Financial Pacific: Emerging Market Credit (third party), december 14.2010

The model portfolio is a hypothetical portfolio and is not intended to reflect actual trading performance.

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

Global

November 30, 2010

EM Credit Portfolio

Sovereign & Corporate

EM Credit View We believe that sovereign risk concerns in the EU will sustain volatility in the near term, but eventually give way to a path of EM spread compression in 1Q11. Global and EM macro momentum has turned more favourable, which should support the market – along with what we believe will be robust fund inflows and ongoing support of QE by the Fed. Technical positioning is overall benign, with EM-dedicated investors remaining overweight investment grade credits. Although the primary market is likely to remain active, new supply should be easily absorbed by strong inflows.

Exhibit 1

EM Spread* 3-Month Forecast (bp)

240

303

200

220

240

260

280

300

320

340

360

380

Mar-10 Apr-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov -10 Jan-11 Feb-11

90% 70% 30% confidence interv al

Source: Bloomberg, Morgan Stanley Research; *EMBI Global spread

EM Model Portfolio Positioning We remain overweight high-beta credits and favour the CEEMEA region. We increase our exposure to Venezuela, Kazakhstan and Poland, which become the most overweight credits along with Argentina and Hungary.

We reduce further our exposure to low-beta countries, Chile, Panama and Malaysia remaining our most underweight credits. We also decrease our exposure on Turkey and South Africa.

We add duration exposure as we see curves bull-flattening in the coming months.

We continue to see value in the Oil & Gas sector.

Exhibit 2

EM Portfolio: Risk Exposure Beta Exposure Spread Exposure

1.03

0.95

1.00

1.05 10bp

-15

-5

5

15

Source: Morgan Stanley Research

Exhibit 3

EM Model Portfolio: Top Changes Monthly Changes in Country Allocation

0.6%

0.6%

0.6%

-0.4%

-0.4%

-0.4%

-0.4%

-0.4%

-0.4%

-0.9%

Poland

Kazakhstan

Venezuela

Chile

Malay sia

Panama

Brazil

Bulgaria

Turkey

South Africa

Ex posure

Increase

Decrease

Ex posure


Morgan Stanley & Co. International plc+

Regis Chatellier [email protected] +44 (0)20 7677 6982

EM Strategy AXJ Strategy EM Economics


2

November 30, 2010 EM Credit Portfolio

Table of Contents

Outlook, Technicals and Valuations _______________________________________________________

EM Market Outlook 4

Credit Portfolio 6

Curve Monitor 7

EM Return versus Risk 8

CDS SovRank Model 9

Fund Flows 11

Cross-Market Monitor 12

EM Technicals 13

Primary Market 14

Bond Payments 15

CDS Market 16

Credit Views 17 _______________________________________________________

Sector Views _______________________________________________________

Quasi-Sovereign Model 40

Oil & Gas Sector 41

Appendix 43


3


Market Assessment

Fundamentals Technicals Valuations Market View

Market

Country Assessment – Sub-Investment Grade

Single B Credits Fundamentals Technicals Valuations Credit View

Argentina (B)

Venezuela (B+)

BB Credits Fundamentals Technicals Valuations Credit View

Colombia (BB+)

Indonesia (BB)

Philippines (BB)

Romania (BB+)

Turkey (BB)

Legend:

FundamentalsPositive Negative Neutral

Technicals

Positive Negative Neutral

ValuationsCheap Rich Fair

Credit View

Outpeform ++ Outperform + Neutral Underpeform - Underpeform - -

Country Assessment – Investment Grade

BBB Credits Fundamentals Technicals Valuations Credit View

Brazil (BBB-)

Bulgaria (BBB-)

Hungary (BBB)

Kazakhstan (BBB-)

Lithuania (BBB)

Mexico (BBB)

Panama (BBB-)

Peru (BBB-)

Russia (BBB)

South Africa (BBB+)

Single A Credits Fundamentals Technicals Valuations Credit View

Chile (A+)

Korea (A+)

Malaysia (A-)

Poland (A-)


4


EM Credit Market Outlook

We believe that sovereign risk concerns in peripheral Europe will sustain volatility in the near term but eventually give way to a path of EM spread compression in 1Q11.

Global macro momentum has turned more favourable, which should support the market along with robust fund flows and QE measures.

Technical positioning is still benign overall, though notably exposure levels have increased; EM dedicated investors maintain their overweight position in investment grade credits.

The primary market is likely to remain very active but strong fund flows and large coupon payments should largely contribute to absorb new supply.

We continue to overweight high-beta credits and the CEEMEA region based on more attractive valuations and a medium-term constructive view of the market.

We extend duration exposure and we see the market rallying into early next year.

The Oil & Gas sector brings substantial alpha versus sovereigns and should better capture EM value.

Tail risks in the EU should take time to affect core Europe and credit markets in general. The recent turbulence surrounding the bailout of Ireland has triggered a sell-off, in line with our prior month’s forecast (see EM Credit Portfolio, October 29, 2010). Given the size of the Irish and Portuguese economies, however, we believe that the problem is still manageable (at least at this point) should policy-makers respond in kind, and the impact on the credit market should in that case eventually subside. In fact, this structural risk is likely to take time to permeate core Europe, the market going through different phases of optimism and pessimism in that respect. As the bailout of peripheral Europe (in this case Ireland and potentially Portugal) is implemented, investors’ confidence should resurface – if only for a time.

Macro momentum and QE measures by the Fed should support the market. After consistently moderating for about a year due to a weak global growth impulse, momentum in macro fundamentals is finally reversing to positive (see Exhibit 4). Moreover, we reiterate that EM fundamentals – growth, fiscal and debt dynamics – remain more favourable than for the majority of DM countries.

The pressure for upgrades remains in place for the majority of EM countries (see our SCRM model, Exhibit 14 on page 9). Indeed, Fitch’s revision of Turkey’s outlook to positive on its BB+ rating is in line with our SCRM rating of BBB- for the credit.

Exhibit 4

Macro Fundamentals Turning Positive MDTI Index*

0

10

20

30

40

50

60

70

80

90

100

Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10

Global AXJ CEEMEA Latin America

Source: Morgan Stanley Research; *See Appendix

So why the recent sell-off? As we highlighted, positioning deteriorated in the run-up to the November FOMC meeting in anticipation of the announcement of additional QE. So, we have endured a technical correction. This reassessment was also integral to our rationale for a short-term correction, with the EMBI spread widening to the 300bp area (see again EM Credit Portfolio). Although the long-term impact on the US real economy of additional QE is unclear, the vast amount of liquidity should help to anchor long-term US yields and in the process help to benefit risky assets.

That said, the EU sovereign risk saga could continue to weigh on investors’ sentiment in the very short term; we see EM spread trading in a wide range around 300bp in the next few weeks. As the situation stabilises in Europe, however, the market should rebound and rally more consistently until early next year; our 3-month spread forecast is 240bp for the EMBI Global (see Exhibit 1).

During most of the year, the performance in EM credit was largely driven by US Treasuries. Going forward, they should play a relatively modest role in EM performance; as US rates remain relatively low due to QE measures, the bulk of the EM performance should come from spread compression (fuelled by both QE and fund flows) and carry.


5


Still-benign overall market technicals. Although hard currency funds registered outflows in the last couple of weeks, and as a result exposure has increased, overall risk exposure remains benign (see Exhibit 5). Despite being overweight some high-beta credits (notably Argentina), EM funds are still largely overweight investment grade credits (around 7% overweight versus benchmark), making the aggregate exposure close to neutral.

Exhibit 5

Relatively Modest Risk Exposure EMEI* Beta Exposure Index

0

10

20

30

40

50

60

70

80

90

100

01-Jan 01-Mar 01-May 01-Jul 01-Sep 01-Nov

EMEI EMEI-HC EMEI-LC


Besides, the market should benefit from a strong seasonality factor which typically sees strategic allocations into the asset class taking place in 4Q/early 1Q. Arguably, the last two weeks have seen outflows for hard currency (credit) funds, but the fact that local currency funds are still posting positive numbers is a gauge that the risk appetite for EM is still there.

We continue to see the primary market as particularly active during 1Q10 as US Treasury yields trade near to historical lows. Amortisations for the next three months reach US$13.7 billion, which should fuel further bond issuance. However, this new supply should be easily absorbed by the market as investors are expected to receive US$21 billion of coupon payments, i.e., 50% more than the amortisations coming due.

Compelling valuations in high-beta names and CEEMEA sovereigns. Given its proximity with the euro-zone, the CEEMEA region has largely underperformed this year. Arguably, fundamentals are a bit weaker than for Latin America and Asia. However, as suggested by our SovRank model (see Exhibit 6), such a discount versus other regions is disproportionate. As tensions become subdued in the EU in the coming weeks, the CEEMEA region should largely outperform.

On average, CEEMEA countries are overweight by 0.4% in our portfolio, compared to an average underweight of 2.7% for Latin America and 1.2% for Asia. Note that two countries of the CEEMA region are substantially underweight in our portfolio: Turkey and South Africa, which brings down the average overweight for the CEEMEA region.

Exhibit 6

SovRank* Model: CEEMEA Cheap to Other Regions

Rom

Bra

Bul

COL

CRO.

HUN

IndiaINDO

Kaz

LITH

Mal

Mex

PAN

PerPHI

POL Rus

Soaf

Thai

Turk

BB-BBBB+BBB-BBBBBB+A-A

0

50

100

150

200

250

300

350

400

Average Rating (Moody's, S&P, Fitch)

5-y

ea

r C

DS

(b

p)


We extend duration to be overweight the 20/30-year sector. Curves have largely steepened in the last few weeks. As the rally materialises, however, curve should largely bull-flatten. Given the steepness of the US Treasury curve, the 20/30-year sector is also where most of the carry remains.

We continue to like the Oil & Gas sector, the latter offering substantial pick-up versus sovereigns, a strong argument for investors trying to capture extra yield. Our view is that Oil & Gas companies are particularly well poised to capture the value of EM (see page 41).

On the month, the MS model portfolio outperformed the EMBI Global benchmark by 52bp (see page 7).


6


EM Credit Portfolio

The recommended sovereign portfolio allocation reflects our relatively benign view on EM credit until early next year.

We believe that the situation in Europe should stabilise, and we take this opportunity to increase exposure on high-beta credit and extend duration.

The beta of the portfolio versus EMBIG index is 1.03 for a weighted average spread of 314bp (11bp higher than the current EMBIG level).

The proposed allocation continues to favour CEEMEA, which trades largely cheap to other regions (see our SovRank model on page 9).

