Asia/GEMs Strategy: Asia Insight: 2013 Outlook: Good Times, Bad Times

November 26, 2012

Asia/GEMs Strategy Asia Insight: 2013 Outlook: Good Times, Bad Times

Our expectation is that 2013 – like 2012 – will see good times and bad times as APxJ/EM equities oscillate unusually rapidly. Of three key macro issues (EU sovereign debt crisis, US fiscal cliff and Chinese growth debate), the closest to resolution is perhaps China. The Morgan Stanley base case is for China’s GDP growth to reaccelerate to 8.2%, which is favourable for APxJ/EM equities’ performance as well as that of cyclicals.

Our 2013 scenario-weighted Target Price is 1,230 (25% upside). We see downside risks as front-end loaded and likely to abate as the year goes on. After a lengthy plateau since early 2011, we forecast 14% US$ EPS growth in 2013 as a base case. Downside risk for earnings is -17% in the bear case versus +25% in the bull. The P/E multiple has room to expand somewhat further after only partially re-rating off the 4Q11 low for the cycle. Our base case envisages 12.7x trailing P/E by year-end 2013 (81st percentile cheapness vs. history) versus 11.5x currently (88th percentile).

EM equities should continue to turn the corner in performance relative to DM equities. We expect APxJ and EM Asia to outperform EM overall in 2013. Near term, we adopt a neutral stance on Japan vs. Asia ex- Japan, based on the Morgan Stanley house forecast of yen weakness, but we suspect this will be a Japan rally to sell longer term. We continue to favour dividend yield and quality. Working with Morgan Stanley bottom-up teams, we issue the third update of our quality stock basket. New inclusions are Bajaj Auto, DiGi.com, HDFC, Hyundai GLOVIS, Larsen & Toubro, Life Healthcare, PGAS, Ping An, Samsung Electronics, Sands China, Tata Consultancy Services and Unilever Indonesia.

We introduce four new themes for 2013: 1) Prefer Cyclicals to Defensives, 2) Prefer State Controlled, 3) Brand Value in EM, and 4) Accounting & Earnings Quality. We also highlight three potential surprises.

Key OW countries: Russia, Poland, Czech, China, and Malaysia. Key OW industries: Real Estate, Banks, Autos, Software, Capital Goods, and Energy.

MSCI EM 2013 Target Price

300

450

600

750

900

1,050

1,200

1,350

1,500

Dec

-05

Mar

-06

Jun-0

6

Sep

-06

Dec

-06

Mar

-07

Jun-0

7

Sep

-07

Dec

-07

Mar

-08

Jun-0

8

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-08

Dec

-08

Mar

-09

Jun-0

9

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-09

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-09

Mar

-10

Jun-1

0

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-10

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-10

Mar

-11

Jun-1

1

Sep

-11

Dec

-11

Mar

-12

Jun-1

2

Sep

-12

Dec

-12

Mar

-13

Jun-1

3

Sep

-13

MSCI EM BenchmarkMSCI EM Index Price TargetMSCI EM Index Bear CaseMSCI EM Index Extreme Bear case*

December 11th, 2006MS GEMs Strategy

Initiation

MSCI EM USD

Target Prices, EPS & PE Assumptions for EM, APxJ & Hang Seng/China Equity indices

Index Target PT %2013 ROE

Price Upside Bull Base Bear Bull Base Bear BaseMSCI EM 1230 25% 110 101 73 14.4 12.7 9.8 14.1%MSCI APxJ 560 28% 44 40 29 16.2 14.5 11.0 13.2%Hang Seng 24800 15% 2220 2060 1650 14.4 12.5 9.2 12.4%HSCEI 13400 29% 1660 1550 1050 11.0 9.0 6.6 17.2%MSCI China 74 26% 7.0 6.4 4.8 13.5 11.6 8.8 15.5%

Scenario Forecasts

2013 EPS Dec-2013 P/E

MS EPS Projection for MSCI EM in 2013

110

101

73

20

30

40

50

60

70

80

90

100

110

120

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Bull

Bear

Base

2013E

Source: IBES, MSCI, Factset, Morgan Stanley Research

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.

M O R G A N S T A N L E Y R E S E A R C H

A S I A / P A C I F I C

Morgan Stanley Asia Limited+ Jonathan F Garner

[email protected] +852 2848 7288

Pankaj Mataney [email protected] +852 2239 7830

Yang Bai [email protected] +852 2239 7685

Corey Ng, CFA [email protected] +852 2848 5523

Morgan Stanley appreciates your support in the Institutional Investor 2013 All-Asia Research and Sales Team Survey. Voting will open in January.

2


November 26, 2012 Asia/GEMs Strategy

2013 Outlook – Good Times, Bad Times

In the days of my youth, I was told what it means to be a man, Now I've reached that age, I've tried to do all those things the best I can. No matter how I try, I find my way into the same old jam. Good times, bad times, you know I've had my share...

– Good Times, Bad Times, Led Zeppelin

It is that time again when, as the Led Zeppelin song reminds us, we should do the best we can. In our case, this means making a 2013 forecast for the APxJ/EM universe. As an asset class within equities, EM has had plenty of good times (1993, 1999-2000, 2003-2007 and 2009), but equally some extremely bad times (1994/5, 1997-98, 2001-02, 2008 and 2011).

EM equities performance in 2013 should be an improvement on 2012 – driven by inflexion in GDP growth and earnings We think we will not be in the “same old jam” again in 2013. However, it is likely to be a year when – as in 2012 – good times and bad times oscillate unusually rapidly under the influence of the three unresolved macro issues that impacted markets in 2012 (EU sovereign debt crisis, US fiscal cliff & growth outlook, and China soft/hard landing debate). Of the three, the closest to resolution is perhaps the China debate, and in a manner (i.e., growth reacceleration) that is favourable to APxJ/EM performance. Our team forecasts that overall EM GDP growth will accelerate from 4.9% in 2012 to 5.4% in 2013 This assumption underpins our call that 2013 performance should be an improvement on 2012, as well as one of our key new themes: cyclicals to outperform defensives. Exhibit 1 shows the calculations underpinning our revised scenario weighted Target Price for MSCI EM of 1230 at year-end 2013 (+25% versus current levels).

Exhibit 1

MSCI EM 2013 Scenario Analysis – Target Price 1,230 (+25% upside) Scenarios 2013 MSCI EM Global Implied

2013 Assigned Dec 2013E Growth Outlook Trailing PE Price Target US$ Return

Outlook Weight EPS 2013 Assumptions* (Dec 2013) Upside (Dec 2013)

Bull Scenario

20%110

(+25%)

Global growth of 3.9% with EM

growth of 6.1%14.4 1585 62%

Base Scenario

60%101

(+14%)


growth of 5.4%12.7 1280 31%

Bear Scenario

20%73

(-17%)


growth of 4.4%9.8 725 -26%

Scenario Weighted Average 1230 25%

Source: Factset, MSCI, Morgan Stanley Research. Data as of Nov 21, 2012

Key Themes of this Report

APxJ/EM equities to grind higher. Policy risks are front-end loaded and may abate in 2H 2013. Our MSCI EM 2013 scenario-weighted Target Price is 1230 (25% upside).

A moderate pickup in EM GDP growth to 5.4% should help earnings growth to resume after a lengthy plateau. We forecast 14% US$ EPS growth in 2013 as a base case (-17% in the bear case versus +25% in the bull).

The P/E multiple should expand further after only partially re-rating off the Q4 2011. Our base case is 12.7x trailing P/E by year-end 2013 (81st percentile to history) versus 11.5x currently (88th percentile).

We retain a 6% OW equities stance in our asset- allocation process. The performance of EM equities should continue to improve relative to DM equities.

We expect Asia ex Japan & EM Asia to outperform EM again in 2013. Near term, we adopt a neutral stance on Japan versus Asia ex Japan based on the Morgan Stanley forecast of yen weakness and look to sell a Japan rally longer term.

Reiterate 2012 Themes: We continue to favour dividend yield and quality. Working with Morgan Stanley bottom-up analyst teams, today we launch the third update of our quality basket: Best Business Models v3.

New 2013 Theme #1: Prefer Cyclicals to Defensives

New 2013 Theme #2: Prefer State Controlled

New 2013 Theme #3: Brand value in EM

New 2013 Theme #4: Accounting & Earnings Quality

Key OW countries are: Russia, Poland, Czech, China, Malaysia, Morocco. Key UW countries are: South Africa, Turkey, Taiwan, Mexico, Philippines and Hungary.

Key OW industries are: Real Estate, Banks, Autos, Software, Capital Goods, Energy. Key UW industries are: Tech Hardware, Diversified Financials, Food Bev & Tobacco, Food Retailing, Consumer Durables & Transportation

We highlight three surprises for 2013: a) naval tensions building further in Asia Pacific, b) Middle East conflict spreads, leading to a prolonged oil price spike, c) accelerated relaxation of exchange controls in Asia.

3



2013 Summary Outlook & 2012 Review

We begin with a summary of our year-ahead forecasts and a review of 2012 versus our expectations a year ago. Exhibit 2 shows our own price target history for MSCI EM Index since inception.

Exhibit 2

Morgan Stanley Target Price History for MSCI EM since Initiation

300

450

600

750

900

1,050

1,200

1,350

1,500

De

c-05

Ma

r-06

Ju

n-0

6S

ep

-06

De

c-06

Ma

r-07

Ju

n-0

7S

ep

-07

De

c-07

Ma

r-08

Ju

n-0

8S

ep

-08

De

c-08

Ma

r-09

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n-0

9S

ep

-09

De

c-09

Ma

r-10

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n-1

0S

ep

-10

De

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Ma

r-11

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n-1

1S

ep

-11

De

c-11

Ma

r-12

Ju

n-1

2S

ep

-12

De

c-12

Ma

r-13

Ju

n-1

3S

ep

-13

MSCI EM BenchmarkMSCI EM Index Price TargetMSCI EM Index Bear CaseMSCI EM Index Extreme Bear case*

December 11th, 2006MS GEMs Strategy

Initiation

MSCI EM USD

Source: MSCI, Factset, Morgan Stanley Research. Data as of Nov 21, 2012. *Eliminated our Extreme bear case scenario.

Exhibit 3 provides a summary of our Target Price calculations for MSCI EM, APxJ, Hang Seng, HSCEI and MSCI China, which are the equity indices directly covered by our team. For other EM equity index targets, please refer to the various year- ahead pieces published by our regional and country equity strategists. We have used the same probability distribution as the Morgan Stanley economics team in their recently published 2013 Outlook: Base Case (60%), Bull Case (20%) and Bear Case (20%). Hence, we have eliminated our previous 10% probability Extreme Bear Case scenario (2008/09 recession or worse).

Exhibit 3

MSCI EM, APxJ, HSI, HSCEI & MXCN Target Prices

Index Target PT %Price Upside Bull Base Bear Bull Base Bear Bull Base Bear

MSCI EM 1230 25%110

(+25%)101

(+14%)73

(-17%) 14.4 12.7 9.8 14.8% 14.1% 11.5%

MSCI APxJ 560 28%44

(+25%)40

(+14%)29

(-17%) 16.2 14.5 11.0 14.1% 13.2% 10.6%

Hang Seng 24800 15%2220

(+14%)2060 (+6%)

1650 (-14%) 14.4 12.5 9.2 13.5% 12.4% 9.9%

HSCEI 13400 29%1660

(+19%)1550

(+11%)1050

(-24%) 11.0 9.0 6.6 18.5% 17.2% 11.7%

MSCI China 74 26%7.0

(+19%)6.4

(+10%)4.8

(-17%) 13.5 11.6 8.8 16.9% 15.5% 11.6%

2013 ROEScenario Forecasts

2013 EPS* Dec-2013 P/E

Source: Factset, MSCI, Morgan Stanley Research. Data as of November 21, 2012. * we also shows the earnings growth relative to 2012 consensus EPS numbers

Morgan Stanley’s economics team’s base case forecast for 2013 suggests, in summary: a) a very subdued DM growth environment of 0.7% GDP growth, with Europe mired in recession, and b) a moderate reacceleration in economic growth in EM to 5.4% from 4.9% in 2012. This would be led by China GDP growth reaccelerating to 8.2%. On this basis, EM would deliver an even more overwhelming majority of global GDP growth than it did in 2012 (see Exhibit 4). Meanwhile, our commodities team’s forecasts for oil and key metals prices are currently somewhat above the forward curves for 2013. Our FX team’s forecasts suggest upside to Asia ex Japan FX parities versus the US dollar. Global core government bond yields will likely remain low.

Exhibit 4

EM share in Global GDP growth is expected to be 90% in 2013

Global Real GDP growth, %

-2

-1

0

1

2

3

4

5

6

7

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Recession shading DM Contribution EM Contribution Period Average

MS Fcast

Source: Morgan Stanley Global Economics Team, Morgan Stanley Research

APxJ / EM EPS growth can begin to reaccelerate in 2013 after two years of tracking sideways In summary, these forecasts suggest an environment where APxJ and EM EPS can begin to reaccelerate after two years of essentially tracking sideways. However, the difficult environment in DM will at a minimum act as a headwind to further global equity market P/E expansion, particularly early on in the year, until some resolution of the US fiscal cliff issue.

Using the economics team’s base case forecast, together with our house FX views and the lagged impact of our margin and revenue proxies, our factor model for EM US$ EPS growth derives a base case forecast for 2013 EPS of US$101, or 14% above the likely year-end 2012 outturn. Consensus is currently US$100. On this basis, ROE should make an inflexion point, rising from here on from 13.2% currently to 14.1%.

4



In the bear case for 2013, EM US$ EPS would decline by 17% to US$73, due to a combination of weaker commodity prices, DM GDP growth and FX losses in a more recessionary/risk-off environment. ROE would fall to 11.5%.

In the bull case for 2013, an early comprehensive resolution of the fiscal cliff, structural reform bearing fruit in Europe and more upside momentum in China’s economic recovery in turn delivering a sustained upside in commodity prices would deliver a rise in EM US$ EPS of 25%. ROE would rise to 14.8%.

Further moderate P/E re-rating is likely Our base case forecast a year ago was for P/E multiple expansion from a level that, at the mid-October 2011 trough of 8.8x, was in the 98th percentile for history for MSCI EM. We targeted 13.0x by year-end 2012 and then revised this down in mid-August 2012 to 12.4x. In the event, the P/E has expanded, but by less than we forecast in the base case, to 11.5x (our bear case forecast was 11.2x. For this year, as discussed in detail below, we forecast a base case of further modest expansion in the trailing P/E to 12.7x (bear -1.5SD is 9.8x, and bull +1SD is 14.4x). This will probably be back-end loaded to 2H 2013.

Our bull scenario for the P/E would be associated with strong and persistent portfolio flows into APxJ/EM, driven by the kind of structural reallocation envisaged by our colleague Rashique Rahman’s work on the needs of institutional investors to upweight on a geographical basis whilst reducing DM weightings. A 2% of assets reweighted towards EM by both institutional and retail investors globally could see as much as US$2trn of new inflows over a medium-term time horizon, which represents a significant proportion of current debt outstanding and equity market capitaliastion. (See Rashique’s joint report FX 2013 Outlook: The Year of JPY Weakness, dated Nov 20, 2012, for more details.)

Exhibit 5

MSCI EM Target Price Decomposition into Multiple Expansion and EPS Growth

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

YT

D

Bu

ll '1

3

Bas

e '1

3

Bea

r '1

3

(Yo

Y %

)

PE Expansion EPS Growth MSCI $ Price Perf (YoY%)

Source: MSCI, FactSet, Morgan Stanley Research. Data as of Nov 21, 2012

Exhibit 5 shows that in our base case, earnings growth will likely contribute about 45% of the forecast upside to MSCI EM Target Price in 2013 with P/E multiple expansion accounting for 55%.

Exhibit 6

MSCI EM trailing P/E and Morgan Stanley projections per different scenarios

12.7

9.8

14.4

5x

10x

15x

20x

25x

30x

De

c-95

De

c-96

De

c-97

De

c-98

De

c-99

De

c-00

De

c-01

De

c-02

De

c-03

De

c-04

De

c-05

De

c-06

De

c-07

De

c-08

De

c-09

De

c-10

De

c-11

De

c-12

De

c-13

Bull

Base

Bear

2013E

Source: MSCI, FactSet, IBES, Morgan Stanley Research. Data as of Nov 21, 2012

Exhibit 7

EM Portfolio Flows (US$tn) Given Allocation Increase

0.6

1.2

2.9

1.0

5.1

2.1

3.5

2.0

0

1

2

3

4

5

6

1% 2% 3.5% 5%

Institutional Reallocation Institutional and Retail Reallocation

Market Cap EM Equity

Market Cap EM Bonds

Source: Morgan Stanley Research estimates, See report “FX 2013 Outlook: The year of JPY Weakness”, dated Nov 20, 2012

5



EM equities absolute and relative performance started to turn the corner in 2012 – When the levee breaks

If it keeps on rainin’, levee’s goin’ to break. When the levee breaks, I'll have no place to stay…

– When the Levee Breaks, Led Zeppelin

EM equities performance has improved in absolute and relative terms this year after a poor performance in 2011. However, after DM’s strong outperformance at the start of 2012, there was no sustained resumption of outperformance in EM for which we argued a year ago, and EM equities lag DM by -150 bps ytd currently.

