2%
* Leading by 6 months
-4
1979
0%
1983
1987
1991
1995
1999
2003
Domestic demand growth* (lhs)
2007
2011
2015
Unemployment rate (rhs)
RBA forecasts lowered in February’s Statement on Monetary Policy
No inflation pressure in the outlook, given soft labour market
5%
7%
4.0%
6%
4.5%
RBA GDP Forecasts
Real GDP Grow th
4%
f/cast
5%
3.75
5.0%
3%
4%
3%
6.0%
2%
6.5%
2%
3.25
2.3
2.8
2.75
2.50
2.1
2.25
1.5
1%
M S Forecasts
(Dotted)
7.0%
Source: ABS, Morgan Stanley Research
2Q17
4Q16
2Q16
4Q15
2Q15
0%
4Q14
Unemployment rate (rhs, inverted)
2016
2Q14
2014
4Q13
2012
2Q13
Non-Tradables Inflation
2010
4Q12
2008
2Q12
2006
4Q11
2004
2Q11
1%
2002
2.7
5.5%
3.50
18
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Labour market – underemployment rising after two years of weak jobs growth
Despite data-quality issues, clear trend of rising unemployment
20%
Participation back at 2006 levels; underemployment about 8%
trend
18%
66%
12%
65%
10%
64%
8%
63%
6%
62%
4%
61%
2%
16%
14%
12%
10%
8%
6%
1980
1985
1990
1995
Un/underemployment rate
2000
2005
2010
60%
1980
2015
Youth unemployment (15-24yo)
1990
Participation rate (lhs)
MS Employment Pulse pointing to continued weak jobs growth
z-score
1985
1995
2000
2005
Underemployment rate (rhs)
2010
0%
2015
Unemployment rate (rhs)
Broad-based lift in unemployment, with WA softening quickly
% yoy
7%
3
Unemployment rate, trend
4%
2
6%
3%
1
5%
0
2%
-1
4%
1%
-2
0%
-3
-4
2001
2003
2005
2007
2009
Morgan Stanley Employment Pulse (lhs, 6m lead)
Source: ABS, Morgan Stanley Research
2011
2013
-1%
2015
Employment growth (trend, rhs)
3%
2%
2004
2005
2006
2007
2008
NSW
2009
VIC
2010
2011
QLD
2012
2013
2014
2015
WA
19
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Crucial Stage for Government and Fiscal Policy – Time to Recalibrate
Fiscal policy needs to be re-calibrated to support growth
Net debt to track up towards 20% of GDP in our scenario
% of GDP
21
0.0
% of GDP
18
-0.2
-0.5
15
-0.6
-0.6
12
-1.0
-1.0
-1.0
9
-1.2
-1.5
6
-1.8
-2.0
3
-1.9
-2.0
0
-2.5
-2.5
-2.4
-3.0
2014-15
-3
-2.8
2015-16
2014-15 Budget (May 2014)
2016-17
2017-18
Mid-Year EFO (Dec 2014)
MS Estimate
Infrastructure agenda put at risk by recent State election outcomes
-6
1970-71 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11 2015-16
Underlying cash balance
Net debt
Budget 2014-15 Projections
MS Projectionst
Key infra project (East-West Link) cancelled in VIC; QLD delays likely
A$bn, annualised
140
120
100
80
60
40
20
0
1985
1990
1995
2000
Engineering & non-res - private sector
2005
2010
2015
Engineering & non-res - for public sector
Source: ABS, Commonwealth Treasury, Lend Lease, Morgan Stanley Research Forecasts
20
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
AUD a necessary relief valve – we forecast AUD/USD at 0.69 by end-2015
Japanese portfolio flows into AUD – signs of pause in Nov/Dec
8
Ongoing RBA focus on AUD deprecation as rebalancing tool
110
AUDbn, monthly
6
140
Index
Index
100
100
4
120
90
100
80
80
70
60
60
90
2
80
0
70
-2
-4
-6
2005
Equities
Other Bonds
Sovereign Bonds
AUDJPY (RHS)
2007
2009
2011
60
40
1980
50
2015
2013
Real AUD/USD still almost 1 s.d. above its post-float average
50
1985
1990
Terms of trade (lhs)
1995
2000
MS forecast
2005
2010
Real Australian TWI (rhs)
2015
MS forecast
Although note RBA has not intervened to weaken AUD since 1991
1.10
A$bn
60
1.00
