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 Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH 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. 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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. 47 MORGAN STANLEY RESEARCH Australia Macro+: Out of Sync and Out of Time? February 19, 2015 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. 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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. 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