Apart from Argentina and Hungary, which were the two biggest overweight credits in our previous allocation, we increase our exposure to Venezuela as the recent sell-off offers a good opportunity to gain high-beta exposure at cheap levels – note in this respect that our increase in exposure to Venezuela is purely tactical as we remain cautious on the long-term perspective of the credit).

We also increase our exposure to Kazakhstan and Poland. These two credits have consistently underperformed the index in the last few months and risk/reward on these two countries has become very compelling, in our view.

We maintain a large overweight on Hungary. The latest measures from the government regarding the pension system could bring some concerns in the longer term. In the short term, however, these measures should bring considerable savings for the government.

We increase our underweight exposure to low-beta credits, in particular Chile, Malaysia and Panama. These three credits should largely underperform the index as spreads on higher-beta names tighten in the coming months.

We also reduce our exposure to South Africa and Turkey. These two low-beta countries have largely outperformed the market in the recent months and valuations have become unattractive, in our view.

Exhibit 7

Morgan Stanley Portfolio Risk Exposure

Beta Exposure Spread Exposure

1.03

0.95

1.00

1.05 10bp

-15

-5

5

15


Exhibit 8

Morgan Stanley Portfolio Allocation (Overweight/Underweight versus EMBIG)

1.3%

1.3%

1.3%

1.3%

0.8%

0.8%

0.8%

0.8%

0.8%

0.3%

0.0%

-0.2%

-0.2%

-0.2%

-0.7%

-0.7%

-1.2%

-1.2%

-1.7%

-1.7%

-1.7%

Argentina (B)

Hungary (BBB)

Kazakhstan (BBB-)

Venezuela (B+)

Romania* (BB+)

Indonesia (BB)

Lithuania (BBB)

Poland (A-)

Russia (BBB)

Bulgaria (BBB-)

Korea* (A+)

Mexico (BBB)

Peru (BBB-)

Philippines (BB)

Brazil (BBB-)

Colombia (BB+)

South Africa (BBB+)

Turkey (BB)

Chile (A+)

Malaysia (A-)

Panama (BBB-)

Underweight Overweight

Overweight

Underweight

Source: Morgan Stanley Research *Off-index


7


On the curve-positioning side, we extend duration to become overweight the 30-year sector.

Curves have dramatically steepened (especially in yield terms), making the long end more attractive. Moreover, long-dated bonds should outperform in cash terms in a rally scenario.

We largely overweight the long end of Indonesia. We believe that the curve should normalise as the 10y30y slope flattens very substantially.

Broadly speaking, the 20y-30y maturity bucket is overweight in our portfolio, including Argentina, Brazil, Colombia, Mexico, Peru, the Philippines, Russia, Turkey and Venezuela.

However, we believe that there is still substantial value in the short end for high-beta credits, in particular Argentina, Hungary and Lithuania. The spread curves of these countries should disinvert in the coming months, at least partially.

The belly is quite attractive for two particular countries: Russia and Poland. The 5y10y slope has massively steepened in the recent weeks (both in yield and spread terms), making the 10Y quite attractive at current levels. Note the particular case of the Russia 2030 benchmark, which should perform particularly well.

MS Portfolio Performance versus EMBI Global

Based on our previous portfolio allocation (see EM Credit Portfolio, October 29, 2010), we outperformed the EMBI Global benchmark by 52bp on the month, 3bp due to country allocation and 49bp due to curve allocation – see below.

Exhibit 9

MS Portfolio Month-to-Date Performance Breakdown Credit Allocation vs. Duration Allocation

52bp

3bp

49bp

0 10 20 30 40 50 60

Duration

Country

Total


Exhibit 10

Curve Attractiveness by Maturity Bucket (See legend at the bottom of the chart)

Argentina

Brazil

Bulgaria

Chile

Colombia

Hungary USD

Hungary EUR

Indonesia

Kazakhstan*

Korea

Lithuania USD

Lithuania EUR

Malaysia

Mexico

Panama

Peru

Philippines

Poland USD

Poland EUR

Romania EUR

Russia

South Africa

Turkey

Venezuela

Short End Belly Long End

Very High Medium Very LowCurve

Attractiveness

High Low N/A

Source: Morgan Stanley Research; *5Y CDS for Kazakhstan assessment


8


EM Return versus Risk

Exhibit 11

Month-to-Date Index Return (Percentage)

+0.7%

-0.0%

-0.6%

-0.7%

-1.1%

-1.1%

-1.3%

-1.5%

-1.7%

-1.9%

-1.9%

-2.3%

-2.3%

-2.9%

-3.0%

-3.1%

-3.1%

-4.2%

-4.4%

-1.9%

-6% -4% -2% 0% 2%

Composite

Bulgaria (BBB-)

Malay sia (A-)

Chile (A+)

Philippines (BB)

Lithuania (BBB)

Turkey (BB)

Kazakhstan (BBB-)

Indonesia (BB)

Russia (BBB)

South Africa (BBB+)

Poland (A-)

Brazil (BBB-)

Argentina (B)

Hungary (BBB)

Venezuela (B+)

Colombia (BB+)

Mex ico (BBB)

Panama (BBB-)

Peru (BBB-)

Source: Bloomberg, Morgan Stanley Research

Exhibit 12

Month-to-Date Return vs. Risk (MTD Return, beta-adjusted, %)

+2.8%

-0.0%

-0.9%

-1.0%

-1.1%

-1.2%

-1.2%

-1.3%

-1.7%

-1.9%

-2.0%

-2.4%

-2.7%

-2.7%

-3.0%

-3.1%

-3.3%

-3.5%

-3.6%

-1.9%

-5% -3% -1% 1% 3% 5%

Composite

Bulgaria (BBB-)

Malay sia (A-)

Argentina (B)

Turkey (BB)

Philippines (BB)

Lithuania (BBB)

Chile (A+)

Venezuela (B+)

Indonesia (BB)

South Africa (BBB+)

Russia (BBB)

Brazil (BBB-)

Mex ico (BBB)

Poland (A-)

Colombia (BB+)

Hungary (BBB)

Kazakhstan (BBB-)

Panama (BBB-)

Peru (BBB-)


Exhibit 13

MS Portfolio Excess Return* (Month-to-date, bp)

5.3

2.4

1.3

1.0

1.0

0.9

0.8

0.7

0.3

0.3

0.0

-0.4

-3.3

-2.0

-1.3

-1.3

-1.2

-1.2

-0.9

2.5

-6 -4 -2 0 2 4 6

Total Portfolio

Panama

Colombia

Peru

Turkey

Mex ico

Chile

Brazil

South Africa

Philippines

Bulgaria

Malay sia

Poland

Kazakhstan

Russia

Indonesia

Lithuania

Argentina

Venezuela

Hungary

Source: Morgan Stanley Research *Excluding duration impact


9


SovRank Credit Model

Exhibit 14

Sovereign Credit Rating Model (SCRM*)

-2 -1 0 1 2

Turkey

Hungary

Israel

Lithuania

Poland

Mexico

Venezuela

China


Exhibit 15

5Y CDS Z-Scores versus Global Credit Curve*

-2 -1 0 1 2 3

Poland

Hungary

Croatia

Chile

Indonesia

Argentina

Israel

Malaysia

Source: Morgan Stanley Research; *CC-MR Model. *See Appendix

Exhibit 16

SovRank* Credit Model

Ger

Rom

Bra

Bul

CHILEChina

COL

Cro

Czh

.

HUN

India

INDO

ISR

Kaz

Kor

LITH

Mal

Mex

PAN

PerPHI

Pol

QAT

Rus

Soaf

Thai

Turk

UkFraAut

Swd

JapAus

Ita

AAA B+BB-BBBB+BBB-BBBBBB+A-AA+AA-AAAA+

0

50

100

150

200

250

300

350

400

Average Rating (Moody's, S&P, Fitch)

5-y

ea

r C

DS

(b

p)

Legend:

CHEAP +

RICH +

Cheap -

Rich -



10


EM Curve Monitor

Exhibit 17

10-Year EM Yield and Z-Spread Composites

200

250

300

350

400

9-Jun 8-Jul 5-Aug 2-Sep 1-Oct 29-Oct 29-Nov

4.6

5.1

5.6

6.1

6.610Y Bond Z-spread Comp.

10Y Bond Yield Comp. (RHS)


Exhibit 18

Yield 10s30s and 5s10s Bond Slopes (bp)

90

100

110

120

130

140

150


180

190

200

210

220

230

24010s30s Yield Slope

5s10s Yield Slope (RHS)


Exhibit 19

10s30s Bond Slopes (Z-Spread Differential, bp)

PHI INDO BRA

PAN MEXCOL PER

TURK RUS

0

10

20

30

40

50

60

701 month ago

10Y-30Y Slope


Exhibit 20

10-Year Bond Z-Spread Level per Country (bp)

RUS

POL

TURK

COL SOAF

INDO MEX PER PAN PHI

BRA

100

120

140

160

180

200

220

2401 month ago

10Y Z-spread


Exhibit 21

Z-Spread 10s30s and 5s10s Bond Slopes (bp)

15

20

25

30

35

40

45

50


-5

0

5

10

15

20

25

3010s30s Z-Spread Slope

5s10s Z-Spread Slope (RHS)


Exhibit 22

5s10s Bond Slopes (Z-Spread Differential, bp)

MEXPHI

SOAFBRA

COL RUSTURK

HUN PER

INDO

PAN

POL

-30

-20

-10

0

10

20

30

40

501 month ago

5Y-10Y Slope



11


Fund Flows

Hard currency funds saw consecutive outflows, while inflows into local currency funds continue. EM credit funds (dedicated hard currency debt funds) had moderated inflows early this month and saw back-to-back outflows in the last two weeks, as returns have started to diminish lately. Local currency funds, however, have continued to receive inflows and the weekly average inflow is now close to US$400 million. Year to date, cumulative hard currency flows are positive for 22.2% of assets under management (AUM), compared to a whopping 98.2% for local currency. Hard and local currency combined, EM debt funds’ YTD fund flows have reached 48.1% of asset under management (source: EPFR).

EM hard currency fund flows are moving in tandem with high yield. The strong correlation between EM hard currency and high yield fund flows remains in place even in weaker periods, as both have registered outflows lately. Flows into EM equity funds have also shown signs of moderation, but outflows remain yet to be seen. In fact, they have recorded positive flows for 26 consecutive weeks, which is the longest streak on record.

Investors seem to be more wary of risky assets. Moderate outflows followed by inflows into money market funds suggest a shift from riskier assets in EM and high yield funds towards safer instruments. These movements are likely to reflect an overall more cautious stance by investors (see Exhibit 23). We think that this is related to a market pullback and hence will be temporary in nature, and expect further inflows into year-end and early 2011.