50
0.90
40
2 std deviations
30
0.80
1 std deviation
20
0.70
post-float avg
10
0.60
0
0.50
0.40
1984
-10
1995
1990
1996
2002
2008
Source: ABS, Japan MoF, RBA, Morgan Stanley Research Forecasts
2014
1997
1999
2001
2003
Intervention
2005
2007
2009
2011
2013
RBA Net Reserves
21
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Morgan Stanley Australian Economic Forecasts
Quarterly
2Q15e
3Q15e
1Q14
2Q14
3Q14e
4Q14e
1Q15e
4Q15e
1Q16e
2Q16e
3Q16e
4Q16e
% qoq
% yoy
1.0
3.0
0.5
2.7
0.3
2.7
0.5
2.4
0.3
1.7
0.3
1.5
0.4
1.5
0.4
1.4
0.6
1.7
0.7
2.0
0.7
2.4
0.7
2.7
% qoq
% yoy
% qoq
% yoy
% qoq
% yoy
% qoq
% yoy
% qoq
% yoy
% qoq
% yoy
% qoq
% yoy
0.5
2.3
0.3
2.2
0.5
2.3
5.6
9.3
0.2
-3.6
-4.5
-6.8
0.2
-1.4
0.8
2.7
0.4
2.3
0.7
2.6
1.0
7.5
1.2
-1.8
-1.6
-6.3
0.7
-0.7
0.5
2.5
0.8
1.7
0.6
2.3
-0.9
6.8
-2.6
-5.6
-4.5
-3.6
-2.7
-2.8
0.4
2.2
0.4
2.0
0.4
2.2
3.0
8.9
-2.6
-3.9
1.2
-9.1
-0.6
-2.5
0.4
2.1
0.5
2.1
0.4
2.1
1.5
4.6
-3.3
-7.2
1.2
-3.7
-1.4
-4.0
0.5
1.8
0.6
2.3
0.5
2.0
1.5
5.1
-3.3
-11.3
1.1
-1.1
-1.3
-5.9
0.5
1.8
0.7
2.2
0.5
1.9
0.8
7.0
-2.6
-11.3
1.0
4.6
-1.1
-4.3
0.5
1.9
0.7
2.5
0.6
2.0
0.8
4.7
-2.3
-11.1
1.0
4.4
-0.9
-4.5
0.5
2.0
0.8
2.8
0.6
2.2
0.5
3.6
-1.0
-9.0
0.9
4.1
-0.3
-3.5
0.6
2.1
0.8
3.0
0.6
2.3
0.0
2.1
-0.9
-6.7
0.9
3.9
-0.3
-2.4
0.6
2.2
0.8
3.1
0.6
2.4
0.0
1.3
-0.1
-4.2
0.9
3.8
0.1
-1.3
0.7
2.4
0.8
3.2
0.7
2.6
0.0
0.5
0.6
-1.4
0.9
3.7
0.5
0.1
Gross national expenditure
% qoq
% yoy
-0.1
0.8
1.7
1.8
-0.4
1.3
0.0
1.1
0.0
1.2
0.0
-0.5
0.1
0.1
0.2
0.3
0.4
0.7
0.4
1.1
0.5
1.5
0.7
2.0
Net export contribution
qtr % pt
yr % pt
1.0
2.2
-0.8
1.1
0.8
1.6
0.5
1.5
0.4
0.9
0.3
1.9
0.2
1.4
0.2
1.1
0.2
0.9
0.3
0.9
0.2
0.9
0.1
0.8
Real GDP by expenditure
Real GDP growth
Household consumption
Government consumption
Total Consumption
Private dwelling investment
Private business investment
Public investment
Total Investment
Nominal growth, inflation, unemployment & policy rates
Nominal GDP growth
CPI (headline)
CPI (underlying)
qtr % pt
yr % pt
1.0
4.8
0.3
3.6
-0.1
2.7
0.6
1.8
0.4
1.3
0.7
1.7
1.1
2.9
1.2
3.5
1.6
4.7
1.4
5.4
1.2
5.5
1.3
5.7
% qoq
% yoy
% qoq
% yoy
0.6
2.9
0.5
2.7
0.5
3.0
0.7
2.8
0.5
2.3
0.4
2.5
0.2
1.7
0.7
2.2
-0.1
1.1
0.6
2.4
0.6
1.2
0.5
2.2
1.0
1.7
0.8
2.6
0.6
2.0
0.4
2.3
0.7
2.8
0.7
2.4
0.7
2.9
0.6
2.5
0.9
2.9
0.9
2.7
0.4
2.7
0.4
2.6
Unemployment rate
%, eop
5.8
6.0
6.1
6.1
6.3
6.5
6.7
6.8
6.8
6.7
6.7
6.7
RBA target rate
%, eop
2.50
2.50
2.50
2.50
2.00
1.75
1.75
1.75
1.75
2.00
2.25
2.50
Source: ABS, Morgan Stanley Research. E = Morgan Stanley Research Estimates
22
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australian Equity Market Themes
23
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Summary of Morgan Stanley Global and Australian Macro+ Views
Global Macro Outlook – Lower but Longer; Battling Lowflation
Key Market Themes
We expect global GDP growth to average 3.5%Y in 2015 and 3.9%Y in
2016, revised down from 3.7%Y and 4.0%Y in September. The global
economy remains out-of-sync, and brittle in nature as Europe & Japan
struggle with sustainable growth and as large EM economies transition
their growth models slowly. The US should grow 2.9% in 2015, helped
by lower energy costs and supportive fiscal policy. We have lowered
growth estimates for China to 7.0%Y in 2015, reflecting weaker-thanexpected fixed asset investment, particularly in property development.