Exhibit 8

MSCI Indices Total Return Performance YTD 2012 (US$) – Asia Pac x Japan and US best performers

14.7%

12.9% 12.6%11.9% 11.6%

10.1%

1.2% 1.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

MS

CI

AP

xJ

US

A

Eu

rop

e

EM

E

ME

A

Wo

rld

(D

M)

EM

EM

L

atA

m

Ja

pa

n


Within the equities asset class, MSCI APxJ has been the best- performing region in global equities (see Exhibit 8). Indeed, it has outperformed other regional indices in global equities ytd, including the US. EM Asia has also outperformed. Asia ex Japan has outperformed Japan. (See our report with MS strategist Yohei Yamada Japan Equity Strategy: More Bearish than consensus: Initiation with TOPIX target 850 (+11% upside) and 9% nominal EPS growth, dated Jan 26, 2012.) However, Latin America was the worst-performing region, not EMEA as we had thought a year ago. In the event, EMEA rode out the EU trade contraction and European bank deleveraging impact better than we or consensus had thought.

Exhibit 9

MSCI EM Total Return US$ Performance Relative to MSCI World

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

log terms


Further improvement expected in EM equities relative performance versus DM in 2013 We expect EM equities to continue to turn the corner versus DM equities in 2013 and most likely outperform again, led by Asia Pacific ex Japan and EM Asia. EM equities continue to trade at a meaningful P/B discount to DM of 12%, despite delivering an ROE premium of 11%. Meanwhile, our economists forecast that EM GDP – led by EM Asia – will show a positive delta in 2013 versus 2012, whilst DM in aggregate will show a negative delta. This is likely to translate into improved relative EPS momentum between EM and DM than seen over the last couple of years.

6



Exhibit 10

MSCI EM P/Book and ROE Relative to MSCI World – ROE relative decline should abate in 2013

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

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Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

P/Book Relative ROE Relative


Exhibit 11

MSCI EM vs. MSCI World US$ EPS Integers (Rebased to Jan-1992)

0

100

200

300

400

500

600

700

Jan

-92

Oct

-92

Jul-

93A

pr-

94Ja

n-9

5O

ct-9

5Ju

l-96

Ap

r-97

Jan

-98

Oct

-98

Jul-

99A

pr-

00Ja

n-0

1O

ct-0

1Ju

l-02

Ap

r-03

Jan

-04

Oct

-04

Jul-

05A

pr-

06Ja

n-0

7O

ct-0

7Ju

l-08

Ap

r-09

Jan

-10

Oct

-10

Jul-

11A

pr-

12Ja

n-1

3O

ct-1

3

MSCI EMMSCI World

Base Case Forecast of US$101

Source: IBES, MSCI, FactSet, Morgan Stanley Research

Asia ex Japan versus Japan – Neutral near term, but this is likely a Japan equities rally to sell medium term Over the medium to long term, we expect Asia Pac ex Japan equities to continue to outperform Japan, due to: a) domestic demand growth differential, b) structural return on equity and margin differential, c) relative valuations (forward P/E), and d) relative corporate leverage.

However, in the run-up to the upcoming elections, and with the yen forecast by our FX team to weaken further near term, we would currently adopt a neutral stance on Japan versus Asia ex Japan, whilst looking for an opportunity to sell a Japan equities rally.

Our FX team forecast yen/dollar to reach 92 by year-end 2013. Exhibit 12 shows that in recent years yen weakness has been associated with rallies in the Topix versus MSCI APxJ.

Exhibit 12

MSCI APxJ Performance Relative to Japan and USD/JPY

80

85

90

95

100

105

110

115

120

125

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oc

t-1

0

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oc

t-1

1

De

c-1

1

Fe

b-1

2

Ap

r-1

2

Jun

-12

Au

g-1

2

Oc

t-1

2

75

80

85

90

95

100MSCI AC APxJ Relative to JapanUSD/JPY (Right)


Exhibit 13

Major Country/Region Return on Equity – Japan worst on ROE

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

MSCI EM MSCI USAMSCI Europe MSCI JapanMSCI APxJ

Source: MSCI, FactSet, Morgan Stanley Research, Data As of Nov 21, 2012

The MSCI Index regional ROE shown on Exhibit 13 shows the challenge to Japan equities performance longer term. Over all phases of the cycle, Japan’s ROE is well below the other regional benchmarks. Moreover, the chart does not yet incorporate Japan’s recent disappointment in CY3Q earnings season.

Keeping that in mind, our strategist for Japan, Yohei Yamada, is concerned that forward EPS growth expectations may be optimistic, even after considering likely improvement due to

7



prospective yen depreciation. It is likely that MSCI Japan/Topix will remain expensive on a forward P/E basis to EM and Europe even at 92 yen/USD (See Exhibit 14).

Exhibit 14

Major Country/Region 12m Forward PE – EM Most Cheapest, while Japan Second Most Expensive after Poor 3Q Earnings

6x

8x

10x

12x

14x

16x

18x

20x

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

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-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

MSCI EMMSCI USAMSCI EuropeMSCI JapanMSCI APxJ

Source: MSCI, IBES, Morgan Stanley Research. Data as of Nov 21, 2012

Asset allocation – we remain 6% OW equities At the asset allocation level, we retain a 6% OW equities recommendation per our most recent reduction in equities weighting in August. Both the forecast upside to Target Price and the back-tests on current valuations suggest a reasonably bullish stance is still warranted, albeit less so than a year ago. Our asset allocation strategy has delivered a return of 11% ytd 2012 in US$ and a CAGR of 7.4% p.a. in US$ since inception in January 2007.

Exhibit 15

Morgan Stanley Asia/GEMs Strategy Recommended Asset Allocation*

Neutral MS Over (Under)

EM Current EM Weight Relative to

Asset Classes Allocation Portfolio Neutral Portfolio

EM Equities 56% 50% 6%

USD & EUR EM Debt 20% 25% -5%

Local Currency EM Debt 20% 20% 0%

Cash 4% 5% -1%

Source: MSCI, FactSet, Morgan Stanley Research.*Multi-asset portfolio represents a portfolio comprising MSCI EM Index, JPM EMBI= Index, JPM GBI-EM are proxies for USD & EUR denominated EM debt and Local Currency EM debt respectively

Exhibit 16

Morgan Stanley Recommended Equity Allocation vs. Multi-Asset Recommended Portfolio Returns*

60

80

100

120

140

160

180

Dec

-06

Ap

r-07

Au

g-0

7

Dec

-07

Ap

r-08

Au

g-0

8

Dec

-08

Ap

r-09

Au

g-0

9

Dec

-09

Ap

r-10

Au

g-1

0

Dec

-10

Ap

r-11

Au

g-1

1

Dec

-11

Ap

r-12

Au

g-1

2

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

MS Recommended Portfolio Returns Equity OW (right)

Source: MSCI, FactSet, Morgan Stanley Research. *Multi-asset portfolio represents a portfolio comprising MSCI EM Index, JPM EMBI+ Index, JPM GBI-EM Index & US$ Cash. EMBI+ and GBI-EM are proxies for USD & EUR denominated EM Debt and Local Currency EM Debt respectively. Unaudited performance show that the Morgan Stanley recommended portfolio had a CAGR of 7.4% since Jan-07. Maximum OW (UW) position for any asset set at +10% (-10%). Data as of November 22, 2012

Meanwhile, our structural preference for equities continues to be driven by: a) the ability of the EM equity asset class to deliver double-digit ROEs even in a difficult global growth environment, and b) our expectation that core DM currencies will weaken, due to monetization of the sovereign debt burden This, combined with long-term upside risks to yields in core US/EU government bond yields, means that USD/Euro EM sovereign government bond debt will not likely generate returns superior to equities over the medium term.

Back-tests for returns from current valuations are consistent with our 2013 Target Exhibit 17 provides details on the back-tests for returns over the 1- to 12-month time horizon using the five key metrics we follow: forward P/E, historical P/B, trailing P/E, equity risk premium and trailing dividend yield. We find that from current valuation using twenty years of history, median returns over the 12-month time horizon have ranged from 35% for the forward P/E metric (with a 89% hit ratio for positive return) up to 71% for the equity risk premium metric (with a 85% hit ratio for a positive return).

8



Exhibit 17

Back-test on Current Valuation Metrics Suggests 35-71% Returns in twelve Months with Hit Ratio of 85-100% Performance (Median)

1 month 3 month 6 month 9 month 12 monthForward PE ≤10.0x 3.5% 7.4% 17.3% 27.9% 35.3%Price to Book ≤ 1.51x 1.6% 6.3% 19.5% 31.3% 37.6%Trailing PE ≤ 11.5x 3.9% 5.4% 19.5% 26.8% 58.1%ERP ≥ 902 bps 6.2% 11.8% 22.1% 47.8% 70.7%Div Yld ≥ 2.94% 5.3% 12.4% 29.9% 48.8% 62.0%

Hit Ratio1 month 3 month 6 month 9 month 12 month

Forward PE ≤10.0x 62.7% 76.5% 83.0% 83.0% 89.4%Price to Book ≤ 1.51x 62.2% 74.4% 82.9% 82.9% 85.4%Trailing PE ≤ 11.5x 57.9% 77.8% 80.0% 73.3% 84.6%ERP ≥ 902 bps 70.0% 89.5% 93.8% 87.5% 84.6%Div Yld ≥ 2.94% 66.7% 82.6% 95.0% 95.0% 100.0%

Forward PE ≤10.0x 22.9%Price to Book ≤ 1.51x 20.3%Trailing PE ≤ 11.5x 9.3%ERP ≥ 902 bps 9.3%Div Yld ≥ 2.94% 11.7%

USD Total Return Performance

Percentage with Postive Returns

Percentage of Total Observations

Source: MSCI, FactSet, Morgan Stanley Research. Data as of Nov 21,2012

Exhibit 18 shows that the trailing P/B metric still remains only slightly above 1 SD cheap to history. However, the forward P/E metric at 10.0x is far closer to the 10-year average of 10.7x.

Exhibit 18

MSCI EM P/Book – Still around 1 SD below Average

1.51x

Average

+1 SD

-1 SD

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Source: MSCI, Factset, Morgan Stanley Research, Data as of Nov 21, 2012

Exhibit 19

MSCI EM 12M Forward P/E

10.0x

4x

6x

8x

10x

12x

14x

16x

18x

20x

22x

24x

Ja

n-9

2

Ja

n-9

3

Ja

n-9

4

Ja

n-9

5

Ja

n-9

6

Ja

n-9

7

Ja

n-9

8

Ja

n-9

9

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Average 10.7x

Average 15.0x

Source: MSCI, FactSet, Morgan Stanley Research. Data as if Nov 21, 2012

Technical and flows position is neutral The technical position is currently broadly neutral. Exhibit 20 summarises the various technical indicators that we follow. The back-tests suggest upside from as low as 5% in US$ terms 12 months out for VIX at 15.1 rising to 19-26% for earnings revisions, cumulative flows, and the CBOE equity put/call ratio. The hit ratios for positive returns range from 56% to 70%, which are less convincing than the equivalent ratios for the valuation metrics discussed above.

Exhibit 20

Back test on Technical Indicators Suggests 5-26% Returns in 12 Months with Hit Ratio of 56-70%

Performance (Median)1M 3M 6M 9M 12M

Cumulative 50 days Performance ≤ -2.5%* 1.2% 3.5% 7.2% 9.3% 12.6%VIX ≥15.1** 0.7% 2.1% 1.7% 5.0% 5.4%CBOE Equity Put call ratio≥0.81** 1.0% 3.7% 10.1% 12.0% 25.9%4 weeks cumulative flows as % of AUM ≤0.9%** 2.5% 5.4% 8.5% 14.4% 20.8%Cos. Trading with 5% of 52W high ≤15.0%*** 0.0% 2.8% 5.0% 5.2% 6.5%FY2 Earnings Revisions, 3MMA ≤-6.1%*** 0.0% 4.4% 8.9% 5.9% 18.6%

Hit Ratio1M 3M 6M 9M 12M

Cumulative 50 days Performance ≤ -2.5%* 58.8% 58.5% 67.3% 61.8% 65.8%VIX ≥15.1** 55.8% 57.2% 53.3% 56.9% 56.3%CBOE Equity Put call ratio≥0.81** 55.7% 61.0% 64.4% 60.7% 65.5%4 weeks cumulative flows as % of AUM ≤0.9%** 62.7% 65.4% 67.8% 68.2% 70.3%Cos. Trading with 5% of 52W high ≤15.0%*** 54.2% 58.8% 58.2% 58.3% 60.4%FY2 Earnings Revisions, 3MMA ≤-6.1%*** 54.2% 75.0% 63.6% 59.1% 64.7%

Percentage of total observations (%)

Cumulative 50 days Performance ≤ -2.5%* 30.3%VIX ≥15.1** 78.6%CBOE Equity Put call ratio≥0.81** 12.7%4 weeks cumulative flows as % of AUM ≤0.9%** 67.2%Cos. Trading with 5% of 52W high ≤15.0%*** 71.6%FY2 Earnings Revisions, 3MMA ≤-6.1%*** 11.7%

USD Total Return Performance

Percentage with Positive Returns

Source: MSCI, FactSet, Bloomberg, Morgan Stanley Research. * Based on daily frequency, **based on weekly frequency ***based on monthly frequency. For cumulative 50 day performance, VIX, companies Trading within 5% of 52 week high and FY2 earnings revision, data since Jan-1995. For 4 weeks cumulative flows, data since Oct-2000. For Put Call ratio, data since Oct-2003. For all the indictors returns are calculated from a level at or above (or at or below) the threshold level shown in the table. Data as of November 19, 2012

9



Flows to EM equities have resumed following the announcement of QE3. In our case forecast for moderate EM GDP growth reacceleration in 2013, we would expect a persistent period of fund inflows to now be set in train.

Exhibit 21

Cumulative Flows to Dedicated EM Funds vs. QE Timeline

-60

-40

-20

0

20

40

60

80

100

120

140

Jan

-08

Mar

-08

May

-08

Jul-

08

Sep

-08

No

v-08

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-09

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-10

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-11

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-12

LTRO2 29th Feb, 2012

QE1 announced 25th Nov, 2008

QE1 ends 31st March 2010

QE1 Extension18th March, 2009

QE2 ends 30th June, 2011

Twist 121st Sep, 2011

Twist 220th June, 2012

LTRO1 21st Dec, 2011

Cumulative inflowsof $73bn

Cumulative inflows of $43bn

QE2 starts 3rd Nov, 2010

Cumulative inflows of

$11bn

QE2 hinted 27th Aug,10(Jackson Hole)

QE313th Sep, 2012

Cumulative inflows of $16.0bn

Source: EPFR, MSCI, Morgan Stanley Research

10



Morgan Stanley Economics Outlook for 2013 – No Quarter

Close the doors, put out the light. You know they won't be home tonight. The snow falls hard and don't you know The winds of Thor are blowing cold…

–No Quarter, Led Zeppelin

Alright, it’s not really that bad out there, but the Morgan Stanley economics teams forecast for 2013 does not suggest it is time to venture outside without a coat. The following few paragraphs summarise Morgan Stanley’s economics team view for 2013. For details see 2013 Outlook: Stuck in the Twilight Zone by Joachim Fels and team, dated November 19, 2012.

Global economy stuck in the ‘Twilight Zone’ but with EM outperforming DM The global economy looks set to remain stuck in the ‘Twilight Zone’ that divides sustainable expansion from renewed recession. We now forecast global GDP to grow by barely more than 3% in 2013, the same as this year and exactly halfway between the 2.5% recession threshold and the 3.7% long-term trend.

What’s changed? Our base case 2013 global GDP growth forecast has come down from 3.3% to 3.1% (2012 unchanged at 3.1%), reflecting downward revisions in the euro area, the UK, CEEMEA, Japan and Brazil, and slight upward revisions in China and India. A first peek into our 2014 crystal ball suggests a return to above-trend global growth of 4.0%. But the road to that point is long and winding.