Exhibit 23

Hard, Local and Mixed Currency Fund Flows (Weekly data, % of assets under management)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Feb-10 Mar-10 Apr-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov -10

EM Debt Blend CCY

EM Debt Local CCY

EM Debt Hard CCY

Source: EPFR

Exhibit 24

EM Debt Fund Flows versus EM Equities (Weekly data, % of assets under management)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


EM Debt-dedicated

EM Equities

Source: EPFR

Exhibit 25

EM Debt Fund Flows versus High Yield Funds (Weekly data, % of assets under management)

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%


EM Debt-dedicated

High Yield

Source: EPFR

Exhibit 26

EM Debt Fund Flows versus Money Market Funds (Weekly data, % of assets under management)

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%


EM Debt-dedicated

Money Market

Source: EPFR


12


Cross-Market Monitor

Eroding EM credit returns first due to the widening in US Treasury yields… EM credit returns have dropped by almost 2% on the month after a stunning performance earlier this year. Interestingly, as the higher returns were mainly driven by the unprecedented tightening in US Treasury yields, the turning point has also been triggered by Treasuries. Post-FOMC Treasury yields have climbed higher and returns have dropped by 1.6% over the past few weeks. Nevertheless, EM credit has underperformed Treasuries by roughly 40bp.

…and due to intensifying risk-aversion lately. With European peripheral issues getting back into the spotlight, risky assets in general have been hit by the latest bout of risk-aversion. This has sparked a decline not only in EM credit but also in EM equities (see Exhibit 28). However, EM equities have closed the month with a moderate decline, MSCI EM dropping by 0.61%. The outperformance of the equity market can be explained by the muted impact of US Treasury yield widening in the first half of the month, while bonds have suffered more.

The correlation between high yield and EM credit spreads remains strong. The strong relationship between EM credit and high yield remains firm, not only with regards to fund flows (see page 11), but also in terms of price action. Correlation between spreads in the two asset classes is 83% in the last six months, somewhat lower than last month as volatility has picked up in the past few weeks (see Exhibit 29). On the month, CDX EM underperformed CDX HY as spreads widened by 19bp and 14bp, respectively.

Exhibit 27

EMBIG Return vs. US Treasury Return* (Based 100)

R²=92%

95

100

105

110

115

4-Jun 2-Jul 2-Aug 30-Aug 28-Sep 27-Oct 29-Nov

UST Return

EMBIG Return

Source: Bloomberg; *IBoxx 7-10Y total return index

Exhibit 28

EM CDX Spread (bp) versus MSCI EM

R²=73%

850

900

950

1000

1050

1100

1150

1200


0

50

100

150

200

250

300

350

MSCI EM

CDX EM Spread (RHS, rev ersed)

Source: Bloomberg

Exhibit 29

EM CDX Spread versus CDX High Yield (bp)

R²=81%

420

470

520

570

620

670

720

7-Jun 5-Jul 2-Aug 30-Aug 1-Oct 29-Oct 29-Nov

150

200

250

300

350

400

450CDX HY Spread

CDX EM Spread (RHS)

Source: Bloomberg

Exhibit 30

EM Spread versus 10Y US Treasury Yield

R²=38%

2.3

2.5

2.7

2.9

3.1

3.3

3.5

3.7


240

260

280

300

320

340

360

380

UST 10Y Yield

EM Spread (RHS)

Source: Bloomberg


13


EM Technicals

Gross nominal exposure of EM hard currency debt funds has risen by 18.6% on a compounded basis over the last four months (versus 24.6% for local currency funds; source: EPFR). Hard currency fund exposure versus benchmark has also risen, climbing back towards neutral from underweight (see Exhibit 31). This shows that investors’ risk appetite for the asset class is still there.

On an aggregate basis, however, cash balances have risen to 5.1% of assets under management (0.3% below the long-term average), due to the accumulation of inflows.

Exposure to EM IG credits has increased to 7.2% overweight from 7.0% – on aggregate, investment grade credits (excluding cash balances) represent nearly 62% of the market value of EM fund’s portfolios.

Argentina remains the biggest overweight credit (both in cash and risk exposure terms). Exposure to this country has risen back to levels last seen two years ago. By contrast, Turkey and the Philippines remain the biggest underweight.

Over the last three months, Turkey is by far the country showing the biggest rise in exposure (+1.1%). The largest decreases in exposure over the period are Indonesia (-0.71%), Mexico (-0.58%) and Hungary (-0.54%).

Year to date, EM hard currency funds have returned over 13%, outperforming their index by 50bp on aggregate.

See Market Technical Watch: Volatility Driving Exposure Lower, November 25, 2010, for the full report.

Exhibit 31

EMEI Beta Risk Exposure Index vs. Benchmark*

0

10

20

30

40

50

60

70

80

90

100


EMEI EMEI-HC EMEI-LC

Source: Morgan Stanley Research *See Appendix

Exhibit 32

Exposure by Rating Category (% AUM)

7.2%

-5.4%

-1.8%

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

+2.5%

+5.0%

+7.5%

+10.0%

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

BBBBBB

Source: EPFR, Morgan Stanley Research

Exhibit 33

EM Funds YTD Excess Return (Alpha) vs. Benchmark

-50

0

50

100

150

200

250

300

350

400

450


EM Alpha Hard Ccy Alpha Local Ccy Alpha Source: Morgan Stanley Research

Exhibit 34

EM Funds’ Cash Balances (% AUM)

3%

4%

5%

6%

7%

8%

9%

Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10



14


Primary Market

As of November 29, total YTD EM bond issuance reached US$288 billion, US$70 billion higher than the total amount issued for the whole of 2009.

So far this year, net supply has amounted to US$200 billion, nearly 40% higher than the peak of 2007.

The primary market should continue to be particularly active; however, this should be easily absorbed by coupon payments and strong fund flows.

After US$39 billion issued in October 2010, November saw another US$28 billion of EM bonds issued in the market, putting YTD total issuance at US$288 billion, US$70 billion higher than the total amount issued for the whole of 2009. YTD net supply (gross issuance, less amortisations) has reached US$200 billion, US$56 billion higher than thr 2007 record of US$144 billion.

Corporates (including banks and quasi-sovereign names) have issued US$202 billion over the period, compared to US$87 billion for sovereigns. This represents net supply of US$147 billion and US$54 billion, respectively.

Per region (sovereigns and corporates combined), CEEMEA has once again largely dominated the EM primary market this year (US$128 billion), followed by Latin America (US$86 billion) and Asia (US$74 billion). The traditional big issuers, including Brazil (US$37 billion), Russia (US$29.4 billion), Mexico (US$25.3 billion), Korea (US$17.0 billion) and Poland (US$11.9 billion), led the pack.

The primary market is likely to continue to be very active, at least until the beginning of next year. In fact, bond amortisations for the next three months reach US$13.7 billion (47% coming from corporate and 53% from sovereign issuers), which should fuel further supply. However, this new supply should be easily absorbed by the market as investors are expected to receive US$21 billion of coupon payments over the period, i.e., 50% more than the amortisations coming due (see page 15). Moreover, fund flows continue to be very strong and provide ample liquidity to the market to absorb further supply.

Exhibit 35

EM Gross Bond Issuance (US$ billion)

55

108132

165 171189

94

218

288

2002 2003 2004 2005 2006 2007 2008 2009 2010

YTD

Source: Bond Radar

Exhibit 36

Net Supply by Sector (US$ billion)

9.4 9.4

46.453.5

134.7

25.6

89.8

147.0

2007 2008 2009 2010 YTD

Sovereigns

Corporates

Source: Bond Radar, Morgan Stanley Research

Exhibit 37

Monthly Net Supply (US$ billion)

-5

-

5

10

15

20

25

30

35

40

45

Nov -09 Jan-10 Mar-10 May -10 Jul-10 Sep-10 Nov -10

Gross Issuance Amortizations Net Issuance

Source: Bond Radar, Morgan Stanley Research


15


Bond Payments

Exhibit 38

Amortisation and Coupon Payments* (US$ billion)

0.1

4.1 3.1 4.1

1.33.5

0.3 2.6

4.1

4.41.4

5.1 3.0

4.3

3.13.5

4.7

3.2

3.6

5.1

13.9

16.1

11.9

14.2

8.5

Dec-10 Jan-11 Feb-11 Mar-11 Apr-11

Amortisation Sov ereign Amortisation Corporate

Interest Sov ereign Interest Corporate

* Sovereign & Corporate Source: Morgan Stanley Research

Exhibit 39

Bond Amortisations per Country (US$ million) Type Country Dec-10 Jan-11 Feb-11 TotalSovereign Brazil 1,582 1,582

Mexico 1,540 1,540Panama 333 333Philippines 1,270 1,270Poland 1,378 1,378Turkey 1,034 1,034Uruguay 92 92

Sovereign Total 0 4,156 3,074 7,230Corporate Argentina 179 179

Brazil 545 545Colombia 250 250Croatia 414 414Czech Rep. 138 138Hong Kong 76 76Hungary 414 414India 100 284 384Kazakhstan 253 253Korea 714 19 615 1,347Malaysia 260 260Other Latam 79 79Panama 150 150Russia 93 93Trinidad & Tob. 100 100U.A.E. 1,600 1,600Ukraine 175 175

Corporate Total 3,496 326 2,634 6,456Total 3,496 4,482 5,708 13,685 Source: Morgan Stanley Research

Exhibit 40

Main Corporate Bond Amortisations of the Month

Date Country Issuer Cpn Ccy Amount $ Equiv. ISIN

01-Dec-10 Panama Banco Continental 6.625 USD 150 150 USP09097AA71

06-Dec-10 U.A.E. Nat'L Bank Of Dubai L+35 USD 750 750 XS0237182513

06-Dec-10 Korea Kookmin Bank L+29 USD 300 300 XS0237030688

06-Dec-10 Other Latam Corp Andina De Fomento 7.625 GBP 49 79 XS0159072668

07-Dec-10 Malaysia Telmal 8 USD 260 260 XS0121434350

08-Dec-10 Korea Woori Bank 35 EUR 300 414 XS0237371678

14-Dec-10 U.A.E. Nat'L Bk Of Abu Dhabi L+30 USD 850 850 XS0238236243

20-Dec-10 Hungary Otp Bank E+15 EUR 300 414 XS0238379514

22-Dec-10 Argentina Telecom Personal 9.25 USD 174 174 USP9030AAA36

23-Dec-10 India State Bank India L+60 USD 100 100 XS0239218471 Source: Morgan Stanley Research


16


CDS Market

Volatility has picked up amid declining liquidity… As concerns around European periphery resurfaced, hedging activity picked up in the CDS space, mainly led by hedge funds. However, liquidity in the CDS market has been fairly poor, implying larger spread movements on lighter volumes.