The dominant theme for central banks in 2015 is their battle against
“lowflation”, initiated by actions from BoJ, the ECB and the PBoC. We
continue to see the Fed hiking only after January 2016 against a
backdrop of low rates and ample liquidity. Please refer to our 2015
Global Macro Outlook: The Battle Against Lowflation for more detail.
Australian Macro Outlook – Shocks to the Economy a SpeedBump for the Transition
We are now bottom of consensus for Australian GDP growth in 2015.
Four shocks to the economy have caused us to be more cautious:
1) faster terms of trade deterioration than expected given the supply
shock and China’s accelerated rebalancing, 2) an alarmist Budget
narrative dampening consumer spirits, 3) a stronger housing recovery
in 2014 forcing a mixed policy outlook for 2015, and 4) a household
income shock given job losses and negative mix effect from the
resources transition. This all paints a negative picture and puts
domestic demand close to recessionary levels in 2015. See Asia
Insight: Lost in Transition? for more detail
We remain cautious on banks as we expect APRA to follow the FSI’s
recommendations on higher capital requirements, which will impact
ROEs. We recommend a portfolio rotation toward non-bank financials,
FX earners, dividend growers and structural growers. Please see our
Asia Insight: It's Not Easy Being Different for more detail.
Negative Earnings Momentum: We are concerned that the downgrade
cycle will broaden from resources to industrials through 1H15 results, and
that FY15 market earnings could finish in negative territory (currently 3%).
Rate Cut Playbook: We advise ‘minding the gap’ for cyclical earnings
between slowing growth momentum and a behind-the-curve RBA response.


Assessing Risk-Reward in Resources: Supply is driving commodity
markets, with metals like copper, zinc and alumina best placed. Bulks are
now abundant, with cost curves low and flat. Oil has near-term risk, but
should also be one of the earliest to recover given rapid decline rates.
The Role of Yield: Our Global Chief Economist notes a ‘triple glut’ of
savings, oil and liquidity is driving bond yields to record low levels. We see
support for Australian bond-proxy and blue-chip yield, particularly where it
can be paired with a defensive earnings stream or growth.


M&A Triggers: With the AUD below 80c, we look for M&A activity when
the value of market incumbency and asset footprint falls below what the
market is willing to pay for the near-term earnings outlook.
Key Portfolio Tilts

Underweight Banks on FSI: We moved underweight the sector in
September 2014, with concerns centering on: 1) the FSI leading to more
onerous capital requirements, which will depress sustainable ROEs,
2) any business credit recovery will be ROE-mix negative, 3) the upgrade
cycle has come to an end, and 4) sector valuations remain elevated.

Too Early on Resources: We are also modestly underweight materials
and energy, with a preference for large caps that can benefit from scale and
cost-curve advantages through the final phase of the commodity cycle.

Buying Global Earners and Yield: With our 0.69 end-2015 AUD/USD
forecast and a ‘lower for longer’ cash rate and yield outlook, we remain
overweight these themes within our Model Portfolio.