Policy makes or breaks: Our ‘Twilight’ base case crucially assumes only moderate fiscal tightening in the US, successful ECB action on rates and OMT, and gradual progress on structural reforms in EM. Such policy action, combined with further global monetary easing, should promote a bottoming of global growth in 1H13 followed by a moderate reacceleration.

Two alternative scenarios – ‘Night’ and ‘Day’: Without appropriate policy action, however, a renewed global recession would likely unfold. Our ‘Night’ scenario has global GDP growth plunging to 2% in 2013, with full-blown recessions in the US, Europe and Japan and more fragility in EM economies. Conversely, in our ‘Day’ scenario, more decisive policy action in the major countries than we assume in our ‘Twilight’ base case propels a more rapid acceleration to almost 4% GDP growth already in 2013.

Stay ready to switch between scenarios: With policy action still pending, Europe and Japan currently in recession, US GDP tracking below 1% in 4Q, and the transition to new growth models still sputtering in a number of EM countries, the next several months may feel more like our ‘Night’ scenario. Yet, investors have to be nimble and prepared to switch between ‘Night’, ‘Twilight’ and ‘Day’ depending on policy developments. More than ever, we are all slaves to policy.

Exhibit 22 summarises the twilight base case view for 2013 as well as the “Night” and “Day” bear and bull scenarios. From an EM perspective, it is noteworthy that our economists expect higher GDP growth in 2013 than in 2012 in three of the four BRICs. For China, the largest economy in APxJ / EM, and the most important in setting the environment for cyclical sectors in APxJ / EM, our economics team forecasts GDP growth acceleration in the base case from 7.7% in 2012 to 8.2% in 2013. For India, growth is forecast to accelerate from 5.0% to 6.1%, for Brazil from 1.6% to 2.8%. Only in Russia, where growth was resilient at 3.6% in 2012, is it forecast to slow down, to 3.1%, in 2013.

Exhibit 22

GDP Scenarios for key Region and Countries: Twilight, Day and Night All figures 2012E 2013E 2014Ein % Twilight Night Twilight Day Night Twilight Day

GLOBAL 3.1 2.0 3.1 3.9 2.8 4.0 4.6G10 1.2 -0.5 0.7 1.5 0.5 1.9 2.5US 2.2 -0.3 1.4 2.2 1.1 2.7 3.3Euro Area -0.5 -1.4 -0.5 0.2 -0.4 0.9 1.4Japan 1.7 -0.1 0.4 0.9 -0.2 0.8 1.6UK -0.2 -0.2 0.8 1.4 0.6 1.6 2.4EM 4.9 4.4 5.4 6.1 4.8 5.9 6.6China 7.7 7.5 8.2 8.6 7.3 8.0 8.7India 5.0 5.1 6.1 7.1 6.2 6.9 7.5Brazil 1.6 2.2 2.8 3.4 2.5 3.4 4.2Russia 3.6 2.5 3.1 4.0 2.3 3.7 4.5

Source: Morgan Stanley Global Economics Team, Morgan Stanley Research. See report “Global Monetary Analyst: 2013 Outlook: Stuck in the Twilight Zone” dated Nov 19, 2012

Exhibit 22 charts the Morgan Stanley economics team’s forecast for GDP Growth for the major economies in APxJ / EM in 2013 versus 2012. Countries are listed by rank order of the size of their GDP.

11



Exhibit 23

Real GDP Growth for 2012 and 2013 (Sorted by 2012 Nominal GDP, US$)

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Ch

ina

Bra

zil

Ru

ssia

Ind

ia

Au

str

alia

Me

xic

o

Ko

rea

Ind

on

esia

Tu

rke

y

Po

lan

d

Tai

wa

n

S.

Afr

ica

Th

aila

nd

Co

lom

bia

Ma

lay

sia

Ch

ile

Sin

gap

ore

Ho

ng

Ko

ng

Pe

ru

Cze

ch

Hu

ng

ary

2012E 2013E

Source: Morgan Stanley Economic Team, Morgan Stanley Research. See report “Global Monetary Analyst: 2013 Outlook: Stuck in the Twilight Zone” dated 19th Nov, 2012

Importance of structural reform in EM Morgan Stanley EM economist, Manoj Pradhan, and Asia Pacific Chief Economist, Chetan Ahya, continue to highlight the need for structural reform to underpin sustained growth recovery. Most recently, the team has argued that industrial policy could provide a structural solution to imbalances in EM. They think that modern industrial policy, which is market-based, non-subsidised, and encourages non-concentrated investment, is consistent with sustainable growth in EM economies. They believe macro-economic policies did well to increase stability, but are ill-suited to addressing the current distributional asymmetries that are the key concern in unbalanced EM economies. The basic premise behind industrial policy of improving sector competitiveness via structural transformation creates a better, sustainable solution to some growth problems discussed above.

There are a few relevant examples in their opinion, such as:

• Investment in China needs to be redirected further: 1) to urbanise the interior of the country, which holds the key to faster consumption growth, and 2) to invest in labour-saving technology to address the shrinking labour force as demographics turn.

• The manufacturing sector within economies afflicted by the Dutch disease – Brazil, Russia and Indonesia – needs to be made more competitive.

• Private investment in India needs to take priority through fast-tracking and the provision of better infrastructure (energy and distribution networks). The administration has recently unveiled several reforms to address this shortcoming.

• Turkish economic rebalancing has already gone a considerable distance towards exports and away from consumption, with a soft landing the most likely outcome in 2013, in our economists’ view.

• Mexico’s economy has relied less on oil exports and more on manufacturing exports (where Mexico has taken market share from Chinese exports). Recent reforms to the rigid labour market promise to address what used to be a key structural drag on growth.

And they also highlight some signs of reforms moving in the right direction: 1) India’s fast-tracking investment via National Investment Board; 2) China’s attempt to redirect investment to the interior of the country; 3) Russian reform agenda; and 4) Brazil’s competitiveness agenda.

Please see report The Global Macro Analyst: Time to build more Shenzhens, by Manoj Prahdan dated October 17, 2012, for more details.

12



Detailed EPS forecasts – Stairway to Heaven

There’s a lady who’s sure all that glitters is gold And she’s buying a stairway to heaven…

–Stairway to Heaven, Led Zeppelin

Equity investing is indeed all about buying a ‘stairway to heaven’ in the form of sustained earnings growth CAGR. To do that, a company, sector or market needs to maintain ROE using the three key drivers of margins, asset turns and (judiciously) leverage.

Our view for 2013 is that EPS growth can come to the party after two years of poor performance, driven mainly by an improvement in margins in cyclical sectors as the underlying economic growth environment improves. This improvement is somewhat offset in our forecast by a moderate fall in asset turnover as investment in operating asset increases at a faster rate than sales (see Exhibit 24). Overall, ROE will likely make an upward inflexion point after trending down since Q2 2011. Our factor model suggests base case 14% US$ EPS growth in 2013. In the Bull “Day” scenario EPS growth will rise by 25%. In the Bear “Night” scenario it will fall by 17% (see Exhibit 25).

Exhibit 24

Return on Net Operating Assets (RNOA) = Net Operating Margins after Tax * Asset Turnover

0%

2%

4%

6%

8%

10%

12%

14%

16%

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

201

2E

201

3E

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

RNOA NOPAT Margins Operating Asset Turnover (RHS)

Source: Worldscope, Morgan Stanley Research. Source: Factset, MSCI, Worldscope, Morgan Stanley Research. *Using our sample of 1000 non-financial firms from a combined APxJ/GEMs universe .

Exhibit 25

MSCI EM US$ EPS (LTM) and Morgan Stanley EPS Projections per Different Scenarios

110

101

73

20

30

40

50

60

70

80

90

100

110

120

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Bull

Bear

Base

2013E

Source: MSCI, FactSet, IBES, Morgan Stanley Research

We have taken the Morgan Stanley economics team’s base case view, as well as bull and bear risk scenarios, and incorporated these into our EM EPS earnings factor model by mapping them into assumptions for the Global PMI and Industrial Production variables. We have also used Morgan Stanley’s house FX forecasts to generate assumptions for the evolution of real effective exchange rates (which are important for measuring the translation effect impact from local currency earnings to US$ earnings). (For further details please see FX 2013 Outlook: The Year of JPY Weakness, dated Nov 20, 2012.) Within EM, our FX team expects Latam and AxJ to outperform CEEMEA. The regression statistics for our earnings factor model are given in Exhibit 26.

Exhibit 26

Four Factor Earnings Model – Regression Fit (MSCI EM)

Coefficients Standard Error t stat

Intercept 5.3 1.7 3.1Global PMI lagged by 10M 0.3 0.1 3.3EM Real Effective Exchange Rate lagged by 0M 1.6 0.3 5.9EM Industrial Production lagged by 3M 1.2 0.3 4.6EM Core CPI-PPI lagged by 17M 1.4 0.3 4.1Multiple R 0.9R Square 0.7

Source: Morgan Stanley Research

Exhibit 25 shows Bull, Base and Bear case forecasts for MSCI EM EPS, which are mapped to the house scenarios for global GDP growth discussed previously. Earnings growth ranges from +14% in the base case to +25% in the bull and -17% in the bear case. Exhibit 27 shows the associated forward P/E, P/B and Dividend Yield valuation metrics for the three scenarios.

13



Exhibit 27

Morgan Stanley Top-Down MSCI EM 2013 Outlook Scenarios2013 AssignedOutlook Weight 2013 2013 2013 2013 2013

Bull (Day) Scenario

20% 25% 8.9x 1.31x 14.8% 3.7%

Base (Twilight) Scenario

60% 14% 9.7x 1.37x 14.1% 3.4%

Bear (Night) Scenario

20% -17% 13.3x 1.53x 11.5% 2.5%

US$ EPS Growth

Price / Earnings

Price / Book

Return on Equity

Dividend Yield


Return on equity ranges from 14.1% in the Base Case Twilight global growth scenario to 14.8% in the Bull case Day scenario and 11.5% in the Bear case Night scenario.

Exhibit 28

MSCI EM Trailing ROE and Morgan Stanley ROE Projections per Different Scenarios

14.1%

11.5%

14.8%

4%

6%

8%

10%

12%

14%

16%

18%

Jan-9

2

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Bull

Base

Bear

2013E

Source: MSCI, FactSet, Morgan Stanley Research

Exhibit 29 provides current consensus & Morgan Stanley bottom-up EPS forecasts by sector for MSCI EM together with our suggested top-down surprise deviation. In the base case scenario of acceleration in EM economic growth, we expect cyclical sectors (energy and materials) to flip from yoy EPS growth contraction to expansion. Elsewhere, we expect Financials (banks, insurance and real estate) to do better than lowball consensus EPS, while we doubt that IT can generate close to 30% EPS growth off the back of near 40% growth this year.

We see the greatest upside surprise potential in 2013 for Industrials, Consumer Discretionary, Energy and Financials. We see the greatest downside surprise for Consumer Staples and Information Technology.

Exhibit 29

MSCI EM 2013 EPS breakdown by Sector: Morgan Stanley Top Down versus Consensus Estimates

MSCI EM MSCI 2012 IBES IBES MS Top Suggested

Sector Weight Consensus Consensus Down Surprise

Financials 25.7% 7.1% 8.1% 9.6% 1.5%

Materials 11.5% -21.6% 23.0% 23.0% 0.0%

Energy 12.8% -11.3% 6.5% 8.5% 2.0%

IT 13.9% 36.2% 24.9% 19.9% -5.0%

Telecom 8.0% 9.2% 7.3% 7.3% 0.0%

Industrials 6.4% 15.1% 17.6% 22.6% 5.0%

Cons Stap 8.8% 9.4% 19.5% 16.5% -3.0%

Cons Disc 8.0% 36.3% 15.2% 19.2% 4.0%

Utilities 3.5% 26.8% 8.0% 8.0% 0.0%

Health Care 1.3% 14.7% 17.1% 17.1% 0.0%

MSCI EM 100.0% 4% 13% 14% 1%

2013 EPS Growth

Source: IBES, MSCI, Morgan Stanley Research

14



P/E modeling – Song Remains the Same

California sunlight, sweet Calcutta rain Honolulu Starbright - the song remains the same…

–The Song Remains The Same, Led Zeppelin

Our song on the P/E multiple does indeed remain the same. We think we can continue to see moderate multiple expansion, as was seen in 2012, from levels which remain low versus history and for forecast ROE. Our base case scenario forecast takes the P/E from 11.5x currently to 12.7x by year- end 2013.

Our bull case assumption of an expansion in the P/E to 14.4x (1SD above the base case) would involve substantial inflows to the asset class courtesy of a positive combination of above base case global and EM GDP growth, Q/E related flows and continued reallocation to Asia / EM by longer-term pension fund, endowment and other institutional sources. This scenario would have 2013 characterised by the formation of asset bubbles in parts of APxJ / EM as in 2007 and 2010.

Our bear case assumption of contraction in the P/E to 9.8x (-1.5. SD below the base case) would be driven by outflows from the asset class courtesy of a move towards bear case GDP growth, risk aversion & dollar strength. Commodity prices would perform poorly. In October 2011 the trailing P/E for MSCI EM troughed at 8.8x.

Exhibit 30

Four Model Estimates of Year-End 2013 MSCI EM Trailing P/E

No. of Model Model Name Bear Case Est. Base Case Est. Bull Case Est.

IMulti-factor regression model 9.6 12.7 14.3

II3-Stage Gordon growth model 9.8 12.7 14.9

IIIAutoregressive time-series model 10.1 13.0 14.4

IVSingle stage residual income growth model 9.7 12.4 14.1

Average 9.8 12.7 14.4

Source: MSCI, FactSet, Morgan Stanley Research1

How we model for base case 10% expansion of MSCI EM trailing P/E to 12.7x in 2013

1 For model I) and III), we use mean estimate plus 1/ 0/ -1.5 standard deviation as our bull/base/bear case estimates; for model II) and IV), we derive them by changing the assumption of EM cost of equity (details are discussed later in this note).

We have reworked the four P/E prediction models that we developed last year, taking into account changes in the factors which drive the model outputs. Exhibit 30 shows the results for each model and the final estimate for the Year-End 2013 EM trailing P/E as the simple average. The four different methodologies yield fairly consistent results (ranging from 12.4x to 13.0x) and suggest that on a base-case view, we should be going for a modest multiple expansion next year. We here briefly describe our four methodologies and the logic behind them.

Methodology 1: Multi-variable regression model By running regressions, we have identified four variables following fundamental, growth, valuation and consensus categories that have predictive power to the next 12-month percentage change of trailing P/E:

1. (lagged) EM CPI minus PPI (-)

2. Last 12-month EPS YoY growth (+)

3. EM Market implied cost of equity (-)

4. Consensus next 12-month EPS growth (-)

The current macro variables that we used in our multi-factor regression model also suggest a slower speed of multiple re-rating. The market implied COE has fallen to 10.7% from the previous level of 12.4% in November 2011, which directionally is as we expected and shows a less depressed valuation level. However, the latest trailing last-twelve-month EPS growth rate has declined to -3% from November 2011’s +14%, which suggesting that we are likely to see a more modest re-rating process rather than what has happened from November 2011 to February 2012, when the P/E multiple expanded by 18% within only three months.

Exhibit 31

Macro Variables in Our Multi-factor Regression Model to Explain Delta in Trailing P/E: November 2011 vs. November 2012

Nov-2011 Nov-2012lagged CPI minus PPI (–) -2.5% 2.2%Last 12M EPS YoY growth (+) 14% -3%Market Implied Cost of Equity (–)* 12.4% 10.7%Consensus Next 12M EPS growth (–) 11.2% 11.8%

Source: MSCI, FactSet, IBES, Morgan Stanley Research. *We estimated the market implied cost of equity of MSCI EM by using our multi-stage dividend growth model.

15



Methodology 2: Multi-stage Gordon growth model The second methodology relies on estimating a multi-stage Gordon growth model using forecasts of earnings, dividends, and cost of equity for the MSCI EM index. Our basic assumptions for the three different growth stages are: 1) we use consensus forecasts for the next three years as proxies for market expectations; 2) we use 6% as the perpetuity nominal growth rate 15 years from now; and 3) to estimate earnings growth forecasts between years 4 and 15, we use a non-linear interpolation, as shown below.

Exhibit 32

EM Earnings Gordon Growth Model Assumptions2

Source: MSCI, Morgan Stanley Research.