CDS spreads have widened across EM, with high-beta names suffering the most. The proximity of Central European countries to the epicentre of the European woes has been reflected in the price action as CEE has underperformed Latin America or even South Africa and Turkey, offering more attractive valuations in the region (see our SovRank model on page 9). Low-beta Latin American names have not been intact, either, with spreads back above the 110bp levels.

…as the bond-CDS basis climbed to neutral territory from negative levels. The CDS market underperformed the bond market in the first half of the month as most of the widening took place in the CDS market, pushing the bond-CDS basis into positive territory, after a long period in negative territory. With prolonged uncertainty in Europe and rising yields in US Treasuries, real money investors have started selling bonds in the second half of the month. Consequently, the bond-CDS basis has dropped back to neutral levels.

Exhibit 41

CDS Slope versus Bond Slope (5s10s, bp)

-5

0

5

10

15

20

25


15

20

25

30

35

40

45Bond Slope Comp.CDS Slope Comp. (RHS)


Exhibit 42

5Y CDS and Basis Spreads (Market Composite, bp)

-50

-40

-30

-20

-10

0

10

20

30


120

130

140

150

160

170

180

190Basis Spread Comp.

5Y CDS Comp. (RHS)


Exhibit 43

5s10s CDS Slopes (bp)

INDO PHI

BRA COL PER SOAF TURK MEX PAN RUS

POL

HUN

0

5

10

15

20

25

30

35

40

451 month ago

10Y-5Y


Exhibit 44

CDS Basis Spreads (5-Year Sector, bp)

UKR

PHI

BRA MEXHUN SOAF

INDO PERTURK

COLPAN

RUS

POL-60

-40

-20

0

20

40

60

80

100 1 month ago

5Y Basis



17


Credit Views


18


Argentina (B)

Fundamentals

By Daniel Volberg: Strong growth, a comfortable fiscal position and the

election calendar underpin our positive outlook for Argentina. The

strength of the economic expansion in Argentina continues to surprise;

in fact, we expect GDP growth to remain robust in 2011 at 5.9% after

nearly breaking into double-digit growth this year. The key seems to be

a combination of robust external conditions: elevated soft commodity

prices and robust growth in Brazil as well as a consumption boom,

driven by real wage growth. With robust growth comes strong tax

revenue and a comfortable fiscal position. In fact, we expect the

authorities to cover next year’s financing needs out of a combination of

a primary surplus and US$7.5 billion in international reserve inflow.

In addition to the comfortable macro fundamentals, especially on the

growth and fiscal fronts, Argentina may see positive momentum on the

policy front. Presidential and congressional elections in October next

year have opened up the potential for a change in policy regime once a

new administration takes office.

Strategy – Outperform ++

After the market correction, we believe Argentina is now well poised to

outperform. Indeed, valuations remain very attractive as the credit

trades wide to fair value, especially considering the latest macro

numbers. Positioning has increased over the last couple of months,

which could limit the upside, but only to a certain extent ,in our view. We

see the Argentina spread curve partially disinverting in the coming

months with the new 2017 global bond benefiting the most from this

move. We also see compelling value in the GDP warrant at current

levels (see Global EM Investor – Update, November 24, 2010).

Argentina Rich & Cheap Model*

B '17

B '13

B '15

$ Disc $ Par

'17 New

€ Disc

€' Par

10Y5Y

2Y

3Y

300bp

350bp

400bp

450bp

500bp

550bp

600bp

650bp

700bp

750bp

800bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:

Source: Morgan Stanley Research; *See appendix

Argentina Macro Fundamentals, 2011 Forecasts*

SCRM Rating: B-GDP Growth

5.9%

Inflation

10.7%

Fiscal Bal./GDP

0.8%

Govt Debt/GDP

45%

Current Acc./GDP

2.6%

Av g. B

Argentina

Source: Morgan Stanley Research forecasts; *The wider the web, the better the fundamentals

Argentina Credit View

Buy GDP WarrantBuy Glo 2017

Credit View

Bea

rish

Bu

llish

Asset Preference

BullSteepening

Argentina Valuations: Spread to Fair Value* (bp)

378

0200400

600800

1000

Nov -10Sep-10Aug-10Jun-10Apr-10Feb-10Dec-09

Source: Morgan Stanley Research; *CDS spread to fair value as per SCRM model

Argentina Technicals: Exposure versus Average

-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%

Oct-10Jun-10Feb-10Oct-09Jun-09Feb-09Oct-08

Argentina Av g. Single B



19


Brazil (BBB-)

Fundamentals

By Gray Newman: After a robust rebound during much of 2009 which

quickened its pace during 1H10, we are starting to see signs of

softening. Despite still strong domestic demand, the experience of

2008/09 (and even more recently during 2Q10) serves as a reminder

that Brazil’s fortunes remain closely linked to global economic factors.

As the Brazilian economy settles back to a much more moderate pace,

the gap with global fundamentals is likely to be reduced.

The Brazilian economy may be at a turning point, a fact that we think is

still underestimated by the market due to deceptive year-on-year

comparisons. Based on industrial production, and despite record

releases on the demand side, 3Q10 is likely to be more sluggish than

during the infamous ‘red hot’ first quarter. Absent a sharp rebound, this

would likely stall Brazil’s potential growth, in our view. If global

fundamentals end up relatively benign, then Brazil should do just fine in

2011. Based on these assumptions, we foresee 4% growth for 2011

(versus around 7.9% in 2010) and expect a strengthening of the Real

(1.65E by year-end 2011). But until then, questions are likely to arise

ahead of January 2011, when a new administration takes office.

Strategy – Underperform

Despite the underperformance of Brazil until early November,

valuations are still not very compelling; we therefore remain neutral on

the credit. In fact, the credit trades expensive to fair value, and the

technical position has been deteriorating. At this point we see the value

mostly in the long end as the curve has steepened a lot in the last few

weeks. We expect investors to be inclined to extend duration in a rally

scenario (our base case for the coming months).

Brazil Rich & Cheap Model*

'30

'40

'20 '21

'41'37'34

'13

'14

'15

'17

'19

'25

'24

'27

10Y

7Y5Y

2Y

3Y

0bp

20bp

40bp

60bp

80bp

100bp

120bp

140bp

160bp

180bp

200bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Brazil Valuations: Spread to Fair Value* (bp)

-43

-80

-60

-40

-20

0



Brazil Credit View

Buy Glo 2037Buy Glo 2034Buy Glo 2041Sell Glo 2040Sell Glo 2014

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Brazil Technicals: Exposure versus Average

-1.5%-1.0%-0.5%0.0%0.5%1.0%


Brazil Av g. BBB


Brazil Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BBB-GDP Growth

4.0%

Inflation

5.1%

Fiscal Bal./GDP

-2.8%

Govt Debt/GDP

60%

Current Acc./GDP

-2.6%

Av g. BBB

Brazil



20


Bulgaria (BBB-)

Fundamentals

By Pasquale Diana: Bulgaria was one of the countries which

accumulated the largest external imbalances during the credit boom.

The current account deficit widened to over 25% of GDP in the course

of 2008, on the back of credit flows and solid FDI inflows (largely in real

estate). The subsequent drought in inflows has turned the C/A position

around dramatically (-1.2% latest, and moving fast into surplus) in a

pattern we also saw in the Baltics. The last data show an economy

which is still contracting, albeit at a slower pace (-1.5%Y in 2Q), and is

driven by net exports. Domestic demand components continue to suffer

from low credit creation and high unemployment (around 9% compared

to sub-6% pre-crisis).

We note with concern that Eurostat revised the 2009 ESA-95 deficit to

4.7% of GDP (up from the previous estimate of 3.5%), a deterioration

worth 6.4% of GDP from 2008, and much worse than the government’s

cash data showing a cash deficit of just 0.8% for the year. The deviation

is likely explained by the social security deficit as well as the inclusion of

the losses made at the state-owned railway company. For this year, the

government targets a 4.6% of GDP cash deficit, which will fall to 2.5%

in 2011, based on somewhat optimistic GDP forecasts (+3.6%Y in

2011). True, Bulgaria’s debt stock is very low in a regional perspective,

at 14.7% of GDP in 2009 according to Eurostat. Note, however, that the

recent fiscal trends are not encouraging, and the government has had

to deplete its fiscal reserve in order to fund the budget deficit: the

reserve is down to around 8% of GDP, roughly half what it was at the

peak in 2008. This fiscal buffer, built over many years thanks to fiscal

discipline, can be used as a source of liquidity for the banking system in

case of a reserve drop and is one of the pillars of the current monetary

policy set-up. That is why its depletion is a concern.

Strategy – Outperform +

Investors have started reducing their underweight in CEE, trying to

rebalance their positioning. They have favoured Bulgaria over Hungary

and Romania, but we disagree on that. Although the public debt is

lower than Hungary, the total external debt hovers at similar level

(external debt versus exports is 182% in Hungary and 220% in

Bulgaria; external debt versus GDP is 142% and 110%, respectively),

particularly so for the short-end component (short-term external debt

versus GDP is 24% in Hungary and 40% in Bulgaria). Bulgaria does not

look attractive at the current level in the CEE space and we prefer either

improving stories (i.e., Hungary) or more generous credits (i.e.,

Romania). However, we rate Bulgaria as Outperform + in the short term

as we see a year-end rally materialising.

Bulgaria Macro Fundamentals, 2011 Forecasts*


2.0%

Inflation

2.9%

Fiscal Bal./GDP

-2.2%

Govt Debt/GDP

19%

Current Acc./GDP

-5.8%

Av g. BBB

Bulgaria

Source: IMF *The wider the web, the better the fundamentals

Bulgaria Credit View

Sell 5Y CDSBuy Glo 2015

Credit View

Bea

rish

Bu

llish

Asset PreferenceSpread

Tightening

Bulgaria Valuations: Spread to Fair Value* (bp)

100

050

100

150200250



Bulgaria Technicals: Exposure versus Average

-0.5%

0.0%

0.5%


Bulgaria Av g. BBB



21


Chile (A+)

Fundamentals

By Luis Arcentales: The fundamental picture for Chile remains strong.

On the real economy front, activity has rebounded sharply from the

tragic earthquake of late February, with substantial strength in domestic

demand (up 18.2% in 3Q compared to a year ago). The rebound

seems to rest on solid ground: consumers are enjoying rising

employment, positive real wage growth and ample credit availability

while confidence among Chile’s captains of industry is riding high,

translating into a surge in investment (+18.5% in 3Q). Even if the global

backdrop deteriorates ahead – an important headwind for a small, open

economy like Chile’s – the post-earthquake rebuilding efforts should

provide a significant boost to growth, particularly in 2011. Indeed, GDP

growth expectations have been progressively upgraded and we

currently forecast 5.6% for 2011. Despite the breakneck pace of growth

so far this year, inflation has remained muted.