24
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Theme 1 - Negative earnings momentum
Dec 2014 saw largest 1M earnings downgrade since GFC
Industrial-ex-Financial valuations not set up for downgrades
x
1.5
23
1.0
21
0.5
19
0.0
17
-0.5
15
-1.0
13
-1.5
11
-2.0
9
-2.5
7
ASX 200 12MF EPS 1M Revision
-3.0
5
2003
-3.5
10
11
12
13
2004
2005
14
2006
2007
Resources
2008
2009
2010
Industrials x Financials
2011
2012
2013
2014
Banks
Historically, weak earnings momentum justifies lower market
multiples
3M Earnings revisions also trending down
10%
8000
5%
7000
10
20
18
5
16
6000
0%
0
14
5000
-5%
12
-5
4000
-10%
3000
-15%
2000
-20%
ASX 200 3M EPS Revisions
-25%
2001
1000
ASX 200 Index
10
-10
8
PE Lower when EPS
momentum is significantly
negative
-15
-20
6
ASX 200 3M EPS Rev (lhs)
4
ASX 200 12MF PE (rhs)
2
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IBES, Datastream, Bloomberg, Morgan Stanley Research
2013
2014
-25
Dec-01
0
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
25
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Long-term Valuations by Macro Sector
Price to Earnings – ASX 200 – Last 15.3x
Price to Earnings – ASX 200 Resources – Last 14.7x
12 mth fw d
12 mth fw d
25
20
23
18
21
19
16
17
15
14
13
12
11
9
10
7
5
8
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
PE
av g
PE
+/-1 std
Price to Earnings – ASX 200 Industrials ex Financials – Last 17.8x
av g
+/-1 std
Price to Earnings – ASX 200 Financials (GICS) – Last 14.0x
12 mth fw d
12 mth fw d
22
16
20
15
14
18
13
16
12
14
11
12
10
10
9
8
8
02
04
05
06
PE
07
09
av g
Source: RIMES, IBES, Morgan Stanley Research
10
+/-1 std
11
12
14
02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14
PE
av g
+/-1 std
26
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Consensus EPS Growth Forecasts – FY15 forecasts lower again….now at 1.5%
Annual EPS Grow th (%)
FY14-17 consensus EPS growth forecasts
FY2014
FY2015
FY2016
FY2017
5.6
1.5
5.4
10.8
EPSg (%)
S&P/ASX 200
14%
Sector
12%
FY17 = +10.8%
10%
8%
6%
FY14 = +5.6%
FY16 = +5.4%
4%
2%
FY15 = +1.5%
0%
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15
2014
2015
2016
2017
Historical consensus annual EPS growth trends
Energy
-4.7
22.2
-23.7
33.3
Materials
15.0
-26.1
6.9
22.6
Industrials
-13.7
22.0
16.9
10.5
Discretionary
3.0
9.2
10.8
8.2
Staples
0.0
1.1
8.6
6.6
Health Care
9.0
14.5
9.0
11.5
Financials
6.2
8.1
5.5
6.5
Info Tech
5.1
9.6
9.9
11.3
Telcos
3.9
7.0
7.3
8.0
Industry Group
Energy
-4.7
22.2
-23.7
33.3
Materials
15.0
-26.1
6.9
22.6
Capital Goods
-9.7
-13.6
7.2
3.7
Commercial Services & Supplies
-2.4
-3.8
9.9
10.3
-27.9
85.1
25.5
12.1
0.5
2.6
8.6
8.0
-17.7
15.0
11.8
7.8
Transportation
Automobiles & Components
%
Consumer Durables & Apparel
30%
20%
10%
0%
2005
Consumer Services
11.8
12.9
12.4
9.6
2006
Media
-8.1
9.1
9.0
5.4
2007
Retailing
-3.7
1.3
8.7
7.4
2008
Food & Staples Retailing
2.9
2.4
8.0
6.1
2009
Food Beverage & Tobacco
-18.0
-8.8
13.2
10.6
2010
Health Care Equipment & Services
6.4
17.2
7.3
9.5
Pharmaceuticals & Biotechnology
11.4
12.1
10.7
13.4
2011
2012
2013
-10%
2014
2015
-20%
2016
2017
-30%
03
04
05
06
07
08
09
10
Source: RIMES, IBES, Morgan Stanley Research
11
12
13
14
Banks
3.8
9.3
4.1
6.7
23.0
13.0
8.5
7.4
Insurance
8.2
4.1
10.2
7.2
Real Estate
12.3
1.1
7.2
4.5
5.1
9.6
9.9
11.3
Diversified Financials
Softw are & Services
Technology Hardw are & Equipment
-65.4
-27.7
84.9
50.0
Telcos
3.9
7.0
7.3
8.0
Utilities
-6.6
4.4
8.5
6.3
27
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Theme 2- Is the Rate Cut Playbook Different This Time?