Exhibit 33

EM Dividend Payout Ratio Assumptions

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Dividend Payout Ratio Linear (Dividend Payout Ratio) Source: MSCI, Morgan Stanley Research.

The model output is, of course, sensitive to the choice of cost of equity (COE). Given the recent market circumstance, we use the following COE assumptions as inputs for different market scenarios: 1) we use the recent two-year average implied COE of 10.95% as the base case scenario input; 2) we use the 20-year average implied COE of 10.2% as the bull case scenario input; and 3) we use the +1.5 standard deviation implied COE of 12.6% as the bear case scenario input. The base case of three-stage Gordon growth model yields an estimation of 12.7x trailing P/E of 2012.

2 For years 1-3, we use consensus earnings forecast numbers.

Methodology 3: Auto-regressive time-series model We did our third P/E estimation based on its auto-regressive (or generally speaking, mean-reversion) feature. Using the following AR(1) function form, we calibrate the values of parameters of long-term mean (μ) and speed of mean reversion (γ), and then generate our time-series forecast.

ttt PEPE εμγμ +−=− − )/()/( 1

Currently, our updated time-series P/E model still suggests further P/E normalization from its current below-average level but at a slower pace (see Exhibit 34). The model gives us an estimation of 13.0x 2013 Year End P/E on a base-case view.

Exhibit 34

MSCI EM Trailing E/P Ratio with Revised Time-series Model Prediction* – We Now Expect Slower Mean Reversion

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%D

ec-

91

De

c-9

2

De

c-9

3

De

c-9

4

De

c-9

5

De

c-9

6

De

c-9

7

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

EM Trailing E/P Ratio TS Est (20 Yr Model) TS Est (10 Yr Model)

20 Yr Average10 Yr Average

Source: MSCI, FactSet, Morgan Stanley Research. Data as of Nov 21, 2012. *Given that the 20-Year and 10-Year average trailing earnings yield numbers are different, we construct two AR(1) models by using different horizons of data, and take the average of outputs as our final time-series estimate.

Methodology 4: Residual income growth model The last methodology relies on estimating a single-stage residual income growth model using forecasts of earnings, book value, and cost of equity for the MSCI EM index. Assuming that we have a constant residual income growth rate of 6% over time, constant dividend payout ratio (DPR), and an average ROE of 15.0% (since 2007), we get the fair value to earnings ratio as:

−−+⋅=gkkROE

EB

EV

e

e10

0

0

The COE assumptions for different scenarios are identical to those in the model II, i.e., three-stage Gordon growth model. This final model generates a P/E estimation of 12.4x as base case output.

4 5 6 7 8 9

10 11 12 13 14

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Earnings Growth (%)

16



Country Views in Summary

OW Russia, Poland, Czech, China & Malaysia Based on our newly relaunched APxJ/EM country quantitative model, our overweight countries currently are Russia, Poland, Czech, China, Malaysia, and Morocco; Our underweight- rated are: South Africa, Turkey, Taiwan, Mexico, Philippines, and Hungary.

Less strong regional preferences within EM than for 2012 We do not expect Asia ex Japan to outperform EMEA & Latam to the same extent in 2013 as in 2012. Although it is still or preferred region, this is linked to: a) the output of our new country quant model), b) the typical behaviour of regional performance in the second year of recovery after a bear phase, and c) our views on China economic recovery and defensives / cyclicals. That said, it is likely too soon to be an aggressive bull on Brazil and our Latam equity strategy team remain somewhat cautious. Meanwhile, our EMEA team has a preference for Russia, which is also the case in for our quant model.

In the process of developing our APxJ/EM new country model, we did some statistical tests like ANOVA (analysis of variance) on the existence of a ‘regional effect’, i.e., whether countries from the same geographic region show more co-movements in their returns. We did not find any statistical evidence that shows that country returns are significantly different across regions (see Exhibit 35). This result not only verifies that a country-level model in APxJ/EM is appropriate, but also hints to us that substantial regional level out- or underperformance is infrequent in APxJ/EM. Hence, LatAm’s pronounced underperformance in 2012 may be aberrational.

Also, Exhibit 36 shows that Latam earnings fell sharply in this cycle versus APxJ and EMEA. EMEA earnings did surprisingly well, given the issues around bank deleveraging and European sovereign crisis. We are currently seeing improvement in APxJ earnings yoy, which typically leads the earnings in overall EM.

Exhibit 35

APxJ/EM Country Return Variance Across Regions as % of Total Variance* (12-Month Moving Average)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Variance across Regions (12MMA) Zero Explanation Power10% Sig Critical Level 5% Sig Critical Level1% Sig Critical Level

Source: MSCI, FactSet, Morgan Stanley Research. * We divide APxJ/EM countries into four geographic regions: EM Asia, EM EMEA, EM Latin America, and DM Asia Pacific

Exhibit 36

IBES LTM EPS Growth – LATAM earnings fell sharply in this cycle versus APxJ and EMEA

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

May

-02

No

v-02

May

-03

No

v-03

May

-04

No

v-04

May

-05

No

v-05

May

-06

No

v-06

May

-07

No

v-07

May

-08

No

v-08

May

-09

No

v-09

May

-10

No

v-10

May

-11

No

v-11

May

-12

No

v-12

EM EMEA EM LatAm

MSCI APxJ

Source: IBES, MSCI, FactSet, Morgan Stanley Research

Our new country model ranks countries across 12 factors including valuation, profitability and earnings, technicals and sentiments, currency, macro economic indicators, and MS view (please see our report Asia/GEMs Equity Strategy: Asia Insight: Update of Asia/GEMs Country Selection Quantitative Model, dated November 19, 2012).

http://link.articles.morganstanley.com/?b=Y2g9T3V0bG9vayUyMEJsYXN0bWFpbCZjdT0zMjRSWSZpZD00NzI1NTg%3D&d=f%2F3f13klu0-3ohi-g001-b12b-002655214300%3Fstore%3D0%26d%3DUwBSZXNlYXJjaAA0NzI1NTg%253D%26user%3Dkkfit9izxw90-339%26__gda__%3D1479454609_b8b7797a546cf8b63c926331a307ea7b&s=f%2F3f13klu0-3ohi-g000-b12b-002655214300%3Fstore%3D0%26d%3DUwBSZXNlYXJjaFNXRgA0NzI1NTg%253D%26user%3Dkkfit9izxw90-338%26__gda__%3D1479454609_52e191cb1cd22eef568a0077b394797c�



17



Exhibit 37

Country Model Framework – Weights of Metrics

Valuations25%

Profitability & Earnings

12%

Macro15%

Technicals & Sentiments

26%

Currency10%

MSView12%

Trailing P/B 6%N12M P/E Z-Score 10%Trailing 12M Div Yld 9%

Trailing ROE 7%Earnings Revision Breadth 3MMA 5%

Aggregated MS Macro Teams' view 12%

2M Price Reversal 7%Relative Strength Index 10%Mid-term fund flow 9%

Leading Indicators 9%Macro Risk 6%

Effective Exchange Rate Change 10%

Source: Morgan Stanley Research.

From the results of our quant model, we prefer countries with cheap valuations, high dividend yields and less overbought technicals, such as Russia, China and Poland. It underweights countries that have a combination of expensive valuations and overbought technicals, such as South Africa, Turkey, Mexico and Philippines.

Exhibit 38

APxJ/EM Country Model Rankings

12

34

56

78

9

1112

1718

19

2122

2324

25

10

13

1514

16

20

Ru

ssia

Po

lan

d

Cze

ch

Ch

ina

Ma

lay

sia

Mo

rocc

o

Ch

ile

Au

stra

lia

Sin

gap

ore

Co

lom

bia

Per

u

Ho

ng

Ko

ng

Th

aila

nd

Ind

ia

Eg

ypt

Ind

on

esia

Ko

rea

Bra

zil

New

Ze

alan

d

Hu

ng

ary

Ph

ilip

pin

es

Mex

ico

Tai

wa

n

Tu

rkey

So

uth

Afr

ica

country rankings: the lower the ranking, the better the score in the model

OVERWEIGHT EQUAL-WEIGHT UNDERWEIGHT Source: MSCI, FactSet, IBES, EPFR, Morgan Stanley Research.

Exhibit 39

APxJ/EM Country & Regional Scatter: Consensus 2013E P/B vs. ROE

MSCI APxJ

New Zealand

Singapore

Hong Kong

Australia

MSCI EM

Morocco

Hungary

Czech Republic

EgyptPoland

Turkey

Russia

South Africa

Peru

Colombia

Chile

Mexico

Brazil

Philippines

Thailand

Indonesia

Malaysia

India

Taiwan

Korea

China

S&P 500

TOPIX

MSCI Europe

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

5% 7% 9% 11% 13% 15% 17% 19% 21% 23% 25%

2013E ROE

2013E Price/ Book

Source: MSCI, FactSet, IBES, Morgan Stanley Research. Data as of 19th Nov, 2012.

Country focus #1 – Taiwan UW A key underweight in our quantitative model is Taiwan. We expect Taiwan to continue to underperform structurally in Asia ex Japan and EM, and this is linked to our UW Technology Hardware view discussed in our sector commentary below. Exhibit 40 shows that ROE relative is not only declining currently, but even in peak periods has not sustained a premium to APxJ over the last 12 years. This is due to a failure to move up the value chain and in particular to develop brands that are of global significance (see the discussion on APxJ / EM brands below).

Exhibit 40

Taiwan ROE Relative to APxJ – Structural Decline since 2010

0%

20%

40%

60%

80%

100%

120%

Dec

-01

Jun

-02

Dec

-02

Jun

-03

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12


Meanwhile, Taiwan’s valuation relative to APxJ on a forward P/E basis remains at around a 25% premium, which is well above the longer-term average.

18



Exhibit 41

MSCI Taiwan 12M Forward P/E Relative to APxJ: 27% Premium to Asian benchmark

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

Dec

-01

Jun

-02

Dec

-02

Jun

-03

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12


Taiwan’s market currently pays out a 3.7% dividend yield, which is above the APxJ average of 2.3%. However, the payout ratio is close to 80% of earnings currently. This raises questions marks over the longer-term funding of investment and is in contrast to the 40% payout ratio for APxJ overall.

Exhibit 42

Taiwan’s Dividend Yield and Payout – Higher Dividend Yield due to the Significantly Higher Payout Ratio

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Dec

-01

Jun

-02

Dec

-02

Jun

-03

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dividend Yield

Dividend Payout (RHS)

Source: MSCI, Factset, Morgan Stanley Research

Country focus #2: Chinese Equities – Heartbreaker “Worked so hard I couldn’t unwind, Get some money saved abused my love a thousand times. However hard I tried Heartbreaker, your time has come…”

–Heartbreaker, Led Zeppelin

Bearish market sentiment towards China from foreign investors has abated significantly recently with signs of an improvement in key growth indicators. However, the onshore investor continues to be negative with very low levels of retail turnover. The A-share market has been a heartbreaker, underperforming all other major global equity indices in 2012.

Our recently revised country quantitative model is OW MSCI China (or HSCEI / H shares) in a pan-APxJ / EM context. The market scores well on forward P/E, Fund Flow, Currency, macro leading indicators and MSView.

Exhibit 43 shows that valuations on HSCEI and Shanghai A remain exceptionally low to history on the forward P/E metric (90th percentile and 98th percentile of the historical range).

Exhibit 43

HSCEI and Shanghai A 12M Forward P/E – Exceptionally Low to History

0

5

10

15

20

25

30

35

40

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Shanghai A

HSCEI

Source: IBES, Morgan Stanley Research

Both markets should respond to the turn in the growth cycle our economists are predicting, although the correlation to M2 growth is stronger for HSCEI than for Shanghai A.

19



Exhibit 44

China M2 Growth vs HSCEI and Shanghai A – M2 Accelerates and Equity Market Correlation Is High

10

12

14

16

18

20

22

24

26

28

30

Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

-100

-50

0

50

100

150

200

250

M2 YoY Chg %

Shanghai A YoY Chg % (RHS)

HSCEI YoY Chg % (RHS)

Source: CEIC, Factset, Morgan Stanley Research

12-month forward earnings growth expectations for H shares may have put in an inflexion already for the cycle, whilst they continue to track lower for Shanghai A (see Exhibit 45).

Exhibit 45

HSCEI and Shanghai A 12M Forward EPS Growth Trend – HSCEI Turning Up while Shanghai A Tracking Lower

0

5

10

15

20

25

30

35

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

HSCEI

Shanghai A


We expect the recent improvement in HSCEI share performance to be sustained, and we prefer HSCEI to the Hang Seng Index. The more globally / DM influenced Hang Seng Index is on a near five-year high forward P/E relative to H of close to 30%. This is similar to the level at which HSCEI began to re-rate versus Hang Seng as China’s economy turned up in early 2005 after the 2004 tightening cycle.

Exhibit 46

HSI and Shanghai A 12M Forward P/E Premium/Discount Relative to HSCEI – Prefer HSCEI to HSI, Shanghai A to HSCEI

30.6%

7.2%

-30%

-10%

10%

30%

50%

70%

90%

Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

5Yr-Avg(29.8%)

5Yr-Avg(13.1%)

HSI vs HSCEI

Shanghai A vs HSCEI


The Shanghai A market should ultimately begin to perform too, but here the lesson from the mid-2000s cycle was that the bear phase in A shares abated only after a 12- to 18-month period of sustained economic recovery. As Exhibit 46 shows, it was not until the second half of 2005 that the A share valuation premium to H began to expand from levels that were then even more depressed than they are today. Two key indicators to watch in relation to A shares will be new account openings and the proportion of accounts with transactions on a weekly basis (see Exhibits 47 and 48).

Exhibit 47

China New Investor Accounts vs Shanghai Composite Index – New Accounts Remain Low

0

100

200

300

400

500

600

700

800

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

1500

2500

3500

4500

5500

6500

Shanghai Composite Index (RHS) New Accounts ('000)

Source: Bloomberg, Morgan Stanley Research

20



Exhibit 48

% of A Share A/C with Transaction vs. Shanghai Composite Index – Trading Activities Remain Low

0%

5%

10%

15%

20%

25%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

1000

2000

3000

4000

5000

6000% of A Share A/C with Transaction during the Week% of A Share A/C with Transaction during the Week, 4-wk maShanghai Composite Index (RHS)

Source: Bloomberg, Morgan Stanley Research

21



Sector Views in Summary

OW Real Estate, Banks, Automobiles, Software and Services, Capital Goods, and Energy Based on the latest update of our Asia/GEMs industry selection quantitative model (published in October 2012), we overweight Real Estate, Banks, Automobiles, Software and Services, Capital Goods, and Energy; we underweight Transportation, Consumer Durables, Food & Staples Retailing, Food Beverage Tobacco, Diversified Financials, and Tech Hardware.

Real Estate and Banks are among our key OW sectors. The former has performed well all year, while the latter has seen an improvement in performance since the announcement of QE3 in September. We also prefer some cheap cyclical industries, such as Energy and Capital Goods, both of which have underperformed the market recently. However, as discussed in our New Theme #1 below, we think there will be a good chance for cheap cyclicals to outperform in 2013. We expect expensive defensives, such as Food Beverage & Tobacco and Food Retail, to underperform. We are also negative on Technology Hardware and Transportation, which are facing structural downward ROE and earnings pressure in comparison with other industries.

Our quantitative model ranks industries across 10 factors including valuation, profitability and earnings, technicals, macro-economic indicators, and Morgan Stanley bottom-up aggregated analysts’ view. We report this model’s recommendations on a regular monthly basis and use it as the primary tool in marking APxJ/EM industry allocation recommendations.

Exhibit 49

Industry Model Framework – Weights of Metrics

Macro 10%

Technicals20%

MSView15%

Profitability & Earnings

35%

Valuations20%

Trailing P/B 10%Trailing P/E Z-Score 10%

Trailing ROE 15%Earnings Growth Forecast 3MMA 8%Earnings Revision Breadth 3MMA 12%

Country Model Skew 5%Aggregated MS Analysts' view 10%

1M Price Momentum 8%Fund Flow 3MMA 12%

Business Cycle Composite 10%

Source: Morgan Stanley Research.