Given the enviable position of Chile’s public sector – with gross debt to

GDP at just 7.0% and assets nearing 10% of GDP at mid-year –

funding is unlikely to be an issue for the rebuilding efforts. Importantly,

despite having ample resources at its disposal, the rebuilding plan

includes a balanced approach that mixes temporary tax hikes, sales of

non-strategic assets as well as partial use of the stabilisation funds,

reflecting the administration’s commitment to fiscal discipline.

Strategy – Underperform - -

Despite very solid fundamentals, Chile has been underperforming since

this summer only to briefly outperform during the latest sell-off. The

technical position has improved and valuations are now more in line

with fair value. Given its low-beta status, the credit should continue to

underperform the index, however. We favour the 2020 global bond.

Chile Z-Spread Curve

'12'12'12

'13

'20

'12'12

58bp

59bp

60bp

61bp

62bp

63bp

64bp

65bp

66bp

67bp

68bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Mod. Duration

Z-sp

read


Chile Credit View

Buy 2020

Buy 5Y CDS

Credit View

Bea

rish

Bu

llish

Asset PreferenceUnchanged

Chile Valuations: Spread to Fair Value* (bp)

-3

-40-30-20-10

01020



Chile Technicals: Exposure versus Average

-0.5%

0.0%

0.5%


Chile Av g. Single A


Chile Macro Fundamentals, 2011 Forecasts*

SCRM Rating: A+GDP Growth

5.6%

Inflation

3.1%

Fiscal Bal./GDP

-0.8%

Govt Debt/GDP

5%

Current Acc./GDP

-2.4%

Av g. A

Chile



22


Colombia (BB+)

Fundamentals

By Daniel Volberg: There are three key stories in Colombia: the cyclical

backdrop, the structural reform outlook, and the oil boom. On the

cyclical front, the economy is on solid footing: GDP growth is in the

4-4.5% range (around 5.1% expected for next year), inflation is below

the 3% target and unemployment is falling. This benign macro backdrop

has allowed the authorities to focus on fighting currency appreciation,

although this goal may be difficult to achieve, given the strong FDI.

The new administration has surprised by announcing a commitment to

structural reforms. One of the key reforms is the proposed fiscal rule,

which was submitted to Congress at the end of September and is now

expected to be approved by mid-2011. This reform should add

transparency, accountability and discipline to the fiscal accounts. In our

view, the implementation of the fiscal rule raises the likelihood of a

rating upgrade for Colombia.

Lastly, Colombia is also enjoying inflows from the early stages of an oil

boom. The government is projecting that technology improvement will

boost oil output to around 1.5 million barrels per day by 2015, nearly

twice the current level. This prospect has brought significant FDI inflows

(nearly half of FDI this year has been directed to the oil sector.

Strategy – Underperform

Colombia should be upgraded at some point, as suggested by our

SCRM model. The credit has been largely overpriced, however, and for

this reason it largely underperformed in the last three months. Technical

position continues to be favourable but the upside remains limited in our

view, the credit still trading expensive to fair value. The 5y10y slope has

substantially flattened recently and we favour the long end of the curve.

Colombia Rich & Cheap Model*

'20

'33

'12

'13

'14

'17'19

'37

'24

'41

10Y7Y

5Y

2Y3Y

0bp

50bp

100bp

150bp

200bp

250bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:

Source. Morgan Stanley; *See appendix

Colombia Credit View

Buy 2041Buy 2037

Sell Glo 2024Buy 5Y CDS

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Colombia Valuations: Spread to Fair Value* (bp)

-43

-60

-40

-20

0

20



Colombia Technicals: Exposure versus Average

-0.5%

0.0%

0.5%


Colombia Av g. BB


Colombia Macro Fundamentals, 2011 Forecasts*


5.1%

Inflation

4.3%

Fiscal Bal./GDP

-2.8%

Govt Debt/GDP

35%

Current Acc./GDP

-0.6%

Av g. BB

Colombia



23


Hungary (BBB)

Fundamentals

By Pasquale Diana: The economy has emerged from recession, but its

recovery remains tentative and vulnerable to a euro area slowdown, given

Hungary’s extreme openness (exports/GDP at around 80%). Risk and

inflation outlooks are inconsistent with rate cuts, we believe. If anything, it

is clear that a move towards weaker risk appetite or a deterioration in the

inflation outlook is likely to be met with rate increases.

Following some unfortunate communication by the government and the

suspension of the IMF talks, markets began to worry about the direction

that fiscal policy would take over the coming years. Hungary has one of

the best primary balance positions in the EU, yet it remains in the spotlight,

given its history of fiscal profligacy, its comparatively high stock of debt

(public and private) and its large FX mismatch on the household liabilities

side. The recent commitment to stick to a sub-3% of GDP deficit target for

2011 looks encouraging to us, although excessively relying on one-off

temporary windfall taxes (on energy, retail, telecom and banking sectors).

We note with concern the plans to effectively nationalise the funds held in

the second pension pillar, worth around 10% of GDP. While the impact on

the debt ratios will be positive in the short-term, this is not necessarily true

in the medium-longer term.

Strategy – Outperform ++

Increasing corporate taxes to re-balance the fiscal position and unwinding

the 1997 pension reform represent a potential problem for the future

commitment of foreign companies in Hungary. We acknowledge that these

decisions are not forward-looking, but in the short-term will have

considerable positive impact on both fiscal balance and debt over GDP

(possibly dropping by 7-8%). We like long positions in Hungary.

Hungary Rich & Cheap Model*

€ Jul-'14

€ '18

€ '13

€ Jan-'14

€ '16

€ '17

€ '20

$ '15

$ '20

Cds 5YCds 10Y

$ '20

$ '15

150bp

200bp

250bp

300bp

350bp

400bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Hungary Credit View

Buy $2015Buy $2020Buy €2018Sell €2020

Credit View

Bea

rish

Bu

llish

Asset Preference

BullSteepening

Hungary Valuations: Spread to Fair Value* (bp)

234

0

100

200

300



Hungary Technicals: Exposure versus Average

-1.5%-1.0%-0.5%0.0%0.5%1.0%


Hungary Av g. BBB


Hungary Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BBB+GDP Growth

2.8%

Inflation

3.5%

Fiscal Bal./GDP

-3.7%

Govt Debt/GDP

80%

Current Acc./GDP

0.5%

Av g. BBB

Hungary



24


Indonesia (BB)

Fundamentals

By Deyi Tan: We remain positive on Indonesia’s growth prospects.

General consensus tends to be also bullish on the credit given elevated

commodity prices, smooth transition to democratic setup and benign

demographic trends. What differentiates our view is that we see a

structural decline in cost of capital driven by improved macro

fundamentals, which should eventually incentivise more investment.

While inflation is structurally declining, cyclical inflation pressures are on

the rise in the near term as growth momentum gathers pace amid

elevated commodity prices. Though core inflation remains at

manageable levels for now, commodity tradables inflation such as food

are elevated amid unusual weather conditions and the relatively high

commodity weights in the CPI basket spell risks of spilling over to core

inflation amid healthy domestic demand. For now, strong trailing

currency appreciation from capital inflows has helped to do the policy

lifting in the interim, keeping a lid on import-led pressures this year, but

incomplete liquidity sterilisation adds to that inflationary risk going

forward.


Indonesia is an improving credit, and this should eventually lead to

substantial upgrades from rating agencies. The technical position has

been consistently improving for more than a year now and this should

support Indonesian bonds in a rally scenario. According to our Rich &

Cheap model, the 10y sector is trading expensive, however, and the

value is essentially in the long end of the curve. On a spread basis, the

5Y sector is attractive compared to the belly.

Indonesia Rich & Cheap Model*

'35

'19

'37

'18 '20

'17'16

'15May '14

Mar '14

'38

Cds 10Y

Cds 5Y

80bp

100bp

120bp

140bp

160bp

180bp

200bp

220bp

240bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Indonesia Credit View

Buy 2038Buy 2037Buy Mar & May '14Sell Glo 2018Sell Glo 2020

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Indonesia Valuations: Spread to Fair Value* (bp)

-35

-50-40-30

-20-10

0



Indonesia Technicals: Exposure versus Average

-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%


Indonesia Av g. BB


Indonesia Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BB+GDP Growth

6.5%

Inflation

6.2%

Fiscal Bal./GDP

-2.0%

Govt Debt/GDP

25%

Current Acc./GDP

1.2%

Av g. BB

Indonesia



25


Kazakhstan (BBB-)

Fundamentals

By Alina Slyusarchuk: We expect Kazakhstan’s real GDP growth to

reach 5.8%Y in 2010 (higher than officials’ forecasts of around 5% and

consensus of 5.3%), supported by strong external demand which has

already translated into healthy output gains in 1H10. The monthly data

show fast recovery in industrial production (+10.4%Y, year-to-date in

October) and retail sales data point to improvement in domestic

demand (+12.5%Y, year-to-date in October). Our long-term GDP

growth outlook for Kazakhstan stands at 5%Y (around +4.5% for 2011),

higher than its CIS peers, as we are positive on external demand

(particularly Chinese) for Kazakh exports (oil and gas). The risk is an

extended stagnation of credit activity, which can put further pressure on

consumption and construction, in our view.

Inflation accelerated this year, with the October print at 7.3%Y, up from

6.5%Y in August 2010, fuelled by the food prices. The budget deficit

widened in 2010: expenditure growth accelerated due to increases in

public sector wages and student grants, leaving the budget deficit on

track for a 2% of GDP deficit this year, after a 1.5% deficit in 2009. We

anticipate fiscal improvement to take place in 2011 as the government

plans to double oil export duties, from US$20 to US$40 per ton.

Strategy – Outperform + +

Kazakhstan is one of our top picks in CEEMEA, as fundamentals

remain very strong and we like being exposed to oil. Investors look

slightly underweight and this should be beneficial for this credit.

Sovereign CDS has underperformed lately and look very attractive now.

However, we recommend investors gain exposure to this credit through

the banking and oil sectors to capture the upside.

Our top pick in the corporate space is KMG ’15, currently offered at

z+394bp (YTM 5.35%). This trade reflects our bullish view on the EM

O&G sector (see EM Profile: EM Oil & Gas – Go Long to Capture the

EM Growth, October 21, 2010) and in our view is the most attractive

route to benefit from the macro story in Kazakhstan.