Futures market pricing 43bp of RBA cuts over 2015
Rate Cut Cycles: Banks and Builders historical beneficiaries, but
Retail less than often assumed
2.75%
300
Rate Cut Cycle
Bank Relative Index
250
Retail
2.50%
Construction Materials
200
2.25%
150
100
2.00%
50
1.75%
Index
Index
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
160
120
145
110
130
100
115
90
100
80
85
70
2000
2001
Bank Impairment Charges / Total Loans at Historical Lows
Consumer Sentiment Weakens into Christmas
130
2000
As of 3 Feb 2015 (post-cut)
1999
0
Feb-2016
1998
RBA Futures Pricing: 2 December 2014
Nov-2015
1997
Aug-2015
1996
May-2015
1995
Feb-2015
70
2002
2004
2006
WBC-MI Consumer Sentiment (lhs)
2008
2010
2012
2014
Time to buy major HH items (rhs)
Source: Datastream, Westpac-MI, Bloomberg Morgan Stanley Research
28
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Theme 3 - Assessing Risk/Reward in Resources
Oil: Incentive pricing for the estimated 30mb/d of gross additions
needed over 2014-20
Crude Oil: Sharp correction from stable price regime
US$/bbl
160
140
120
100
80
60
40
20
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
Tapis Crude Oil
Chinese growth remains in 2012-2014 downtrend
Bulks and Base Metals trading well below 1H15 forecasts
35
MS 1H15 Forecasts vs Spot
30
25
%
20
15
10
5
0
-5
-10
Source: Bloomberg, Morgan Stanley Research
29
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Theme 4 - The Role of Yield – Low Rates Forecast
M1KE (Months to 1st Rate Hike)
Equity dividend yield now historically inexpensive compared to
bond yields
21
8%
19
6%
17
4.4%
15
4%
2.5%
13
2%
11
0%
9
-2%
7
*ASX 200 vs 10 Yr Aus Gov Yield
-4%
2000
2002
2004
2006
2008
Earnings Yield* gap
2010
2012
2014
Mar-14
May-14
M1KE
Dividend yield gap
Jul-14
Sep-14
Nov-14
Jan-15
Natural Trend from Jan 14
Strong relative performance of yield-linked sectors against falling
Australian 10-year bond yields
Australian yield remains attractive globally
5.5%
5.0%
5
Jan-14
5.5%
4.8%
5.0%
4.7%
4.5%
4.5%
4.1%
4.0%
4.0%
3.9%
4.0%
3.7%
3.5%
3.5%
3.0%
3.0%
3.0%
2.5%
2.7%
2.1%
2.2%
2.0%
2.0%
2.5%
2.0%
1.9%
1.5%
1.5%
ASX 200
S&P 500
FTSE 100
Current
Hang Seng
TOPIX
MSCI AC
World
12MF Dividend Yield (10Yr Average)
Source: IBES, Datastream, Bloomberg, Morgan Stanley Research
30
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
The Role of Yield – The Yield Spectrum
Source: IBES, Thomson Reuters Bloomberg, Morgan Stanley Research
31
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Theme 5 - M&A Triggers – Additives to a Low-Growth Diet
M&A cycle improving but not yet at peak
Global M&A Cycle in Sync
25,000
3,000
20,000
$USbn
$USbn
300
2,500
250
2,000
200
1,500
150
1,000
100
15,000
10,000
500
5,000
50
0
0
1996
1996
1998
2000
2002
2004
2006
2008
2010
2012
1998
2000
2002
2004
2006
2008
2010
2012
2014
2014
US Announced Transaction Values (ann)
Rest of World
Australia (rhs)
M&A Values as Proportion of Market Cap
30%
Proportional M&A Transaction Values seeing
strong growth and now back at trend levels
25%
20%
15%
10%
5%
*Announced M&A transactions per annum. Indices used for Mkt Cap are ASX All Ords and
S&P 500
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Australian M&A as % of Mkt Cap
Source: Dealogic, Bloomberg, ABS, Morgan Stanley Research
2008
2009
2010
2011
2012
2013
2014
US
32
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
10 Surprises that Would Matter – 4 Highlights
33
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
#1: Industrial Earnings Finish FY15 Negative
ASX 200 FY15e EPSg falling sharply, but Resources the major drag
Key Industrial Sector Growth Expectations: Consumer sectors
have come down, but Health Care and Financials remain elevated
Source: Bloomberg, Morgan Stanley Research
#2: Staples outperform REITs?
Structural earnings pressure in CCL and WOW weigh on consumer
staples performance
Rate rebound scenario along with higher food inflation could see
Staples outperform REITs.