Exhibit 50

APxJ/EM Industry Group Rankings

12

34

56

78

9

1112

1718

19

2122

2324

1

34

76

2

1312

8

5

22

19

21

23

10

13

1514

16

20

9

18

14

11

17

24

20

1516

10

Re

al E

stat

e

Ba

nk

s

Au

to

So

ftw

are

& S

vcs

Cap

ital

Go

od

s

En

erg

y

Per

son

al P

rod

uct

s

Se

mic

on

du

cto

rs

Insu

ran

ce

Ph

arm

a

Mat

eria

ls

Co

ns

Srv

cs

Co

mm

Srv

cs

He

alth

Car

e E

qp

t

Tel

eco

m

Ret

ailin

g

Uti

liti

es

Me

dia

Te

ch H

ard

wa

re

Div

ersi

fied

Fin

Fo

od

Bev

To

ba

Fo

od

Ret

ailin

g

Co

ns

Du

rab

les

Tra

nsp

ort

atio

n

Industry rankings: the lower the ranking, the better the score in the model

Current Ranking

Prior Ranking

Biggest Movers

OVERWEIGHT EQUAL-WEIGHT UNDERWEIGHT Source: MSCI, FactSet, Morgan Stanley Research.

Exhibit 51

EM Industry Scatter: Consensus 2013E P/B vs. ROE

Cons Durables

Insurance

Commercial Srvcs

Health Care Eqpt

Cons Srvcs

Pharma

Personal Products

Media

Retailing

Transportation

Food Retailing

Real Estate

Auto

Software & Svcs

Diversified Financials

Utilities

Food Bev Toba

Tech Hardware

Semiconductors

Capital Goods

Telecom

Energy

Materials

Banks

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

5% 10% 15% 20% 25% 30%

2013e ROE

2013e P/Book

Source: MSCI, FactSet, IBES, Morgan Stanley Research.

Sector Focus : Banks – a sector crucial to the performance of the asset class Banks are the largest sector in APxJ (accounting for 22% of market cap and EM (accounting for 18%). Exhibit 52 shows a striking divergence in bank credit growth, which has continued in Asia Pacific, whilst the Global Financial Crisis led to an abrupt shift to deleveraging trends in USA and Euro Area.

Recently, our EM banks team, led by Magdalena Stoklosa, has published a Blue Paper on the industry titled Global Emerging Market Banks: On Track for Growth, dated November 19, 2012. In general, this supports the positive stance taken by our industry quantitative model.

22



Our EM banks team sees robust growth on the horizon for GEM banks. While developed banking markets have been buffeted by headwinds since 2008, GEM banks have proven relatively resilient. A more benign macro backdrop, solid balance sheets, simple business models, tight regulation, demographic change and healthy credit demand all underpin our belief in strong, sustainable growth until 2015. Importantly, better affordability of credit, with lower rates and an increase in discretionary income, supports the sustainability of credit growth.

The EM banks team expects local deposit funding ultimately to determine loan growth. Although deposit growth lags credit growth overall in GEM right now, they expect savings ratios to remain at their current high levels in Asia and to rise in Latin America and EMEA as countries achieve middle- to high-income status (annual income per capita of US$15-20k) by 2015.

The team sees striking convergence of both loan growth and returns on equity amongst the different banking markets in EM. Although global emerging markets are diverse in a number of ways, they project a 13-22% loan growth CAGR by 2015; at the same time, they see ROEs, which have been normalising since 2010, moving towards 15-18% as revenue margins stabilise yet cyclical pressures persist into 2014.

Exhibit 52

Global Bank Credit Growth (contribution disaggregated by region) – Asia Pacific Still Growing whilst Other Regions De-lever

-10%

-5%

0%

5%

10%

15%

20%

Mar

-01

Dec

-01

Sep

-02

Jun

-03

Mar

-04

Dec

-04

Sep

-05

Jun

-06

Mar

-07

Dec

-07

Sep

-08

Jun

-09

Mar

-10

Dec

-10

Sep

-11

Jun

-12

USA Euro AreaAsia Pac LatAmEM Euro

Source: updated series from BIS wp 377 (here: http://www.bis.org/publ/work377.pdf ), Morgan Stanley Research

On lending, the team expects Indonesia, Mexico and Russia to deliver the strongest growth and highest penetration gains across GEM. On funding, China, India and Indonesia still have some room to support domestic lending. On profitability,

Indonesia, Russia, Turkey and Mexico should enjoy higher returns on assets in the medium term. On valuation, however, it is China and Russia that stand out, at a ~40% discount to GEM peers despite ROE convergence.

Exhibit 53

Banks Valuation among Major Global EM Countries – China and Russia Stand Out

9.5

12.1

5.7

8.3

5.8

15.0

13.5

1.42.4

1.1 1.4 1.02.1 2.4

TU INDO RU BR CH MEX IN

P/E P/B

Source: IBES, Morgan Stanley Research Note: Graph shows 12-month forward multiples

New Theme for 2013 #1 – Defensives versus Cyclicals outperformance to reverse

We sense client confusion over whether the global growth and commodity price outlook are strong enough to warrant a fully fledged rotation to cyclicals, as for example took place in 2009. Recently, we have been asked more on this topic than any other single strategy debate in APxJ / EM.

We think there is a good chance that cyclicals will outperform defensives in APxJ / EM next year for the first time since 2009. We define cyclicals as Energy, Materials, Industrials and Consumer Discretionary and defensives as Consumer Staples, Healthcare, Utilities and Telecoms. In 2012 defensives counter-intuitively outperformed cyclicals by 966 bps in a rising market (see Exhibit 54).

23



Exhibit 54

The Relative Performance of Defensives vs. Cyclicals Is Usually Negatively Correlated with EM Returns Historically – 2012 Seems To Be an Exception

2012 YTD

y = -0.4157x + 0.0242

R2 = 0.5944

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-60% -40% -20% 0% 20% 40% 60% 80% 100%

MSCI EM Annual Total Return in US$

EM

Def

en

siv

e vs

. Cy

clic

al A

nn

ua

l Rel

ati

ve

Ret

urn

in U

S$


Moreover, Exhibit 55 shows that Consumers Staples was amongst the top three performers by industry group for a third year running and the fourth year out of five. No industry has had such a strong run of performance since Energy in the 2005-2007 period

Exhibit 55

Index Return with Sector Performance Rank (1= Best Performer, 10=Worst Performer)

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995MSCI EM (Total Return US$) 10% -18% 19% 79% -53% 40% 33% 35% 26% 56% -6% -2% -31% 66% -25% -12% 6% -5%

Energy 8 6 9 4 9 3 3 1 6 1 4 1 4 3 10 1 1 7Materials 10 9 5 3 8 2 2 8 7 5 1 2 6 5 5 7 9 10Industrials 7 10 3 7 10 1 6 10 3 4 5 8 8 10 8 10 8 6Cons Disc 6 3 1 1 6 9 8 5 4 3 3 3 9 2 7 9 7 9Cons Stap 3 1 2 6 2 8 7 2 5 10 6 7 2 8 3 5 4 4Health Care 1 7 4 9 1 7 10 3 10 6 2 9 1 4 2 3 5 5Financials 4 8 6 5 7 6 5 6 1 8 7 5 3 7 4 8 6 3IT 2 5 7 2 5 10 9 7 9 7 10 4 10 1 1 2 10 1Telecom 5 2 8 10 4 4 4 9 2 9 9 10 7 6 6 4 2 2Utilities 9 4 10 8 3 5 1 4 8 2 8 6 5 9 9 6 3 8

Per

form

ance

Ran

ks*

Source: MSCI, Factset, Morgan Stanley Research. Data as of Nov 21, 2012

The reason for the debate is probably the counter-intuitive outperformance of defensives in a rallying market in 2012, as well as the significant valuation premium the group commands to cyclicals (without currently delivering superior ROE). Exhibit 56 plots the trailing P/E relative of defensives to cyclicals. The defensives are now trading at a P/E premium of 70% to cyclicals, which is at the 83rd percentile to the historical range dating back to early 1996. Prior peaks were at 1.95x in Dec-08 and 2.07x in Dec-00. ROE relative for defensives is at parity to cyclicals in a depressed period for cyclical earnings.

24



Exhibit 56

Defensives Trailing P/E Relative to Cyclicals – Currently at a 70% premium to cyclicals

1.69

0.0

0.5

1.0

1.5

2.0

2.5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

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-01

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-04

Jan

-05

Jan

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-07

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-11

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-12


Exhibit 57

Defensives ROE Relative to Cyclicals – ROE relative is at parity and cyclicals should improve as EM growth picks up

1.0

0.0

0.5

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1.5

2.0

2.5

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-96

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-97

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-98

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-99

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-00

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-01

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-03

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-05

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-06

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-08

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-10

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-12


A move from GDP growth deceleration to acceleration, our house forecasts of oil and metal price gains beyond those embedded in forward curves, and our back-tests on relative valuations all suggest that cyclicals should outperform defensives by as much a 15-20% over the calendar year.

Exhibit 58

MSCI EM Defensives Underperformed Cyclicals Historically When EM GDP Growth Picked Up

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

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-02

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p-0

2

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-03

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p-0

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-04

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p-0

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-05

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p-0

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-07

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p-0

8

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p-0

9

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p-1

0

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p-1

1

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p-1

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Se

p-1

3

60

70

80

90

100

110

120EM Real GDP YoY (LHS)

EM Real GDP YoY MS Forecast (LHS)

EM Defensives vs. Cyclicals RelativePerformance (RHS)

MS Forecast


Our back-tests on Trailing P/E suggest that the premium in valuations currently commanded by defensives has now reached a level which is likely to lead to an average underperformance of 7-19% on a 6- to 12-month time frame (see Exhibit 59).

Our most preferred cyclical areas are Autos within Consumer Discretionary, Cap Goods (and Industrials more generally), Energy and selected parts of Materials. Our bottom-up teams in some of these areas have also become more constructive recently (most notably MS analysts China cement analysts John Lam and steel analyst Rachel Zhang). Our least preferred defensives areas are Consumer Staples (Food, Beverage and Tobacco and Food Retailing) and Utilities.

Exhibit 59

Back-test of Relative Performance of EM Defensive versus Cyclicals when relative trailing P/E >1.69x

-6.4%

-21.2%

-7.4%

-19.0%

-25%

-20%

-15%

-10%

-5%

0%

6m Fwd Rel. Return 12m Fwd Rel. Return

median

mean


Our most preferred area within defensives is Healthcare, although we would note that our industry quant model

25



downgraded to EW from OW in October and that the sector was best performer of all industries in 2012.

New Theme for 2013 #2 – State-controlled

We advocate buying the state-controlled group within the combined APxJ / EM universe. We expect state-controlled equities in EM to outperform, due to a combination of: a) near record low P/B relative, b) superior ROE relative to the index, and c) gearing to Energy, Materials and Financials, which are sectors generally favoured in our sector quant model currently.

Exhibit 60 shows that even allowing for sector skew divergence the 122 most state-controlled companies in the combined APxJ / EM universe (i.e., those where the state holds a more than a 30% stake) have outperformed the overall benchmark consistently since January 2001. Contrary to consensus views that state control leads to lower efficiency, we find that the group has delivered systematically higher ROE than the benchmark overall.

For more information and discussion on why the state- controlled group outperforms over the cycle see our full piece Investing in State Controlled Companies in EM: An attractive proposition, dated April 23, 2012.

Exhibit 60

State-Controlled Companies Have Outperformed MSCI EM over the Cycle

50

100

150

200

250

300

350

400

Ja

n-0

1

Oc

t-01

Jul-

02

Ap

r-03

Ja

n-0

4

Oc

t-04

Jul-

05

Ap

r-06

Ja

n-0

7

Oc

t-07

Jul-

08

Ap

r-09

Ja

n-1

0

Oc

t-10

Jul-

11

Ap

r-12

State-controlled Basket Relative to MXEF

State-controlled Basket Relative to MXEF adjusted for basket's sector skew*

Source: *MXEF Index levels adjusted using the sector weights from our group of 122 stocks. Source: Factset, LionShares, Morgan Stanley Research. Data as of Nov 20, 2012

Currently, the group is delivering an ROE premium of over 20% to the index and yet is trading at near record low P/B discount relative to the index of more than 20% (see Exhibit 61). Consensus implies a moderate erosion of this ROE premium through 2013, but we think that this is likely to be too cautious given the state controlled groups skew to some of our preferred sectors (Financials and Energy in particular).

Exhibit 61

P/Book and ROE of State –Controlled Companies Relative to MSCI EM

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Feb

-02

No

v-02

Au

g-0

3

May

-04

Feb

-05

No

v-05

Au

g-0

6

May

-07

Feb

-08

No

v-08

Au

g-0

9

May

-10

Feb

-11

No

v-11

Au

g-1

2

May

-13

ROE- Relative to MXEF PBV- Relative to MXEF

Implied ROE- based on 2012-end consensus estimates

Implied PBV- based on 2012-end consensus estimates

Source: MSCI, Factset, Morgan Stanley Research. Data as of 20th Nov, 2012

Meanwhile, dividend yield payout is 32% of earnings for the state controlled versus 33% for the index. The dividend yield spread to the index is +110 bps which is near a record high (see Exhibit 62). The absolute trailing dividend yield for the state controlled group recently appears to have peaked at over 4.0%.

Exhibit 62

Dividend Yield of State-Controlled Companies Tend to Outperform EM Over the Cycle

4.0

2.9

1

2

3

4

5

Au

g-0

1

Feb

-02

Au

g-0

2

Feb

-03

Au

g-0

3

Feb

-04

Au

g-0

4

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-05

Au

g-0

5

Feb

-06

Au

g-0

6

Feb

-07

Au

g-0

7

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

Feb

-12

Au

g-1

2

(%)

DY of companies with 30% or more state ownership MXEF DY

Source: FactSet, LionShare, Morgan Stanley Research

New Theme #3 – APxJ / EM Brands

We introduce a new theme of focus on key “Brands” within the APxJ / EM universe. As the EM middle class develops rapidly, brand awareness and loyalty are likely to be important elements in sustainable competitive advantage for EM firms.

WPP publishes the top 100 Most Powerful Global Brand Ranking each year. This is an annually conducted survey that

26



began in 2006 and has gained global attention ever since. In its latest 2012 report, there are 20 brands originating in EM countries that made it to the list (Exhibit 63). This compares to only two brands (both from China) in 2006. China still dominates the EM list with 13 brands; by 2012, brands from five other EM countries are included, and there is representation of Asia, Europe, South America, and Africa.

Exhibit 63

WPP Global Top 100 Brands 2012: EM Brands’ Details Ranking Category Brand Country Ticker

10 Telecoms China Mobile China 0941-HK

13 Financial ICBC China 1398-HK

24 Financial CCB China 0939-HK

25 Technology Baidu China BIDU-US

37 Technology Tencent China 0700-HK

38 Financial ABC China 1288-HK

53 Insurance China Life China 2628-HK

56 Oil & Gas Sinopec China 0388-HK

61 Financial Bank of China China 3988-HK

63 Financial ICICI Bank India ICICIBANK-IN

68 Oil & Gas Petrochina China 0857-HK

69 Alcohol Moutai China 600519-SH

71 Telecoms Airtel India BHARTIARTL-IN

74 Financial Sberbank Russia SBER-MZ

75 Oil & Gas BR Petrobras Brazil PETR3-BR

78 Insurance PingAn Insurance China 2318-HK

85 Telecoms MTS (Mobile TeleSystems) Russia MBT-US

88 Telecoms MTN South Africa MTN-JO

90 Telecoms China Telecom China 0728-HK

97 Telecoms Telcel (América Móvil) Mexico AMX.L-MX Source: WPP “Top 100 Most Powerful Global Brand Ranking”, Morgan Stanley Research

EM countries – China dominates Top Brand Ranking The emergence of global-level Chinese brands approximately coincided with the country’s economy boom. Back in 2006, only China Mobile and Esprit (HK) made it – with only China Mobile from mainland China. By 2012, all 13 brands on the list are from Mainland China. China Mobile still tops at no. 10, and the other new comers over the sis-year period are from a diversified industry/sector background, including finance (both bank and insurance), technology, oil and gas, consumer, and telecom. Also note that six out of the seven new EM non-China brands (except for BR Petrobras from Brazil) are in either the telecom or bank sectors.

EM’s representation in Global Top 100 Brands rises dramatically Besides China, Russia and India each gained two spots, Brazil, Mexico and South Africa one each. EM’s advancement came at the cost of DM’s historical dominance. US, Europe, and Japan lost 11, six and four spots, respectively (Exhibit 64).