We continue to see further stabilization in the Kazakh banking sector

with the level of bad loans stable at 26%. According to the latest data

from the regulator, depositor flow was 3.4% in October. Our top-pick in

the Kazakh banking sector is Halyk Bank 9.25% 2013, currently trading

at z+ 397bp (YTM 4.95%).

Kazakhstan Credit View

Buy KMG 2015Buy Halyk Oct '13

Credit View

Bea

rish

Bu

llish

Asset PreferenceSpread

Tightening

Kazakhstan Valuations: Spread to Fair Value* (bp)

47

02040

6080

100



Kazakhstan Technicals: Exposure versus Average

-0.5%

0.0%

0.5%

1.0%


Kazakhstan Av g. BBB


Kazakhstan Macro Fundamentals, 2011 Forecasts*


4.5%

Inflation

7.8%

Fiscal Bal./GDP

-1.0%

Govt Debt/GDP

17%

Current Acc./GDP

3.5%

Av g. BBB

Kazakhstan



26


Korea (A+)

Fundamentals

By Sharon Lam: In the recovery cycle, Korea's growth has been driven

by strong exports, capex expansion and rising private consumption. In

2H10, growth looks certain to slow due to the diminishing low base

effect, less policy stimulus and lower exports following the slowdown of

the major economies. If global demand disappoints, we think Korea’s

exports could show more resilience compared to other countries due to

its high competitiveness, backed by a relatively weak currency, its

strength in technology and in branding. On the other hand, if the global

recovery moves ahead, we believe Korea could be a beneficiary, given

its export distributions towards more high-growth emerging markets.

The current spike in food prices could very easily trigger inflation

expectations among consumers. At this point, we expect Korea’s CPI

inflation to rise to above 3.0% in 4Q10 and 2011, but it is not likely to

get out of control, in our view, as the BoK would be likely to raise the

policy rates to anchor pre-emptive inflation pressures. Administrative

measures are also very likely if inflation rises too fast. Given its high

dependence on imported raw materials, Korea remains vulnerable to a

potential rise in commodity prices in the international market. With the

CRB index regaining momentum, this risk could become more tangible

if the pace of appreciation of the index were to accelerate.

Strategy – Underperform -

Fundamentals remain very solid, but at current levels Korean bonds

look fairly priced. At this point, we believe the current political tensions

with North Korea should not have a very significant impact on the credit.

Korea should still underperform the market in a rally scenario because

of its low-beta status. We see most of the value in the wings of the

curve (4Y and 15Y sectors).

Korea Rich & Cheap Model*

'16'16

'25

'19

Sep '14

Apr '14

'13

€'15€'15€'15€'15

60bp

70bp

80bp

90bp

100bp

110bp

120bp

130bp

140bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Korea Credit View

Buy Apr'14Buy 2025

Sell 2013Sell 2016

Credit View

Bea

rish

Bu

llish


Korea Valuations: Spread to Fair Value* (bp)

18

-20

0

20

40

60



Korea Technicals: Exposure versus Average

-0.5%

0.0%

0.5%


Korea Av g. Single A


Korea Macro Fundamentals, 2011 Forecasts*

SCRM Rating: A+GDP Growth

4.5%

Inflation

3.2%

Fiscal Bal./GDP

-0.2%

Govt Debt/GDP

38%

Current Acc./GDP

1.5%

Av g. A

Korea



27


Lithuania (BBB)

Fundamentals

By Paolo Batori: Exports and inventories are expected to lead the

recovery in 2010 and GDP growth is set to move back to positive

territory (IMF forecast: 2.1% in 2010 and 3.2% in 2011). However, the

extent of the recovery is limited by weak domestic demand and lack of

credit. High unemployment reduced the demand for loans on the one

side, while deterioration in asset quality (NPLs from 5% in 2008 to 20%

in 2009) is likely to stem loan supply, on the other.

Debt has increased sharply, but sustainability still looks manageable to

us (government debt/GDP 29.3% in 2009, 38.6% in 2010E and 45.4%

in 2011E – European Commission forecast). Below-potential GDP and

deflationary pressures should keep upward pressure on the debt/GDP

ratio, and this will likely require a tight and orthodox fiscal policy and

reforms for years to come. Lithuania’s linkage to the Southern

European countries is limited, as mostly Nordic banks are involved in its

financial system.


As per our SCRM model, Lithuania looks cheap in spread terms and

positioning remains quite light. We think investors are likely to reposition

from underweight to (at least) market-weight. Lithuania should largely

outperform in a year-end rally scenario, although we acknowledge the

country still faces fundamental challenges and we play this positioning

tactically. We like steeper USD bonds curve and favour Lithuania 2020

USD to the 2018 Euro, although we are aware of the different client

base. Buy 2015 and 2020 in USD and 2016 in Euro; sell 2018 in Euro.

Lithuania Rich & Cheap Model*

$ '15$ '15

€ '12€ '13

€ '14

€ '16

€ '18

$ '15 $ '17

$ '20$ '15$ '15$ '15

0bp

50bp

100bp

150bp

200bp

250bp

300bp

350bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Lithuania Credit View

Buy $2015Buy €'14

Credit View

Bea

rish

Bu

llish

Asset Preference

BullSteepening

Lithuania Valuations: Spread to Fair Value* (bp)

142

050

100

150200250



Lithuania Technicals: Exposure versus Average

-0.5%

0.0%

0.5%


Lithuania Av g. BBB


Lithuania Macro Fundamentals, 2011 Forecasts*


3.2%

Inflation

-1.1%

Fiscal Bal./GDP

-8.5%

Govt Debt/GDP

45%

Current Acc./GDP

2.6%

Av g. BBB

Lithuania

Source: Morgan Stanley, EU forecasts, IMF *The wider the web, the better the fundamentals


28


Malaysia (A-)

Fundamentals

By Deyi Tan: Malaysia should continue to get support from elevated

commodity prices, constructive global environment and still

expansionary fiscal policy, which should help sustaining growth at

around 5% in 2011 and 5.5% in 2012. In terms of growth outlook in the

region, we rank Malaysia on par with Thailand (below Indonesia and

Singapore). In the longer-term, however, structural issues such as soft

infrastructure gaps in labour force quality have implications on potential

growth prospects and are still in the midst of being addressed.

Compared to other Asian credits, Malaysia arguably falls in the camp of

the countries facing relatively low inflationary pressures. We forecast

inflation to remain fairly contained at 2.3% (2011) and 2.2% (2012). This

is because with commodity prices elevated, the first phase of inflation

pressures tend to come from the tradables front, but a subsidy system

on selected items (such as certain retail fuel and food items) helps defer

inflation to a certain extent until the next round of subsidy rationalisation.

The fact that the economy is not going into an overheated mode will

also keep demand-pull pressures and core inflation in check.


Malaysia benefits from strong fundamentals, but valuations remain tight

(Malaysia 5Y CDS now trades in line with DM countries like Austria and

France). Technical position has been deteriorating since the beginning

of the year; this factor should contribute to the country’s

underperformance in a market rally scenario.

Malaysia Credit View

Buy 5Y CDS

Credit View

Bea

rish

Bu

llish


Malaysia Valuations: Spread to Fair Value* (bp)

-33-40

-30

-20

-10

0



Malaysia Technicals: Exposure versus Average

-0.5%

0.0%

0.5%

1.0%


Malay sia Av g. Single A


Malaysia Macro Fundamentals, 2011 Forecasts*

SCRM Rating: A-GDP Growth

5.0%

Inflation

2.3%

Fiscal Bal./GDP

-3.5%

Govt Debt/GDP

51%

Current Acc./GDP

13.7%

Av g. A

Malay sia



29


Mexico (BBB)

Fundamentals

By Luis Arcentales: Mexico remains in the midst of a two-tier recovery,

characterized by a robust industrial rebound coupled with sluggish

consumption and anemic investment. Against this backdrop, the

economy is likely to remain heavily dependent on the US cycle. Part of

Mexico’s weak momentum in domestic demand seems to be explained

by the negative income shock the country has experienced due to a

relative deterioration in the terms of trade. After expanding at a pace in

excess of 5% annualized during 1H10, growth has cooled off and

should continue to expand at a moderate pace thanks to the support

from US industrial activity. The deficit of the current account remains

contained at this point (-0.2% of GDP in 1H10), although some

deterioration is likely to take place ahead.

Fiscal accounts have improved due to the combination of higher oil

prices and output, a strong bounce in VAT and tax revenues, as well as

under-execution of expenditures. The authorities are committed to a

gradual reduction of the fiscal deficit through 2012, as delineated in the

fiscal reform of 2009 which projected to lift revenues by near 1.0% of

GDP. The 2011 budget approved in mid-November had a deficit of

2.5% of GDP; most of the parameters in the budget seem reasonable, if

not necessarily conservative as was the case in 2010.

Strategy – Neutral

Technical position and valuations have improved over the last few

months, but like many other Latin American credits, Mexico remains

expensive to fair value. The shape of the curve has largely normalized,

and at presents we favour the very long end which trades 20bp to 25bp

cheap to Brazil despite showing better average rating (high BBB for

Mexico, BBB- for Brazil).

Mexico Rich & Cheap Model*

'22

Jan '14

'16

'40

'34'33

'13

Feb '14

'15

'17

Mar '19'20

Dec '19

'31

10Y

5Y

2Y3Y

0bp

50bp

100bp

150bp

200bp

250bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Mexico Credit View

Buy 2033Buy 2034Buy 2040Buy 5Y CDSSell 2015

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Mexico Valuations: Spread to Fair Value* (bp)

-33

-60

-40

-20

0

20



Mexico Technicals: Exposure versus Average

-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%


Mex ico Av g. BBB


Mexico Macro Fundamentals, 2011 Forecasts*


3.9%

Inflation

3.8%

Fiscal Bal./GDP

-2.3%

Govt Debt/GDP

35%

Current Acc./GDP

-1.3%

Av g. BBB

Mex ico



30


Panama (BBB-)

Fundamentals

By Rosa Velasquez: The economy is recovering at a robust pace: real

GDP expanded by 6.1% during 1H10 (up from 2.8% in 1H09) and

6.24%Y in July 2010. We expect the growth momentum to continue

through the end of the year.

The fiscal accounts are improving. The NFPS deficit narrowed to 0.3%

of GDP in 1H10, down from 0.9% in 1H09 and well below the official

NFPS/GDP 2010 limit of 2%. The primary balance improved as well,

increasing to 1.0% of GDP in 1H10 from 0.6% in 1H09. Monthly

inflation rose by 0.5% in August, bringing inflation to 3.6%Y, up from

1.8% in August 2009.