34
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
#4 : Fiscal Austerity Abandoned
#3: RBA cuts by more than 50bps
Futures now pricing 50bp in RBA rate cuts, but ‘behind the curve’
response might necessitate more
Electoral cycle should see more stimulatory Budget
2.75%
2.50%
2.25%
2.00%
1.75%
Feb-2015
May-2015
Aug-2015
RBA Futures Pricing: 2 December 2014
Nov-2015
Feb-2016
As of 3 Feb 2015 (post-cut)
Housing market sentiment has come back to more sustainable
levels, but watching for further slowing
90%
National Clearance Rate
Index
Housing-Led
Recovery
Government has retained profile of fiscal austerity, despite
additional shocks to the outlook
% of GDP
115
0.0
110
-0.5
Budget, 13 May
-0.2
80%
-0.6
70%
105
-0.6
-1.0
-1.0
-1.0
-1.2
-1.5
60%
100
50%
95
40%
90
-2.0
-1.8
-1.9
-2.5
-2.5
-2.4
-3.0
2014-15
30%
Mar-2011 Sep-2011 Mar-2012 Sep-2012 Mar-2013 Sep-2013 Mar-2014 Sep-2014
Auction Clearance Rate (lhs)
Dwelling Prices (rhs)
-2.0
-2.8
2015-16
2016-17
2017-18
85
2014-15 Budget (May 2014)
Mid-Year EFO (Dec 2014)
MS Estimate
Consumer sentiment (rhs)
Source: ABS, Datastream, Bloomberg, ABC, Morgan Stanley Research
35
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
MSWM Portfolio and Asset Allocation
36
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
MSWM TAA Strategy – Equities over Cash and Government Bonds
International Equity Country ETF Model Portfolio
MSWM Tactical Asset Allocation Strategy
MSWM TAA - Balanced Investor
Equities
Australian Equities
Global Equities
Listed Property
Fixed Income
Gov t. Bonds
Credit
Cash
Alternatives
Commodities
Hedge Funds
Source: Morgan Stanley Research, MSWM Research
TAA Tilt
Retail Soph.
+5%
+4%
+10%
+8%
0%
0%
Code
Name
Weight
*Bmark
Tilt
VTS
Vanguard US Total Market Shares
51.0%
54.5%
-3.5%
IEU
iShares S&P Europe 350
26.0%
24.7%
1.3%
IJP
iShares MSCI Japan
10.0%
7.9%
2.1%
IEM
iShares MSCI Emerging Markets
11.5%
10.4%
1.1%
1.5%
2.5%
-1.0%
AGF
-10%
-8%
-3%
-1%
-2%
-4%
n.a.
-1%
n.a.
+2%
AMP Capital China Growth Fund
1
*MSCI All Country World Index ex Canada, Australia, NZ, Singapore and Hong Kong.
Benchmark weight adjusted. 1. Including the 2.6% exposure to China H-shares within IEM, in
total we have a 4.1% allocation to China. This represents a 1.75% overweight relative to the
MSCI AC World Index
37
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
MSWM’s Asset Allocation for a Balanced Investor
MSWM Strategic Asset Allocation
MSWM Tactical Asset Allocation
Cash, 6%
Cash, 8%
Australian
Equities, 26%
Fixed Income
- Credit, 16%
Retail
Balanced
SAA
Fixed Income Credit, 13%
Fixed Income Bonds, 10%
Australian
Equities, 31%
Retail
Balanced
TAA
Property, 5%
Fixed Income Bonds, 20%
International
Equities, 25%
Property, 5%
Source: \MSWM Research
International
Equities, 35%
38
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
MSWM Equity Model Portfolios
For more detail, please talk to your Morgan Stanley adviser
Value Portfolio
Growth Portfolio
SRI-Ethical
Portfolio
• Suited to more
conservative
investors, with
preference for
dividends
• Suited to investors
who prefer to invest
in “undervalued”
stocks
• Provides more
balanced mixture of
yield and capital
returns
• Suited to investors
who can tolerate
higher risk
• Performs well under
more bullish growth
conditions
• Suited to investors
who want a socially
responsible
portfolio with above
average dividend
yield
Gross Yield (est: 6.3%)
Gross Yield (est): 5.7%
Gross Yield (est): 5.7%
Gross Yield (est): 6.3%
Income Portfolio
39
39
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australian Equities: Finding Earnings at a Reasonable Price
ANN – Strong Sales and Margin Growth Driving EPS
Good earnings momentum trading at reasonable
multiples:
•Ansell:
MSe 10% EPS growth in F16; beneficiary of
lower input costs; improved demand in Developed
Markets; exposure to Emerging Markets growth;
synergies from BSSI acquisition.