In 2006, the US still held three spots in the auto/vehicle industry, and all were gone by 2012. US has also retreated significantly in the financial sector, where it lost six spots. The US auto industry has gone through challenging times in the past decade, and the financial sector was deeply hurt by the 2008 financial crisis. Japan's prolonged economic depression and currency appreciation have negatively affected its competitiveness across multiple industries. For Europe, the two sectors where it lost the most presence are financial and luxury goods. The financial sector has been hit by similar forces as in the US, plus the recent drag from the Eurozone sovereign debt crisis. As for the six luxury brands that made to the 2006 list (No. 24 Louis Vuitton, No. 75 Chanel, No. 82 Cartier, No.90 Rolex, No. 92 Hermès, No. 100 Hennessy), other than Louis Vuitton, the rest were ranked relatively low in the list, so it is understandable that they were pushed out as new additions from EM took over (Louis Vuitton was ranked No. 21 while Hermès made a big leap to No. 32 in 2012).

As a comparison, the Chinese brands on the 2012 list cover a large diversity of industries. The growth in the oil and gas sector reflected China’s growing energy demand, driven by its economic growth; the appearance of consumer, bank, insurance brands, and the addition to telecom (China Telecom besides China Mobile in 2012) revealed the significant potential in consumer demands for product/services that improve quality of life. What is worth noting is that two Chinese names – Baidu and Tencent – joined the top technology brand club. India’s trajectory shows a similar pattern: by 2012, one bank brand and one telecom brand had gained global recognition, reflecting the economic development and consumer demand growth. As we discussed earlier, the rest of the EM league concentrate in financial services and telecom sectors for obvious reasons.

27



Exhibit 64

Global Top 100 Brands Additions & Deletions: EM vs. DM

2012 2006 '06-'12 Δ 2012 2006 '06-'12 Δ 2012 2006 '06-'12 Δ 2012 2006 '06-'12 Δ 2012 2006 '06-'12 Δ 2012 2006 '06-'12 Δ 2012 2006 '06-'12 Δ 2012 2006 '06-'12 ΔAlcohol 1 1Apparel 1 1 2 2Baby Care 1 1Beer 1 1Cars 3 (3) 3 4 (1) 3 5 (2)Conglomerate 1 1Entertainment 1 2 (1)Fast Food 4 2 2Financial 7 13 (6) 2 (2) 3 6 (3) 4 4 1 1 1 1Food 1 (1)Industrial 1 (1)Insurance 1 1 2 2Logistics 2 2 1 1Luxury 2 6 (4)Oil & Gas 2 2 2 1 1 2 2Personal Care 2 3 (1) 1 1Pharma 1 (1)Retail 5 5 4 5 (1)Soft Drinks 2 2 1 1Technology 10 12 (2) 1 2 (1) 2 3 (1) 2 2Telecoms 2 3 (1) 1 1 6 4 2 2 1 1 1 1 1 1 1 1 1 1Tobacco 1 1Total 43 54 (11) 5 9 (4) 27 33 (6) 13 1 12 2 0 2 2 0 2 1 0 1 1 0 1

Russia Brazil MexicoUS Europe China IndiaJapan

Source: WPP “Top 100 Most Powerful Global Brand Ranking”, Morgan Stanley Research

A closer look at China: domestic consumer demands have nurtured brand-building culture WPP also compiled an exclusive Chinese brand list – “Top 50 Most Valuable Chinese Brands”. There has been much discussion about China’s economic growth model being export-oriented and investment-driven. However, the brand survey reveals that a large number of companies have appeared that cater to domestic consumer demands.

Among the 50 brands, 10 are directly from the consumer sector, followed by technology, bank, airline, apparel, etc., all of which are also driven greatly by domestic consumer demands and behaviors. This distribution across diversified industries/sectors proves the huge potential in domestic market. Brand building helps set industry standards and improve product/service quality, which in turn would help drive larger and more upgraded demands in the future. This could turn into an invaluable virtuous cycle in a country/market, where both companies and consumers are “young” and still learning, helping each other in an interactive educational process.

Exhibit 65

WPP Top 50 Chinese Brands: Brand-building across Sectors; Consumer & Technology Leading the Game

10

7

6

5 5

3 3 3 3

2 2

1

0

2

4

6

8

10

12

Consu

mer

Techn

ology

Bank

Airline

Appar

el

Insu

ranc

e

Pharm

a

Teleco

m

Electri

cal A

pplia

nces

Oil & G

as

Retail

Auto

Source: WPP “Top 50 Most Valuable Chinese Brands”, Morgan Stanley Research

28



Exhibit 66

Complete List: WPP Top 50 Most Valuable Chinese Brands 2012 # Brand/Company Category Ticker1 China Mobile Telecom 0941-HK2 ICBC Bank 1398-HK3 CCB Bank 0939-HK4 BOC Bank 3988-HK5 ABC Bank 1288-HK6 Baidu Search engine BIDU-US7 China Life Insurance 2628-HK8 Sinopec Oil & Gas 0388-HK9 PetroChina Oil & Gas 0857-HK10 Tencent IT 0700-HK11 China Telecom Telecom 0728-HK12 Ping An (Insurance) Insurance 2318-HK13 Moutai (Kweichow Moutai Co. Ltd) Alcohol 600519-SH14 China Merchant Bank Bank 3968-HK15 China Unicom Telecom 0762-HK16 Air China Airline 0753-HK17 Wu Liang Ye (Wuliangye Yibin Co. Ltd) Alcohol 000858-SZ18 Mengniu Dairy 2319-HK19 CPIC (China Pacific Insurance) Insurance 2601-HK20 Changyu (Changyu Pioneer Wine Co. Inc.) Wine 000869-SZ21 Suning Consumer Electronics Retailer 002024-SZ22 Yili Dairy 600887-SH23 Lenovo Computer Hardware Manufacturer 0992-HK24 China Eastern Airlines Airline 0670-HK25 Sina Web portal SINA-US26 Yunnan Baiyao Pharmaceutical & Personal Care 000538-SZ27 Gree Air Conditioner Manufacturer 000651-SZ28 China Southern Airlines Airline 1055-HK29 Haier Household Appliance Manufacturer 1169-HK30 Meters/bonwe Apparel 002269-SZ31 Midea Household Appliance Manufacturer 000527-SZ32 Shuanghui Group Meat Processor 000895-SZ33 Gome Consumer Electronics Retailer 0493-HK34 Tsingtao Beer 0168-HK35 Renren.com Internet Service Portal RENN-US36 Tong Ren Tang Pharmaceutical 600085-SH37 Li-Ning Sportswear 2331-HK38 Huaxia Bank Bank 600015-SH

39

Snow Beer (JV of China Resources Enterprise, Ltd 0291-HK 51% and SABMiller SAB-LN 49%) Beer NA

40 Ctrip E-Commerce CTRP-US41 ANTA Sportswear 2020-HK42 Yanjing Beer (Beijing Yanjing Brewery) Beer 000729-SZ43 Bright Dairy 600597-SH44 999 Pharmaceutical 000999-SZ45 SeptWolves Apparel 002029-SZ46 Hainan Airlines Airline 600221-SH

47

Fulinmen (COFCO Group, brand belongs to one of COFCO's listed companies: China Foods) Cooking Oil & Rice Producer 0506-HK

48 BYD Auto BYD-US49 Sohu Web portal & Search SOHU-US50 361° Sportswear 1361-HK Note: Some stocks above are dual-listed (e.g. listed and traded at two stock exchanges), we list the HK ticker here Source: WPP “Top 50 Most Valuable Chinese Brands”, Morgan Stanley Research

Brand power translates into significant equity value and could help improve profitability WPP has tried to quantify the present value of all future earnings that can be dedicated purely to the brands, excluding all tangible and intangible factors that come from other barriers and structural conditions. In other words, brands that generate high value for the businesses are supposed to be in industries/sectors where structural barriers or switching costs are low; however, the consumers still perceive the brands as highly differentiated and have strong, relevant and distinctive images3.

From a financial value creation perspective, brands create value in the following ways:

3 “BrandZ Top 100 Most Powerful Brands” 2006 - 2008, “BrandZ Top 100 Most Valuable Global Brands” 2009 - 2012, Milward Brown Optimor

1) Maintain price premium and/or increase market share vs. competitors when customers/consumers attribute/assign unique positive identity to the brand.

2) Enable the parent company to leverage the brand as an intangible strategic asset to branch into new product categories or new business territories as long as they fit the general brand image and positioning.

Both help improve the sustainability of a company’s earnings and will be positively perceived by the financial market. We expect returns to brand development within EM to be high, and will remain as an increasingly important driver of EM companies’ competiveness and their valuations.

Exhibit 67 shows the calculated brand equity value for all EM brands in the Global Top 100 list (including Samsung from Korea) compared to their parent companies’ F2011 net income. As mentioned above, these brand equity figures are the present value of all future earnings that can be attributed purely to the brand name itself. We do not intend to compare the relative magnitude of brand value vs. net income among these brands because: 1) they are from different industries/ sectors, and have different valuation methodologies and metrics; 2) one standalone year’s numbers could have accidental cyclical factors that affect valuation in different directions; and 3) some parent companies may have other businesses non-related to the brand listed. That said, it is clear that the brand equity value in financial terms may be material, and can have a significant impact on company valuations.

Exhibit 67

Brand Is Money – 2012 Brand Equity Value ($M) vs. F2011 Net Income ($M) for WPP Most Valuable EM Brands

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

China

Mob

ileIC

BCCCB

Baidu

Tence

ntABC

China

Life

Samsu

ng

Sinope

c

Bank o

f Chin

a

ICIC

I Ban

k

Petro

china

Mou

tai

Airtel

Sberb

ank

BR Pet

robr

as

PingAn

Insu

ranc

e

MTS (M

obile

Tele

Syste

ms)

MTN

China

Teleco

m

Brand Value 2012 ($M) Net Income FY 2011 ($M)

Source: WPP “Top 100 Most Powerful Global Brand Ranking”, Morgan Stanley Research

29



New Theme #4 – Accounting and Earnings Quality in EM Our final new theme involves focusing on Accounting and Earnings Quality issues with a view to avoiding potential risks to the portfolio. MS analyst Peter Joos recently updated his 10 earnings quality scores (EQS) for a large global sample of over 5,000 stocks. For further details, please see his report Global Valuation & Accounting: Earnings Quality: The EM-DM Gap Persists, dated October 30, 2012. The goal of this study was to examine regional, sector and country differences in earnings quality, with an emphasis on comparing patterns in emerging versus developed markets. He finds that at a global level, EM firms continue to display weaker earnings quality than DM firms. Consumer Discretionary and Energy see the largest weakening of earnings quality, driven by a widening gap between EM and DM constituents. Healthcare (Utilities) is the GICS sector with the largest (smallest) earnings quality differences between EM and DM constituents in 2011. Telecoms sees the most pronounced widening of the earnings quality gap between EM and DM firms, while at a country level BRIC (and particularly China and India) exhibit weaker earnings quality than DM firms: South Africa’s average EQS weakens somewhat but is still DM-like.

We apply this work from Peter Joos to inform our stock selection work, in particular in relation to our Best Business models list and APxJ / GEM focus lists.

Exhibit 68

EM Change in Average Earnings Quality Score per Global GICS Sector between 2010 and 2011

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

UTIL MATE IT TELEC HEALTH INDUS CSTAP ENER CDISC

Source: FactSet, Morgan Stanley Research

Exhibit 69

Global GICS Sectors: Average Earnings Quality Score Gap between EM vs. DM Constituents 2011

0.0

0.5

1.0

1.5

2.0

2.5

3.0

UTIL IT ENER INDUS TELEC MATE CSTAP CDISC HEALTH

EM DM

Source: FactSet, Morgan Stanley Research

Exhibit 70

Average Earnings Quality Score in BRIC Countries Is Still Higher than in Large DM Countries; Average EQS in South Africa increases but Is Still more DM-like

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Brazil Russia India China South Africa USA Japan

2010 2011 Source: FactSet, Morgan Stanley Research

30



2012 Theme Reiterated #1 – Dividend Yield

We continue to recommend a focus on dividend yield, specifically preferring top-quintile trailing dividend yield and our screen for high and rising dividend yield with balance sheet strength at the stock level.

High Dividend Yield stocks currently have a high mapping to cyclicals A key pushback that might be posed to this call is how to reconcile buying cyclicals versus defensive (discussed above) with a reiteration of a buy high dividend yield stocks view. Exhibit 71 shows that high-yielding stocks have higher exposure than MSCI EM benchmark to cyclical industries like Industrials and Materials. The top quintile also has a skew towards Telecoms and Utilities, which are defensives. However, Consumer Staples, which is our Key UW in the defensive sector, is under-represented.

Exhibit 71

Dividend Quintiles Sector Composition Relative to MSCI EM Weights – Top Quintile is OW in Some cyclicals and UW in Consumer Staples within Defensive

Q1 Q2 Q3 Q4 Q5Cons Disc -2.3% 4.9% 1.8% -0.8% 7.1%Cons Stap -6.7% -2.0% 0.0% 4.6% 3.7%Energy -7.1% -4.5% -6.6% -8.2% -8.6%Financials 0.2% 2.3% 3.8% 1.6% -11.1%Health Care -0.8% -0.2% 1.3% 1.8% 4.5%Industrials 3.9% 3.9% 10.7% 10.1% 11.3%IT -2.0% -6.2% -10.3% -7.2% -4.6%Materials 4.0% 3.0% 3.0% 1.9% -1.1%Telecom 5.0% -3.9% -5.9% -5.9% -4.4%Utilities 5.8% 2.7% 2.2% 2.1% 3.2%

Delta to MSCI EM Weights

Source: MSCI, Morgan Stanley Research

Exhibit 72 shows that the highest dividend yield (Quintile 1) stocks have significantly outperformed all other quintiles over the cycle. However, there were periods where the highest dividend yield quintile underperformed the benchmark, especially during the global boom phase of 2005-07. Only in our bull case would we witness such a GDP growth acceleration in 2013. As highlighted earlier in this note, our economics team expects a base case “twilight” global growth environment that is likely to hold core global government bonds yield low, which is favorable for high-yielding stocks in that scenario (see Exhibit 73).

Exhibit 72

Quintile Performance Relative to MSCI EM / APxJ Combined Universe – High-yielding Stocks Outperform over the Cycle

50

100

150

200

250

300

350

Dec

-99

Sep

-00

Jun

-01

Mar

-02

Dec

-02

Sep

-03

Jun

-04

Mar

-05

Dec

-05

Sep

-06

Jun

-07

Mar

-08

Dec

-08

Sep

-09

Jun

-10

Mar

-11

Dec

-11

Sep

-12

50

100

150

200

250

300

350Quintile 1*Quintile 2*Quintile 3*Quintile 4*Quintile 5*MSCI EM/APxJ** (Right)

Source: MSCI, FactSet, Morgan Stanley Research. Note: Quintile 1 = Highest Dividend yield Stocks. Quintle 5 = Lowest Dividend yield Stocks *Average Performance of Quintile based on Dividend Yield relative to EM / APxJ combined universe. **MSCI EM / APxJ combined Performance. Data as of Nov 2012

Exhibit 73

US 10-year Bond Yield and Quintile 1(high) Dividend Relative Performance - Falling or Low Bond Yields Favorable for High Dividend Yield Stocks

50

100

150

200

250

300

350

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %Performance of Top Quintile(High) Div Yld Stocks Relative toMSCI EM*

10 Year US Treasury Yield (Right)

Performance rebased to Dec-99=100

Source: MSCI, Factset, Morgan Stanley Research

This year, although the highest dividend-yielding stocks have outperformed the benchmarks, they have underperformed moderately since the start of QE3 and the announcement of OMT by the ECB. We can see this in Exhibit 74, which shows redemptions from the global dividend funds around QE3. However, inflows to dividend funds have resumed recently

31



and are likely to remain high unless bond yield start to rise systematically.

Exhibit 74

Global* Dividend Equity Funds Weekly Flows YTD 2011

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

5-Ja

n

9-F

eb

16-M

ar

20-A

pr

25-M

ay

29-J

un

3-A

ug

7-S

ep

12-O

ct

16-N

ov

21-D

ec

25-J

an

29-F

eb

4-A

pr

9-M

ay

13-J

un

18-J

ul

22-A

ug

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Source: EPFR, Morgan Stanley Research. Data as of Nov 21, 2012 * GLobal funds is the total of all countries flows provided by country flows database of EPFR

To play this theme, we highlight a list of stocks in Exhibit 75 to narrow down the high dividend plays by applying the following criteria: For non-financial stocks, the screen has the following six components:

1) Increasing dividend yield forecast by Morgan Stanley analysts (2011 DY < 2012E DY <2013E DY) with Average DY for 2012 and 2013 above 4.5%.

2) Average Morgan Stanley forecast 2012 and 2013 dividend payout less than 75% of earnings.

3) Average Morgan Stanley forecast 2012 and 2013 net debt/market cap less than 10%.