On the external side, the current account registered a deficit of US$1.3

billion in 1H10. Nevertheless, the deficit was virtually covered by strong

FDI flows of US$1.1 billion (up 26% from 1H09). The debt/GDP ratio

stood at 42.4% on June 30, 2010, down from 45.1% in December 2009.


Apart from the current account, Panama is on solid ground. Despite

underperforming peers in the last six months, the credit is still trading

rich to fair value. Technical position is not supportive either. Given the

limited liquidity on the credit, we recommend sticking with the main

benchmarks (essentially the 2020 global).

Panama Rich & Cheap Model*

'29

'12

'36 S'27

'26'20'15 Cds 10Y

Cds 5Y

0bp

50bp

100bp

150bp

200bp

250bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Panama Credit View

Buy 2020

Buy 5Y CDS

Credit View

Bea

rish

Bu

llish


Panama Valuations: Spread to Fair Value* (bp)

-51

-100-80-60

-40-20

0



Panama Technicals: Exposure versus Average

-0.5%

0.0%

0.5%

1.0%


Panama Av g. BBB


Panama Macro Fundamentals, 2011 Forecasts*


6.3%

Inflation

2.9%

Fiscal Bal./GDP

-1.1%

Govt Debt/GDP

42%

Current Acc./GDP

-8.9%

Av g. BBB

Panama



31


Peru (BBB-)

Fundamentals

By Daniel Volberg: With GDP growing above 9% on a year-on-year

basis, Peru’s economy continues to be one of the strongest in Latin

America (and indeed in EM). Somewhat surprisingly, despite very

strong growth inflation remains near the 2% target. However, this near-

double-digit GDP growth does pose demand driven inflation risks for

next year.

Yet the central bank has paused the rate hiking cycle, leaving the policy

rate on hold at 3.00%. The decision to pause rate hikes appears to be

largely due to concerns that rising rates – though necessary to slow

growth and head of inflation risks – were contributing to currency

strengthening. Faced with this dilemma, we expect the central bank to

resume tightening monetary policy next year, but at a slower pace as

the authorities engage in a tight balancing act between growth and the

currency.


The credit has been consistently underperforming the market since mid-

August. Initially, Peru started to underperform due to political turmoil

triggered by the results of local elections, but it continued to do so as

the market perceived Peru as quite expensive on a pure valuation

basis. Macro fundamentals remain very strong, however, which should

limit the downside; we believe the country should now perform more in

line with the index. We favour the recently issued 2050 global bond,

which offers substantial pick-up relative to the 2037 benchmark; also, its

very long duration should make this bond outperforming in a rally

scenario.

Peru Rich & Cheap Model*

'50

'15

'37 S'33

'25

'19'16

Cds 10Y

Cds 5Y

0bp

50bp

100bp

150bp

200bp

250bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Peru Credit View

Buy 2050Buy 2037Buy 2025Sell 2016Buy 5Y CDS

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Peru Valuations: Spread to Fair Value* (bp)

-43

-80

-60

-40

-20

0



Peru Technicals: Exposure versus Average

-1.0%

-0.5%

0.0%

0.5%


Peru Av g. BBB


Peru Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BB+GDP Growth

5.5%

Inflation

3.1%

Fiscal Bal./GDP

-0.7%

Govt Debt/GDP

26%

Current Acc./GDP

0.6%

Av g. BBB

Peru



32


Philippines (BB)

Fundamentals

By Pieter Van Der Schaft: Economic prospects remain positive, with

2010 full-year GDP growth likely to exceed the government’s 5-6%

forecast after 7.9% GDP growth during 1H10 amid continuing growth in

foreign worker remittances (+7.4%Y during 8M 2010). Moreover,

subdued inflation (+3.8%Y, and within the 3.5-5.5% inflation target) has

allowed BSP to keep rates on hold, while strong foreign capital inflows

(BSP’s FX reserves rose by US$9 billion during 9M 2010 to US$53.5

billion, equivalent to 13 months’ import coverage) and a further shift in

government funding towards domestic and offshore PHP issuance have

further improved the Philippines’ external funding profile. Finally,

prospects are for political stability as President Aquino has started his

six-year term, while Congressional elections are not due until 2013.

That said, we believe that two risks remain: i) potential fiscal

slippage related to the government’s narrow tax revenue base; and

ii) the Philippines’ traditional sensitivity to rising food and oil prices,

which may also be exacerbated by possible crop damage due to

typhoon Megi. We view these risks as moderate though as: i) strong

GDP growth is tentatively showing up in stronger growth in revenue

collections; this may facilitate government efforts to reduce the fiscal

deficit to 2% of GDP by 2013; and ii) the Philippines has a strong

external liquidity profile.


Early November, S&P upgraded the Philippines by one notch to BB,

reflecting a continuous improvement in fundamentals. However, the

credit remains well overpriced compared to peers, in our view. Given its

high-beta nature, it should still perform reasonably well in a rally

scenario. We rate the Philippines as neutral in our portfolio.

Philippines Rich & Cheap Model*

'24

Old-'16

'17

'34'32

'31'30

'25

'13

'14

'15

N '16

Jan '19

'20

Jun '19'21

5Y

10Y

0bp

50bp

100bp

150bp

200bp

250bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Philippines Credit View

Buy 2034Buy 2032Buy 2031Sell 2021Sell 2020

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Philippines Valuations: Spread to Fair Value* (bp)

-76

-150

-100

-50

0



Philippines Technicals: Exposure versus Average

-1.5%

-1.0%

-0.5%

0.0%

0.5%


Philippines Av g. BB


Philippines Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BB-GDP Growth

4.0%

Inflation

4.0%

Fiscal Bal./GDP

-2.5%

Govt Debt/GDP

63%

Current Acc./GDP

2.3%

Av g. BB

Philippines



33


Poland (A-)

Fundamentals

By Pasquale Diana: Polish regional growth outperformance continues,

with GDP growth in 2Q reaching 3.5%Y, above expectations. We have

raised our 2011 forecast to 4.4% (from 3.2% previously), on the back of

a better trajectory into next year and a more optimistic view on public

and private capex ahead of the 2012 European football championships.

That said, we view with concern the lack of serious fiscal tightening, and

would note that Poland is the only country in Central Europe that has

not tackled the issue of the budget deficit decisively, partly also due to

the electoral calendar (elections in 2011). The ESA-95 deficit could

reach 8% of GDP this year, a level many would have deemed

unthinkable just a few quarters ago.

We think that the NBP will be among the first central banks to start

raising rates in CEE, in response to better growth, stronger domestic

demand and inflation moving stably above the 2.5% target. Our rate

profile shows that the MPC will raise rates by 100bp next year, in an

effort to normalize monetary conditions.


Poland has been penalised lately, due to uncertainty on its debt

sustainability and the need for investors to hedge against a possible

GIPS-CEE contagion. In our view, investors should reduce their current

underweight, as CEE has still comfortable access to external funding

(i.e., the 1y CCS swap basis is improving) and a change in the fiscal

rules is unlikely. We favour the long end in the euro-denominated bond

curve.

Poland Rich & Cheap Model*

€ '19

€ '25

€ '13

€ '14

€ '16 € '17

€ '18 € '21

€ '20

€ '22

$ '12

$ '14

$ Jul-'15

$ Oct-'15 $'19

Cds 5Y

Cds 10Y

0bp

50bp

100bp

150bp

200bp

250bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Poland Credit View

Buy $2019Buy €2025Buy €2016Sell $2014

Credit View

Bea

rish

Bu

llish

Asset Preference

BullFlattening

Poland Valuations: Spread to Fair Value* (bp)

29

-20

0

20

40

60



Poland Technicals: Exposure versus Average

-1.0%-0.5%0.0%0.5%1.0%1.5%


Poland Av g. Single A


Poland Macro Fundamentals, 2011 Forecasts*

SCRM Rating: A-GDP Growth

4.4%

Inflation

2.8%

Fiscal Bal./GDP

-6.2%

Govt Debt/GDP

56%

Current Acc./GDP

-3.7%

Av g. A

Poland



34


Romania (BB+)

Fundamentals

By Pasquale Diana: In the last GFS we revised the growth outlook

lower, and we now see 2010 GDP growth at -2.9% and 2011 growth at

-1.7%. Such a weak growth outlook is a function of additional fiscal

tightening on top of the original IMF package: a 5% VAT hike, an

increase in the retirement age to 65, the announcement of over 70,000

job cuts in the public sector and a 25% salary cut for state employees.

Most of the weakness should be seen in the next two/three quarters,

and this is enough to depress the near-term growth outlook significantly.

Romania has a low stock of debt (24% of GDP), but it is struggling to

contain the deficit (now running at 8% on an annual basis) to the 6.8%

the IMF is demanding. Moreover, the government does not enjoy a

stable majority and continues to face the threat of a no-confidence vote.

The latest confidence motion in October failed, but the tensions looks to

have abated only temporarily. The coalition remains quite shaky, and

with yet another electoral campaign looming (elections in 2012),

austerity will prove rather hard to implement.


Uncertain political environment and challenging fiscal dynamics make

Romania a possible target of investors’ concerns on possible contagion

from Peripheral Europe (PE). In fact Romania spreads have increased

in the past two weeks or so, as well as Hungary. Our base case is for

no contagion from PE into the CEE region. Therefore we are still

comfortable with an ‘Outperform +’ stance on this credit.

Romania Z-Spread Curve

Hun € '17Hun € '17

Rom € '12

Rom € '15

Rom € '18

Bul '15Bul '15

Cds 5YCds 5Y

Bul € '13Bul € '13

0bp

50bp

100bp

150bp

200bp

250bp

300bp

350bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Mod. Duration

Z-sp

read


Romania Credit View

Sell 5Y CDSBuy €2018Buy €2015

Credit View

Bea

rish

Bu

llish


Romania Valuations: Spread to Fair Value* (bp)

162

0

100

200

300



Romania Technicals: Exposure versus Average

-0.5%

0.0%

0.5%


Romania Av g. BB


Romania Macro Fundamentals, 2011 Forecasts*


-1.7%

Inflation

4.8%

Fiscal Bal./GDP

-6.2%

Govt Debt/GDP

33%

Current Acc./GDP

-5.8%

Av g. BB

Romania



35


Russia (BBB)

Fundamentals

By Alina Slyusarchuk: Russia GDP slowed down to 2.7%Y in 3Q10

after a robust recovery in 2Q, due to the extended heat wave. Activity in

early 4Q got off to a good start and we still expect the rest of 4Q to

prove strong helped by recovering credit activity and improving

corporate investment demand. We are positive for 2011, with a GDP

forecast at 4.3%. Note, that the government plans to increase social

spending prior to presidential elections in 2012. We therefore remain

concerned about upside inflation risks, although we are still optimistic

on household consumption (+5.5%Y in 2011).