•Oil
Search: rising earnings profile despite lower oil
prices led mainly by production growth; Well placed to
adapt to lower oil prices – break even EBIT ~ $40/bbl;
PNG LNG a relatively cost project with potential for
additional trains.
•Perpetual:
MSe 17% EPS growth in F16; interest
rate cuts to support flows; launch of Global Share
Fund; TRU acquisition; Valuation reasonable relative
to history and peers.
Source: Company presentation.
PPT - Strong Net Flows Aids FUM Growth
40
Source: Company data, Morgan Stanley Research
40
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australian Equities: The Role of Yield
Low interest rates, record low bond yields, supports
defensive yields or yield with a story:
Singtel: Optus Mobile Revenue Showing Recovery
•Duet:
regulated assets with largely predictable revenues;
above industry-average yield; SKI holds a synthetic 14.1%
interest.
•SingTel:
Emerging Asian consumer and demand for
mobile data; Optus turnaround; dividends supported by
steady cash flow from Singapore business.
•AMP:
play on Australian superannuation growth; interest
rate cuts to support flows; strategic position in Chinese
pension market; exercising strong cost disciplines.
Note: Company Data, Morgan Stanley Research
•Lend
Lease: improved visibility of earnings; $36bn
development pipeline, including in urban re-generation;
Government policy to drive future growth in infrastructure
spending.
•Exchange
Duet: Yield Gap to 10yr Bond Yield Relatively High (ppts)
Traded Funds
Source: Company Data, Morgan Stanley Research. y-axis is difference between
distribution yield and 10yr bond yield (ppts)
41
41
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australian Equities: Assessing Risk/Reward in Resources
In Materials – positioned in lower cost, larger cap
miners. In Energy – weighing up growth and balance
sheets:
BHP: Further Reduction in Unit Costs Expected in F15
•BHP:
diversified asset base; low cost producer; levers
to pull; relative value.
•RIO:
low cost producer; capex and opex reductions to
support cash flow; returning capital; gearing just 21%
post buyback; relative value.
•Origin:
integrated energy company; discount to DCF;
our oil price forecasts still see EPS and DPS doubling by
F17, driven mainly by APLNG.
•Oil
Search: rising earnings profile despite lower oil
prices led mainly by production growth; Well placed to
adapt to lower oil prices – break even EBIT ~ US$40/bbl;
PNG LNG a relatively cost project with potential for
additional trains.
Note: Company presentation, Morgan Stanley Research
OilSearch: Unit Cash, Non-Cash & Exploration Costs
Source: Morgan Stanley Research
42
42
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Australian Equities: Global Leaders
Exposure to recovering global growth or weaker AUD:
Industrial Companies with > 30% of Sales Outside
Aus/NZ
•Global
•
Ansell
•
Recall: regulation driving physical document
storage growth; margin expansion opportunities;
acquisitions.
•
Brambles: cost reduction opportunities; tailwinds
from stronger USD; exposure to more defensive
FMCG sectors.
•
Goodman Group: work-in progress across Asia,
US, Europe, UK.
•
James Hardie: exposure to US housing recovery.
•US
•Europe
•
Macquarie Atlas – Key asset is French toll road
APRR. Has significantly lowered debt and interest
costs.
•Asia/EM
•
SingTel
Source: Datastream, Worldscope, Company reports. * based on MS numbers. Stocks43
highlighted are in MSWM Model Portfolios
43
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Stocks Mentioned: Comparison Table
Source: Modelware, Morgan Stanley Research, MSWM Research. Intraday prices 20 Feb 2015 used. *S$4.65 price target converted to $A at 0.944 exchange rate.
44
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Behind It All: The Global Presence of Morgan Stanley
Our global network of analysts cover over 3,300 stocks across the world, bringing the
investment debate to you, regardless of geography
North America
Europe
Asia Pacific
1,047 Stocks
91% of S&P 500 market cap
756 Stocks
83% of MSCI EU market cap
990 Stocks
89% of MSCI Asia market cap
Japan
334 Stocks
81% of TOPIX
Latin America
211 Stocks
75% of MSCI LA market cap
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This communication is not a research report.
Copyright © by Morgan Stanley 2015, all rights reserved.