4) Average Morgan Stanley forecast 2012 and 2013 FCF yield greater than 5%.

5) Stock rated Overweight and Equal-weight by MS analyst.

6) Market cap greater than US$2.0bn.

For financial stocks (banks, insurance and diversified financials), we exclude conditions 3 and 4 above and replace them with Average Morgan Stanley forecast 2012 and 2013 return on assets greater than 1.5%.

Exhibit 75

High and Rising Dividend Yield Plus Balance Sheet Strength (Sorted by Market Capitalization) Company GICS MS Mcap Current Upside

Ticker Name Country Sector Rating US$ Bn Curr Price to PT 2012E 2013E 2011 2012E 2013E 2012E 2013E PE PBV

COAL.NS Coal India Limited India Energy OW 40.7 INR 354.8 11.3% 4.8% 6.7% 2.4% 4.0% 5.0% 44.0% 46.9% 11.1x 4.85xWPL.AX Woodside Petroleum Australia Energy OW 28.6 AUD 33.54 23.7% 6.6% 5.6% 3.2% 4.7% 4.9% 60.8% 60.0% 13.0x 1.91xSBKJ.J Standard Bank South Africa Financials EW 19.1 ZAc 10682 6.7% 4.0% 4.5% 4.8% 50.2% 46.8% 11.2x 1.47xTLKM.JK Telekomunikasi Indonesia Telecom OW 18.5 IDR 9200 17.4% 4.9% 5.4% 4.0% 4.8% 5.6% 65.0% 65.0% 12.5x 2.85x0880.HK SJM Holdings Hong Kong Cons. Disc OW 13.0 HKD 18 5.6% 7.6% 8.4% 4.1% 4.5% 5.1% 69.5% 66.6% 15.6x 5.23xBSAC.N Banco Santander Chile Chile Financials EW 12.2 USD 26.27 4.3% 4.5% 5.4% 60.0% 60.0% 13.5x 2.62xIAG.AX Insurance Australia Group Ltd Australia Financials OW 9.6 AUD 4.45 1.1% 3.7% 4.8% 6.3% 66.7% 66.8% 13.8x 1.80x2357.TW Asustek Computer Inc. Taiwan IT OW 8.1 TWD 314 14.6% 5.4% 6.6% 4.6% 4.8% 5.1% 50.9% 51.8% 10.5x 1.87xLLC.AX Lend Lease Corporation Australia Financials OW 5.1 AUD 8.5 11.8% -1.2% 4.6% 4.3% 4.7% 5.2% 42.8% 43.9% 9.1x 1.01xCOMI.CA Commercial International Bank Egypt Financials OW 3.8 EGP 37.9 13.5% 2.6% 4.0% 5.3% 44.7% 48.4% 11.3x 2.12xALQ.AX ALS Ltd Australia Industrials OW 3.0 AUD 8.62 27.6% 6.4% 8.5% 4.7% 5.7% 5.9% 67.4% 71.5% 11.7x NATOASO.IS Tofas Turkey Cons. Disc OW 3.0 TRY 10.8 -5.6% 7.5% 9.7% 4.8% 6.9% 7.2% 75.0% 75.0% 10.9x 2.67xABLJ.J African Bank Investments Limited South Africa Financials OW 2.8 ZAc 3105 28.8% 5.8% 6.0% 7.7% 50.0% 50.7% 8.4x 1.76xFLT.AX Flight Centre Limited Australia Cons. Disc OW 2.8 AUD 26.45 5.9% 12.6% 9.9% 3.7% 4.5% 5.0% 56.7% 57.5% 12.7x 2.10x001450.KS Hyundai Marine & Fire S. Korea Financials OW 2.6 KRW 34500 27.5% 3.4% 4.2% 5.0% 27.2% 28.4% 6.4x 1.40x

FCF Yield 2012EDiv PayoutDiv Yld

For important disclosures regarding companies that are the subject of this screen, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. Source: MSCI, FactSet, Morgan Stanley Research

32



2012 Theme Reiterated #2 – Quality

We also continue to expect quality to outperform both near term and over the cycle. Today we issue our Best Business Model (BBM) version 3 by selecting one Best Business Model in each of the 31 industries in APxJ/EM. Our BBM v2 basket (MSMSBBMG Index) has outperformed MSCI EM benchmark by 1,300bp since launch on October 28, 2011, and YTD 1,420bp (see Exhibit 76).

We use the same approach to select stocks as in our previous two versions – i.e., we select companies using the following screen:

1) High level of average profitability over the business cycle defined by return on net operating assets (RNOA);

2) Coefficient of variance for historical RNOA lower than 1.0x – i.e., low RNOA volatility;

3) Altman Z-score above 1.8 – i.e., balance sheets above the “distress zone” in the Altman scale;

4) Positive assessment by Morgan Stanley analysts regarding the medium- to long-term strength of the business model, management skills, sustainability of competitive advantages and barriers to entry; and

5) We only considered Morgan Stanley covered stocks with a market capitalization greater than US$2.0bn and daily trading volume of at least US$4mn.

For financial stocks, we look at ROA instead of RNOA and exclude Altman Z score criteria.

Exhibit 76

Best Business Model v2 – Outperformed MSCI EM by 1,300bp

96

98

100

102

104

106

108

110

112

114

116

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28-

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850

900

950

1000

1050

1100BBM V2 Rel to EM

MSCI EM (RHS)

Past performance is not a guarantee of future results. Source: Bloomberg, Factset, Morgan Stanley Research. Data as of Nov 21, 2012

Based on our revised list, Exhibit 77 shows the summary of changes we are making versus our Best Business Model Version 2 list. We are adding 12 stocks and removing nine stocks from our previous published list.

Exhibit 77

Summary Table of Stocks Changes in the Best Business Model list (V3 versus V2)

Sector Industry Groups Stocks Removed Stocks Added

Cons Disc Automobiles & Components Hyundai Mobis Bajaj AutoCons Disc Consumer Services Ctrip.com Sands ChinaCons Stap Household & Personal Products Hindustan Unilever Unilever IndonesiaFinancials Diversified Financials -- HDFCFinancials Insurance -- Ping AnHealth Care Health Care Services -- Life Healthcare GroupIndustrials Capital Goods Hyundai Heavy Industries Larsen & ToubroIndustrials Transportation & Logistics Localiza Rent A Car SA Hyundai GlovisIT Software & Services Infosys Limited TCSIT Technology Hardware & Equipment Largan Precision Samsung ElectronicsMaterials Steel Novolipetsk Steel --Telecom Wireless Telecom Services Advanced Info Service Digi.comUtilities Gas Utilities -- PGAS


33



Exhibit 78 shows the full list of stocks in Best Business Model version 3 together with associated valuation and RNOA / ROA statistics.

Exhibit 78

Full BBM v3 List with Valuation, Morgan Stanley Rating and Price Target

Company GICS Industry MS Mcap Latest Price UpsideAverageRNOA

Name Ticker Country Sector Group Rating US$ Bn Curr Price Target to PT 1998-2011 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E

Bajaj Auto Ltd. BAJA.NS India Cons. Disc. Automobiles & Components OW 9.6 INR 1819.4 2005.0 10.2% 175.0% 16.7x 14.1x 7.3x 5.8x 43.6% 40.9% 2.6% 3.0%Titan Industries Ltd TITN.NS India Cons. Disc. Consumer Durables & Apparel UW 4.8 INR 297.3 198.0 -33.4% 23.2% 37.2x 30.7x 14.6x 11.3x 39.1% 36.8% 0.8% 0.9%Sands China Ltd. 1928.HK Hong Kong Cons. Disc. Consumer Services OW 32.9 HKD 31.6 35.0 10.6% 15.5% 19.8x 15.7x 4.9x 4.0x 24.9% 25.8% 3.3% 3.9%Mr Price Group MPCJ.J South AfricaCons. Disc. Retailing OW 4.1 ZAc 13750 13700 -0.4% 51.4% 24.3x 19.9x 11.4x 9.6x 47.0% 48.4% 2.7% 3.3%Tencent Holdings Ltd. 0700.HK China Cons. Disc. Media OW 62.0 HKD 258.0 320.7 24.3% 37.0% 31.0x 25.4x 9.3x 6.9x 29.9% 27.1% 0.4% 0.5%BIM BIMAS.IS Turkey Cons. Stap. Food & Staples Retailing OW 6.7 TRY 79.0 78.6 -0.5% 81.4% 36.0x 29.4x 15.9x 12.8x 44.3% 43.4% 1.9% 2.3%AmBev ABV.N Brazil Cons. Stap. Beverages EW 126.9 USD 40.6 NA 21.9% 24.7x 22.9x 7.6x 7.9x 31.0% 34.4% 2.9% 3.4%Want Want China Hldgs Ltd 0151.HK China Cons. Stap. Food Products OW 18.6 HKD 10.9 10.3 -5.9% 32.8% 33.9x 27.0x 11.5x 9.9x 33.8% 36.8% 1.8% 2.2%ITC Ltd. ITC.NS India Cons. Stap. Tobacco OW 40.6 INR 286.1 300.0 4.9% 34.7% 32.4x 27.9x 11.0x 9.9x 33.9% 35.4% 1.9% 2.2%Unilever Indonesia UNVR.JK Indonesia Cons. Stap. H'Hold & Personal Products EW 20.8 IDR 26200 27320 4.3% 104.6% 40.2x 35.0x 45.2x 40.0x 112.5% 114.5% 2.0% 2.4%CNOOC 0883.HK China Energy Oil & Gas Exploration & Prod OW 93.1 HKD 16.3 21.0 29.0% 37.0% 8.5x 9.2x 1.8x 1.6x 21.8% 17.4% 2.6% 2.8%Tupras TUPRS.IS Turkey Energy Oil & Gas Refining & Mark. EW 6.2 TRY 44.2 44.0 -0.5% 30.5% 10.0x 9.4x 2.5x 2.3x 24.7% 24.6% 8.2% 8.1%China Shenhua Energy 1088.HK China Energy Coal OW 79.7 HKD 31.1 36.0 15.9% - 10.2x 10.0x 1.9x 1.7x 18.7% 16.7% 3.6% 3.8%HDFC Bank HDBK.NS India Financials Banks OW 28.3 INR 663.7 825.0 24.3% - 24.5x 19.0x 4.6x 3.9x 18.8% 20.4% 0.8% 1.0%HDFC HDFC.NS India Financials Diversified Financials OW 21.7 INR 778.8 840.0 7.9% - 27.1x 22.0x 5.2x 4.5x 19.1% 20.3% 1.5% 1.8%Ping An Insurance Co 2318.HK China Financials Insurance OW 59.4 HKD 58.2 80.0 37.5% - 17.3x 11.1x 2.4x 2.0x 14.0% 18.4% 1.0% 1.2%Sun Pharmaceutical SUN.NS India Health Care Pharmaceuticals Biotech OW 13.2 INR 700 799.0 14.1% 23.7% 23.5x 20.2x 5.1x 4.2x 21.7% 20.8% 0.7% 0.8%Life Healthcare Group LHCJ.J South AfricaHealth Care Health Care Equipment OW 3.7 ZAc 3098 3400.0 9.7% 25.1% 19.7x 17.1x 8.1x 7.3x 41.0% 42.6% 3.5% 4.1%Copa Holdings CPA.N Panama Industrials Airlines OW 4.2 USD 94.4 91.0 -3.6% 16.9% 12.0x 9.8x 2.5x 2.1x 20.7% 21.2% 2.1% 2.7%CCR CCRO3.SABrazil Industrials Transportation Infra EW 16.1 BRL 19.0 NA 20.4% 29.0x 23.1x 9.4x 8.6x 32.6% 37.2% 3.0% 4.0%GLOVIS 086280.KS S. Korea Industrials Marine OW 7.5 KRW 215500 320000 48.5% 42.8% 15.1x 12.5x 4.1x 3.2x 27.2% 25.4% 0.7% 0.9%Larsen & Toubro LART.NS India Industrials Construction & Engg. EW 17.4 INR 1565.7 1440.0 -8.0% 10.7% 20.0x 17.8x 3.4x 3.0x 17.0% 16.7% 1.1% 1.2%Samsung Electronics 005930.KS S. Korea IT Technology Hardware OW 185.6 KRW 1384000 1500000 8.4% 27.6% 8.8x 8.0x 1.7x 1.4x 18.8% 17.5% 0.6% 0.6%TSMC 2330.TW Taiwan IT Semis OW 80.6 TWD 90.5 96.0 6.1% 20.8% 14.0x 11.5x 3.7x 3.1x 26.1% 26.6% 3.3% 3.3%Tata Consultancy Services TCS.NS India IT Software & Services EW 45.5 INR 1282.2 1225.0 -4.5% 48.4% 19.5x 16.8x 6.6x 5.2x 33.9% 31.1% 1.6% 1.8%LG Chem 051910.KS S. Korea Materials Chemicals OW 18.2 KRW 296500 390000 31.5% 16.2% 11.7x 8.4x 1.8x 1.5x 15.2% 17.9% 1.4% 1.4%PT Indocement INTP.JK Indonesia Materials Construction Materials OW 8.5 IDR 22350 22400 0.2% 15.5% 18.3x 15.6x 4.3x 3.7x 23.5% 23.8% 1.6% 2.0%BHP Billiton Plc BHP.AX Australia Materials Diversified Metals & Mining OW 184.4 AUD 33.4 40.0 19.9% 20.3% 12.1x 10.8x 2.6x 2.3x 21.6% 21.0% 3.4% 3.6%Telekomunikasi TLKM.JK Indonesia Telecom Diversified Telecom Services OW 18.5 IDR 9200 10800 17.4% 25.4% 12.5x 11.4x 2.9x 2.6x 22.8% 22.9% 4.5% 5.1%DiGi.com DSOM.KL Malaysia Telecom Wireless Telecom Services EW 12.2 MYR 4.8 4.0 -16.7% 42.2% 28.0x 20.8x 27.8x 25.9x 99.5% 124.8% 5.5% 5.1%Perusahaan Gas Negara PGAS.JK Indonesia Utilities Gas Utilities OW 11.6 IDR 4600 4550 -1.1% 23.8% 15.3x 13.2x 5.5x 4.6x 36.1% 34.7% 3.4% 3.9%

P/E Div YldROEP/B

For valuation methodology and risks associated with any price targets above, please email [email protected] with a request for valuation methodology and risks on a particular stock. Source: Morgan Stanley Research

Focus List Changes

We incorporate our updated Best Business Model in our Focus lists.

Today, the names we are removing from our GEMs Focus List are: Axiata Group Berhad (AXIA.KL, RM5.83), Cairn India (CAIL.NS, Rs327.35), Catcher (2474.TW, NT$143.00), Hyundai MOBIS (012330.KS, W267,000.00) and Telefonica Brasil (VIV.N, US$22.93).

We are adding PT Telekom, Larsen & Toubro, LG Chem, Hyundai Glovis and PGAS.

The names we are removing from our APxJ Focus List are: Axiata Group Berhad, Cairn India, Catcher, China Unicom (0762.HK, HK$12.36), Hyundai MOBIS and SJM Holdings (0880.HK, HK$18.04).

We are adding PT Telekom, Larsen & Turbro, LG Chem, PGAS, Hyundai Glovis and Sands China.

See our full List of focus list stocks on Exhibit 79 and 80

34



Three big surprises – What is and what should never be

In terms of surprises for 2013, we highlight two negatives and one positive surprise for APxJ / EM equity prices.

Escalation of tensions in Asia-Pacific The first potential negative surprise is a further escalation of tension in the Asia-Pacific region following the China leadership transition and upcoming Japan election. This might lead to a continuation or intensification of the current consumer boycotts now taking place in both countries, which would be detrimental to regional trade. Other countries, including Korea and the Philippines, could become involved given their claims on disputed island territories. A step-up in defense spending in the Asia-Pacific region is a possibility, providing a drain on budgetary resources and with a likely heavy imported component (in particular from the US defense industry) for countries other than China.

Middle East conflict spreads, generating sustained oil price spike The second potential negative surprise is that the tensions in the Middle East intensify and expand. The fact that risks here

arise from so many different interrelated sources – and that natural resources are concentrated there – is reason enough to warrant investor focus.

Accelerated FX control liberalization in Asia. The potential positive surprise would be an accelerated period of currency appreciation consequent on FX control liberalization in China stimulating further liberalization in the wider APxJ region (most notably perhaps in India, Taiwan and Korea). The PBOC has for some time been promoting liberalization of the capital account alongside interest rate liberalization and a reform of exchange rate setting. In a recent speech after the Party Congress, Governor Zhou Xiaochuan argued for further diversification of China’s reserves holding and opening up of the capital account to benefit China’s corporate sector’s globalization. Such reforms undertaken during a period of economic re-acceleration would be a signal of confidence in the ability of domestic demand to drive growth on a sustained basis.