45
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 20, 2015
Research in Asia – 1,324 Stocks
Korea
China / HK
93 Stocks
351 Stocks
India
Japan
130 Stocks
334 Stocks
Singapore
Taiwan
32 Stocks
92 Stocks
Indonesia
53 Stocks
Australia / NZ
178 Stocks
Malaysia/Thailand/Philippines
61 Stocks
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This communication is not a research report.
Copyright © by Morgan Stanley 2015, all rights reserved.
46
MORGAN STANLEY RESEARCH
Australia Macro+: Out of Sync and Out of Time?
February 19, 2015
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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For valuation methodology and risks associated with any price targets referenced in this research report, please contact the Client Support Team as follows: US/Canada +1 800 303-2495;
Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81 (0)3-6836-9000.
Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: 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: Chris Nicol.
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
The 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:
Antony Conte - Nat Aust Bank(common or preferred stock), Telstra Corporation(common or preferred stock), Westpac Banking(common or preferred stock).
As of December 31, 2014, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research:
BlueScope Steel, Dexus, Goodman Group, Lend Lease Corporation.
Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of AMP Ltd, Commonwealth Bk Aust, Macquarie Group Limited, MMA
Offshore, Westpac Banking.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from AMP Ltd, Commonwealth Bk Aust, Lend Lease Corporation, MMA Offshore,
Nat Aust Bank, Oil Search Ltd., Westpac Banking.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AMP Ltd, BHP Billiton Limited, BlueScope Steel, Brambles
Ltd., Commonwealth Bk Aust, CSL Ltd, Dexus, Domino's Pizza Enterprises Limited, DUET Group, DuluxGroup, Goodman Group, InvoCare Ltd, JB Hi-Fi, Lend Lease Corporation,
Macquarie Group Limited, MMA Offshore, Nat Aust Bank, Navitas Limited, Oil Search Ltd., Origin Energy Ltd., Rio Tinto Ltd, Telstra Corporation, Wesfarmers, Westpac Banking,
Programmed Maintenance Services Limited, Transpacific Industries Group Ltd.
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Disclosure section (cont.)
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AMP Ltd, BHP Billiton Limited,
Commonwealth Bk Aust, DUET Group, IOOF Holdings, Lend Lease Corporation, Macquarie Group Limited, Nat Aust Bank, Rio Tinto Ltd, Westpac Banking.
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: AMP
Ltd, BHP Billiton Limited, BlueScope Steel, Brambles Ltd., Commonwealth Bk Aust, CSL Ltd, Dexus, Domino's Pizza Enterprises Limited, DUET Group, DuluxGroup, Goodman Group,
InvoCare Ltd, JB Hi-Fi, Lend Lease Corporation, Macquarie Group Limited, MMA Offshore, Nat Aust Bank, Navitas Limited, Oil Search Ltd., Origin Energy Ltd., Rio Tinto Ltd, Telstra
Corporation, Wesfarmers, Westpac Banking, Programmed Maintenance Services Limited, Transpacific Industries Group Ltd.
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: AMP Ltd, BHP Billiton Limited, Commonwealth Bk Aust, Domino's Pizza Enterprises Limited, DUET Group, IOOF
Holdings, Lend Lease Corporation, Macquarie Group Limited, Nat Aust Bank, Rio Tinto Ltd, Telstra Corporation, Westpac Banking.
Morgan Stanley & Co. LLC makes a market in the securities of BHP Billiton Limited, Westpac Banking.
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.
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Disclosure section (cont.)
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.
Global Stock Ratings Distribution
(as of January 31, 2015)
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, Equalweight, 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)
Count
% of
Total
Count
Overweight/Buy
1173
35%
320
41%
27%
Equal-weight/Hold
1446
43%
361
46%
25%
Stock Rating Category
% of % of Rating
Total IBC
Category
Not-Rated/Hold
107
3%
14
2%
13%
Underweight/Sell
603
18%
92
12%
15%
Total
3,329
787
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley 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.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as
indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated
below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated
below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX;
Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.
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Disclosure section (cont.)
Important Disclosures for Morgan Stanley Smith Barney LLC Customers
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Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of BHP Billiton Limited, Commonwealth Bk Aust, Lend Lease
Corporation, Macquarie Group Limited, Nat Aust Bank, Origin Energy Ltd., Rio Tinto Ltd, Tabcorp Holdings, Telstra Corporation, Wesfarmers, Westpac Banking.
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MORGAN STANLEY RESEARCH
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February 19, 2015
Disclosure section (cont.)
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Disclosure section (cont.)
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H0113P
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