35



GEMs Equity Strategy: Focus List (Alphabetical Order) Exhibit 79 Data as of: 22-Nov-12Company GICS Mkt Cap Date Total US$ Return 12m Total Latest Target Target Price DY, % Morgan Stanley P/EName Ticker Rating Country Sector USD bn Added Since Added Return Price Price Currency Upside, % 2012E 2012E 2013E Analyst

Bank Rakyat Indonesia BBRI.JK OW Indonesia Financials 17.9 06/27/11 1.2% 2.1% X 7100 8182 IDR 15.2% 1.9% 10.4x 9.5x Lord, Nick

BHP Billiton Plc BILJ.J OW South Africa Materials 165.0 11/03/11 1.4% 19.5% 27728.0 28900.0 ZAc 4.2% 3.9% 11.7x 11.1x Sanderse, Menno

CNOOC 0883.HK OW China Energy 93.5 08/25/09 71.2% 22.0% X 16.36 21.00 HKD 28.4% 2.9% 8.5x 9.3x Tan, Wee-Kiat

Compania de Minas Buenaventura S.A.

BVN.N EW Peru Materials 8.6 11/10/11 -20.3% -14.1% 33.66 42.60 USD 26.6% 0.0% 11.4x 9.1x De Alba, Carlos

Country Garden Holdings Company Limited

2007.HK OW China Financials 8.1 06/28/12 19.4% 48.0% X 3.45 4.10 HKD 18.8% 4.5% 7.8x 7.0x Leung, Brian

GLOVIS 086280.KS OW S. Korea Cons. Disc. 7.5 11/23/12 0.0% 8.4% # 216000.0 320000.0 KRW 48.1% 0.9% 15.1x 12.5x Lee, HyunTaek

HDFC Bank HDBK.NS OW India Financials 28.5 11/03/11 24.8% 49.9% X 669.10 825.00 INR 23.3% 0.8% 30.4x 23.3x Agarwal, Anil

Indocement Tunggal Prakarsa

INTP.JK OW Indonesia Materials 8.4 11/03/11 39.9% 41.4% X 22050 22400 IDR 1.6% 1.3% 18.0x 15.4x Spencer, Charles

Industrial and Commercial Bank of China

1398.HK OW China Financials 234.2 08/16/11 6.7% 31.7% X 5.20 5.60 HKD 7.7% 5.7% 6.1x 5.8x Xu, Richard

Jiangxi Copper 0358.HK OW China Materials 8.7 06/19/12 12.6% 22.8% X 19.40 23.00 HKD 18.6% 3.7% 8.3x 6.4x Zhang, Rachel

Larsen & Toubro LART.NS EW India Industrials 17.7 11/23/12 0.0% 28.1% # 1591 1440 INR -9.5% 1.5% 21.7x 19.9x Soni, Akshay

LG Chem 051910.KS OW S. Korea IT 18.2 11/23/12 0.0% 1.1% # 296500 390000 KRW 31.5% 1.6% 11.7x 8.4x Hwang, Harrison

Life Healthcare Group LHCJ.J OW South Africa Health Care 3.6 05/18/12 5.8% 56.6% 3100 3400 ZAc 9.7% 3.6% 20.4x 17.7x Olanow, Andrew

Perusahaan Gas Negara PGAS.JK OW Indonesia Telecom 11.6 11/23/12 0.0% 53.0% # 4625.0 4550.0 IDR -1.6% 3.9% 15.4x 13.3xMaheshwari,

Mayank

Rosneft ROSNq.L ++ Russia Energy 74.2 03/14/11 -12.0% 20.6% 8 ++ USD NA 1.5% 8.4x 8.2x Sorokin, Pavel

Samsung Electronics 005930.KS OW S. Korea IT 188.4 04/15/10 72.0% 61.7% X 1417000.0 1500000.0 KRW 5.9% 0.7% 9.0x 8.2x Kim, Shawn

Sberbank SBER.RTS OW Russia Financials 60.8 06/10/10 24.8% 17.4% X 2.82 4.40 USD 56.3% 3.7% 5.4x 5.6xStoklosa,

Magdalena

Sinopharm Group 1099.HK OW China Health Care 7.7 06/19/12 15.8% 38.6% X 24.70 30.00 HKD 21.5% 1.3% 25.6x 21.7x Li, Bin

Telekomunikasi TLKM.JK OW Indonesia Telecom 18.6 11/23/12 0.0% 20.8% # 9250.00 10800.00 IDR 16.8% 4.7% 12.6x 11.5x Killa, Navin

TSMC 2330.TW OW Taiwan IT 80.6 02/17/12 20.0% 34.5% X 91.30 96.00 TWD 5.1% 3.3% 14.1x 11.6x Lu, Bill

NA = Not available. OW = Overweight, EW = Equal-weight, UW = Underweight, V = More volatile. Source: ModelWare, Morgan Stanley Research. Data as of Nov 21st, 2012. The US$ total return of the Morgan Stanley GEM Equity Strategy Focus List since inception on December 11, 2006 is 46.26% (MSCI EM index total return 30.35%). This assumes the focus list constitutes an equal-weighted portfolio, rebalanced whenever positions are added or subtracted. Results shown represent total absolute return (including dividends) and exclude brokerage commissions. These figures are not audited. Past performance is no guarantee of future results. (X) indicates stock has outperformed MSCI EM index since inclusion in the Focus List. For valuation methodology and risks associated with price targets mentioned, please refer to the latest relevant research on these stocks, which is available through your sales representative; Client Link at www.morganstanley.com; or other electronic systems. ++ Ratings and price targets for these companies have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time. Please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures for stocks under coverage appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures.

http://www.morganstanley.com/researchdisclosures�

36



APxJ Equity Strategy: Focus List (Alphabetical Order) Exhibit 80

Data as of: 22-Nov-12Company GICS Mkt Cap Date Total US$ Return 12m Total Latest Target Target Price DY, % Morgan Stanley P/EName Ticker Rating Country Sector USD bn Added Since Added Return Price Price Currency Upside, % 2012E 2012E 2013E Analyst

BHP Billiton Plc BHP.AX OW Australia Materials 185.9 11/03/11 -4.4% 8.1% 33.69 40.00 AUD 18.7% 3.5% 11.9x 12.5xFitzpatrick,

Brendan

CNOOC 0883.HK OW China Energy 93.5 07/16/09 90.1% 22.0% X 16.36 21.00 HKD 28.4% 2.9% 8.5x 9.3x Tan, Wee-Kiat

Cheung Kong Holdings 0001.HK OW Hong Kong Financials 34.7 07/04/12 18.9% 42.7% X 116.20 133.00 HKD 14.5% 2.7% 11.3x 10.0xChoudhary,

Praveen

Country Garden Holdings Company Limited

2007.HK OW China Financials 8.1 06/28/12 19.4% 48.0% X 3.45 4.10 HKD 18.8% 4.5% 7.8x 7.0x Leung, Brian

Dr. Reddy's Lab REDY.NS OW India Health Care 5.3 08/16/11 -4.4% 8.2% 1730.15 2039.00 INR 17.9% 0.6% 19.1x 15.9x Baisiwala, Sameer

GLOVIS 086280.KS OW S. Korea Industrials 7.5 11/23/12 0.0% 8.4% 216000 320000 KRW 48.1% 0.9% 15.1x 12.5x Lee, HyunTaek

HDFC Bank HDBK.NS OW India Financials 28.5 11/03/11 24.8% 49.9% X 669.10 825.00 INR 23.3% 0.8% 30.4x 23.3x Agarwal, Anil

Industrial and Commercial Bank of China

1398.HK OW China Financials 234.2 08/16/11 6.7% 31.7% X 5.20 5.60 HKD 7.7% 5.7% 6.1x 5.8x Xu, Richard

Jiangxi Copper 0358.HK OW China Materials 8.7 06/19/12 12.6% 22.8% X 19.40 23.00 HKD 18.6% 3.7% 8.3x 6.4x Zhang, Rachel

Larsen & Toubro LART.NS EW India Industrials 17.7 11/23/12 0.0% 28.1% 1590.75 1440.00 INR -9.5% 1.5% 21.7x 19.9x Soni, Akshay

LG Chem 051910.KS OW S. Korea Materials 18.2 11/23/12 0.0% 1.1% 296500 390000 KRW 31.5% 1.6% 11.7x 8.4x Hwang, Harrison

Oil Search Ltd. OSH.AX OW Australia Energy 9.7 08/16/11 9.1% 25.2% X 7.00 8.25 AUD 17.9% 0.6% 57.5x 47.9x Baker, Stuart

Perusahaan Gas Negara PGAS.JK OW Indonesia Utilities 11.6 11/23/12 0.0% 53.0% 4625.00 4550.00 IDR -1.6% 3.9% 15.4x 13.3xMaheshwari,

Mayank

Bank Rakyat Indonesia BBRI.JK OW Indonesia Financials 17.9 06/27/11 1.2% 2.1% X 7100.00 8182.00 IDR 15.2% 1.9% 10.4x 9.5x Lord, Nick

Indocement Tunggal Prakarsa

INTP.JK OW Indonesia Materials 8.4 11/03/11 39.9% 41.4% X 22050 22400 IDR 1.6% 1.3% 18.0x 15.4x Spencer, Charles

Samsung Electronics 005930.KS OW S. Korea IT 188.4 04/15/10 72.0% 61.7% X 1417000 1500000 KRW 5.9% 0.7% 9.0x 8.2x Kim, Shawn

Sands China Ltd. 1928.HK OW Hong Kong Cons. Disc. 33.5 11/23/12 0.0% 61.6% 32.25 35.00 HKD 8.5% 1.5% 20.1x 16.0xChoudhary,

Praveen

Sinopharm Group 1099.HK OW China Health Care 7.7 06/19/12 15.8% 38.6% X 24.70 30.00 HKD 21.5% 1.3% 25.6x 21.7x Li, Bin

TSMC 2330.TW OW Taiwan IT 80.6 02/17/12 20.0% 34.5% X 91.30 96.00 TWD 5.1% 3.3% 14.1x 11.6x Lu, Bill

Telekomunikasi TLKM.JK OW Indonesia Telecom 18.6 11/23/12 0.0% 20.8% 9250.00 10800.00 IDR 16.8% 4.7% 12.6x 11.5x Killa, Navin

NA = Not available. OW = Overweight, EW = Equal-weight, UW = Underweight, V = More volatile. Source: ModelWare, Morgan Stanley Research. Data as of Nov 21, 2012. The US$ total return of the Morgan Stanley APxJ Equity Strategy Focus List since inception on 23rd April 2009 is 84.84% (MSCI APxJ index total return 79.39%). This assumes the focus list constitutes an equal-weighted portfolio, rebalanced whenever positions are added or subtracted. Results shown represent total absolute return (including dividends) and exclude brokerage commissions. These figures are not audited. Past performance is no guarantee of future results. (X) indicates stock has outperformed MSCI APxJ index since inclusion in the Focus List. For valuation methodology and risks associated with price targets mentioned, please refer to the latest relevant research on these stocks, which is available through your sales representative; Client Link at www.morganstanley.com; or other electronic systems. Please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures for stocks under coverage appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. ++ Ratings and price targets for these companies have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time.

http://www.morganstanley.com/researchdisclosures�

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Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, and/or PT Morgan Stanley Asia Indonesia and their affiliates (collectively, "Morgan Stanley"). 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 [email protected] 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 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: Jonathan Garner. 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 owns securities (or related derivatives) in a dual listed company that he covers or recommends in Morgan Stanley Research: Leigh Bregman - BHP Billiton Limited (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 October 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: Catcher Technology, Copa Holdings, Dr. Reddy's Lab, GLOVIS, HDFC, HDFC Bank, Life Healthcare Group, Samsung Electronics. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Axiata Group Berhad, Sberbank. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from BHP Billiton Limited, Cheung Kong Holdings, Ctrip.com, Hyundai MOBIS, Industrial and Commercial Bank of China, LG Chem, Oil Search Ltd., Rosneft, Samsung Electronics, Sberbank, Sinopharm Group, Tata Consultancy Services, Tencent Holdings Ltd.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AmBev, Axiata Group Berhad, Bajaj Auto Ltd., Bank Rakyat Indonesia, BHP Billiton Limited, BIM, Cairn India Ltd., CCR, Cheung Kong Holdings, Compania de Minas Buenaventura S.A., Copa Holdings, Country Garden Holdings Company Limited, Ctrip.com, Dr. Reddy's Lab, HDFC, HDFC Bank, Hyundai Heavy Industries, Hyundai MOBIS, Industrial and Commercial Bank of China, ITC Ltd., Jiangxi Copper, Larsen & Toubro, LG Chem, Life Healthcare Group, Localiza Rent A Car SA, Novolipetsk Steel, Oil Search Ltd., Perusahaan Gas Negara, Ping An Insurance Company, Rosneft, Samsung Electronics, Sberbank, Sinopharm Group, SJM Holdings, Sun Pharmaceutical Industries, Tata Consultancy Services, Telekomunikasi, Tencent Holdings Ltd., Titan Industries Ltd, Want Want China Holdings Ltd. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Bank Rakyat Indonesia, BHP Billiton, BHP Billiton Limited, Cheung Kong Holdings, China Unicom, Copa Holdings, Ctrip.com, HDFC, HDFC Bank, Hyundai Heavy Industries, Hyundai MOBIS, Industrial and Commercial Bank of China, LG Chem, Oil Search Ltd., Ping An Insurance Company, Rosneft, Sands China Ltd., Sberbank, Tencent Holdings Ltd.. 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: AmBev, Axiata Group Berhad, Bajaj Auto Ltd., Bank Rakyat Indonesia, BHP Billiton Limited, BIM, Cairn India Ltd., CCR, Cheung Kong Holdings, Compania de Minas Buenaventura S.A., Copa Holdings, Country Garden Holdings Company Limited, Ctrip.com, Dr. Reddy's Lab, HDFC, HDFC Bank, Hyundai Heavy Industries, Hyundai MOBIS, Industrial and Commercial Bank of China, ITC Ltd., Jiangxi Copper, Larsen & Toubro, LG Chem, Life Healthcare Group, Localiza Rent A Car SA, Novolipetsk Steel, Oil Search Ltd., Perusahaan Gas Negara, Ping An Insurance Company, Rosneft, Samsung Electronics, Sberbank, Sinopharm Group, SJM Holdings, Sun Pharmaceutical Industries, Tata Consultancy Services, Telekomunikasi, Tencent Holdings Ltd., Titan Industries Ltd, Want Want China Holdings 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: Axiata Group Berhad, Bank Rakyat Indonesia, BHP Billiton, BHP Billiton Limited, Cheung Kong Holdings, China Shenhua Energy, China Unicom, Compania de Minas Buenaventura S.A., Copa Holdings, Ctrip.com, HDFC, HDFC Bank, Hyundai Heavy Industries, Hyundai MOBIS, Industrial and Commercial Bank of China, Jiangxi Copper, Larsen & Toubro, LG Chem, Oil Search Ltd., Ping An Insurance Company, Rosneft, Sands China Ltd., Sberbank, Telekomunikasi, Tencent Holdings Ltd., Tupras. Morgan Stanley & Co. LLC makes a market in the securities of AmBev, Bank Rakyat Indonesia, BHP Billiton, BHP Billiton Limited, Cheung Kong Holdings, China Unicom, CNOOC, Compania de Minas Buenaventura S.A., Copa Holdings, Ctrip.com, Dr. Reddy's Lab, HDFC Bank, Infosys Limited, Perusahaan Gas Negara, Ping An Insurance Company, Telekomunikasi, Tencent Holdings Ltd., TSMC. 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 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

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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 October 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 Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 1085 37% 446 40% 41%

Equal-weight/Hold 1288 43% 504 46% 39%

Not-Rated/Hold 109 4% 31 3% 28%

Underweight/Sell 481 16% 121 11% 25%

Total 2,963 1102 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.

Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, 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. .

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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Research publications may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available Citi Research publications in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, 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 Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of BHP Billiton Limited, CNOOC, Country Garden Holdings Company Limited, HDFC, Larsen & Toubro, Rosneft, Samsung Electronics, Sberbank, Tencent Holdings Ltd.. 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

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Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. 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International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The following companies do business in countries which are generally subject to comprehensive sanctions programs administered or enforced by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") and by other countries and multi-national bodies: Tupras. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. 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