We anticipate inflation pressures from food prices, monetary

aggregates growth and recovering consumer demand – our year-end

CPI forecast is at 8%Y for 2010. However, the Central Bank of Russia

should stay on hold until the end of the year and start tightening only in

2011, when the recovery is on firmer ground. Under the official 2011

budget, a deficit of 3.6% of GDP is planned after a 4.4% deficit in 2010

(on our forecasts). The 2011 budget funding will rely heavily on

domestic borrowing, which can potentially drain some liquidity.


The Russian credit is one of our favourites in CEEMEA in terms of

fundamentals but, at current levels, the credit is arguably trading close

to fair value. In fact, we prefer implementing our bullish view through the

banking and oil sectors. Strong banking sector fundamentals position

the sector to benefit from the strong domestic demand and overall

macro story: we favour VTB 18p ’13 and Alfa Bank ’15 to play this

strategy. In the oil sector, we recommend the longer dated Gazprom

bonds, namely GAZPRU ’34 currently offered at z+329bp (YTW 6.85%)

(see Oil & Gas section on page 42).

Russia Rich & Cheap Model*

'18

Mf 7

'28

'30 R

'20'15

3Y2Y

5Y

10Y

0bp

50bp

100bp

150bp

200bp

250bp

300bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Russia Credit View

Buy 2030Buy 2020Buy Gazprom '34Sell 2015

Credit View

Bea

rish

Bu

llish

Asset Preference

BullSteepening

Russia Valuations: Spread to Fair Value* (bp)

23

0

20

40

60

80



Russia Technicals: Exposure versus Average

-1.5%-1.0%-0.5%0.0%0.5%1.0%


Russia Av g. BBB


Russia Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BBBGDP Growth

4.3%

Inflation

8.5%

Fiscal Bal./GDP

-3.8%

Govt Debt/GDP

10%

Current Acc./GDP

2.2%

Av g. BBB

Russia



36


South Africa (BBB+)

Fundamentals

By Andrea Masia: External and fiscal accounts remain the key drivers

for South Africa. Although we expect the current account deficit to

widen in 2H10 (expected -3.7% of GDP for 2010), large-ticket inward

direct investment transactions are likely to combine with strong, carry-

related portfolio inflows to fully fund the current account gap. This

should also help to stabilise inflation around current levels for longer,

engendering a relatively stable growth outlook (expected +3.5% for next

year, versus 3% for 2010).

With regard to the fiscal accounts, revenue outperformance continues

to exceed expenditure outlays, resulting in projections of future fiscal

deficits which are narrower than previously anticipated. Overall debt

levels, although on the rise, are still within comfortable limits. The risk is

for a disorderly correction in the currency that destabilises both inflation

and growth outlook.


South African fundamentals remain solid; on the valuation side, the

credit is trading close to fair value. Positioning is neutral in absolute

terms, but a bit heavy when compared to the BBB average. South

Africa has outperformed considerably in the past month and this made

us change the stance from Neutral to Underperformance -.

The general strong demand for long-dated EM bonds has caused the

10-year sector to move towards rich levels. Investors looking for

duration should switch out of the 2020 into the 2022, in order to improve

the performance. In the short end, we prefer 2014 to the 2012, as the

former presents better carry and very steep roll-down.

South Africa Rich & Cheap Model*

'22

'12

'14

'19 '20'22

5Y

10Y

0bp

20bp

40bp

60bp

80bp

100bp

120bp

140bp

160bp

180bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


South Africa Credit View

Buy 2020

Buy 5Y CDS

Credit View

Bea

rish

Bu

llish


South Africa Valuations: Spread to Fair Value* (bp)

3

-100

10

203040



South Africa Technicals: Exposure versus Average

-1.0%

-0.5%

0.0%

0.5%

1.0%


South Africa Av g. BBB


South Africa Macro Fundamentals, 2011 Forecasts*


3.5%

Inflation

5.4%

Fiscal Bal./GDP

-3.5%

Govt Debt/GDP

37%

Current Acc./GDP

-4.5%

Av g. BBB

South Africa



37


Turkey (BB)

Fundamentals

By Tevfik Aksoy: We expect real GDP growth to reach 7%Y in 2010 on

the back of robust growth in private consumption, investments and the

inventory cycle – despite the negative contribution of net exports

stemming from weak demand from Europe and relatively high oil prices.

We expect 2011 growth to be slower but still robust at around 4.2%. We

consider the main risk to these forecasts to be protracted weakness in

external demand. As Turkey is facing general elections in June 2011,

we expect the fiscal stimulus to be present at least in 1H11, essentially

resulting in a noticeable slowdown in 2H11.

Inflation is forecast to decline gradually to 7.6% at end-2010 and 6% at

end-2011, but in the meantime we expect the headline inflation rate to

hit 5.5-6%% in 1Q11 as base effects kick in. The current account deficit

is widening and likely to reach 5.7% of GDP in 2010. While financing is

unlikely to be an issue, we think that the quality of the financing mix is

less than ideal. The fiscal picture had been stable and safe thanks to

higher-than-anticipated growth that led to strong revenues. If the

government maintains the current practice of controlled discretionary

spending, we expect debt-to-GDP ratio to decline gradually.


Investors are still largely underweight the credit, but momentum has

changed lately and positioning is moving towards more balanced levels.

Our SCRM model is anticipating a strong rating upgrade, but the credit

is already trading at rich value. We advise investors to keep their

current underweight as current valuation does not give cushion to

absorb possible volatility. We favour the 30y sector.

Turkey Rich & Cheap Model*

'30

Nov '19'18

Mar '19

'17'16

'15

'14'13

'20

'21'25

'34 '38

'36'40

€'19

€'17

€'16

€'14

€'12

3Y

2Y

5Y

10Y

60bp

80bp

100bp

120bp

140bp

160bp

180bp

200bp

220bp

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Turkey Credit View

Buy 2036Buy 2040Buy 2025Sell 2015Sell 2017

Credit View

Bea

rish

Bu

llish

Asset PreferenceSteepening

Turkey Valuations: Spread to Fair Value* (bp)

-13-20-10

010203040



Turkey Technicals: Exposure versus Average

-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%


Turkey Av g. BB


Turkey Macro Fundamentals, 2011 Forecasts*


4.2%

Inflation

6.0%

Fiscal Bal./GDP

-3.8%

Govt Debt/GDP

43%

Current Acc./GDP

-5.3%

Av g. BB

Turkey



38


Venezuela (B+)

Fundamentals

Daniel Volberg: We continue to see medium-term deterioration in

Venezuela’s fundamentals, though the near term may prove more

manageable. In the near term, access to credit (even if at high rates)

has not been compromised and the asset cushions – more than $28

billion in international reserves and near $8-9 billion in other liquid dollar

assets held by the public sector – appear sufficient to provide a dose of

near-term comfort for investors.

That said there are major pitfalls. In the medium term Venezuela

appears to be facing a severe shortage of hard currency – roughly $20-

25 billion per year – that is forcing it to rapidly accumulate debt.

Meanwhile, major near-term risks seem to be the potential arbitration

penalties as well as headline risk associated with policy radicalization.

And in the one area that could significantly improve the overall outlook –

development of the Orinoco belt oil resources – progress appears to be

very limited.

Strategy – Outperform + +

Investors have been looking for yield, and deeply discounted

Venezuelan bonds should benefit from investors’ risk appetite. In the

short term – to the extent that the country has enough FX reserves and

risk of default is not imminent – Venezuelan bonds should outperform

as oil prices remain strong. In fact, benign technicals should support the

credit.

As we run our Par Bond Equivalent Spread model, the 2014 and 2025

global bonds appear to be the most compelling assets when taking into

account the recovery value. Our Rich & Cheap model also confirms the

attractiveness of these two bonds.

Venezuela – Rich & Cheap Model*

'28

'27

'24

Old '18

'13'22 S

'19 '23

'34

'38

'25'20

N '18'16

'14

3Y2Y

5Y7Y

10Y

700bp

800bp

900bp

1000bp

1100bp

1200bp

1300bp

1400bp

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Mod. Duration

Z-sp

read

Cheap+ Cheap-

Rich+ Rich-

Legend:


Venezuela Credit View

Buy 2025Buy 2014

Sell 2034Sell 2024

Credit View

Bea

rish

Bu

llish

Asset Preference

BullSteepening

Venezuela Valuations: Spread to Fair Value* (bp)

910

0

500

1000

1500



Venezuela Technicals: Exposure versus Average

-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%


Venezuela Av g. Single B


Venezuela Macro Fundamentals, 2011 Forecasts*

SCRM Rating: BGDP Growth

-0.7%

Inflation

35.5%

Fiscal Bal./GDP

-3.8%

Govt Debt/GDP

15%

Current Acc./GDP

3.8%

Av g. B

Venezuela



39


Sector Views


40


Quasi-Sovereign Model

We introduced our quasi-sovereign (QS) model in August (see EM Quasi-Sovereigns – Valuations on a Global Basis, August 27, 2010) to establish a framework within which to value QS bonds on a consistent basis across the EM credit universe. The key investment thesis is to consider quasi-sovereigns as corporate credits, plus a put option to the government.

Quasi-sovereign corporates continue to be one of our preferred strategies to gain exposure to strong underlying macro fundamentals. Exhibit 45 shows that the CIS region represents the best risk/reward, and this is in line with our overall bullish view on CEEMEA credit.

The performance of the quasi-sovereigns in the past month has been mixed.

Asia – Korean QS spreads over the sovereign generally compressed during the period, driving the overall spread tightening of the Asian QS.

CEEMEA – ME QS (TAQA, TDICUH, MUBAD) showed similar spread compression as the Asian QS. CIS QS generally continue to lag the rest of the universe, with the exception of KAZATOM.

Latam – ENAP and CDEL were the best performers in Latam, with ELEBRA and ECOPET showing considerable spread widening during the past month.

Key recommendations based on the QS scoring: Asia: We prefer PETHAI ’14 to KOROIL ’14.

CEEMEA: KZOLKZ ’15 looks most attractive; we also like GAZPRU ’13.

Latam: We prefer the pick-up PETBRA ’18 offers over PEMEX ‘19.

Exhibit 45

Quasi-Sovereign Model

TENAGA '15

MISCMK '14

PETROL '14

HIGHWY '15KOSPO '14

KORELE '14

KOHNPW '14

KORGAS '14

KOROIL '14

PLNIJ '19

PSALM '19

KOLAHO '14

KORESC '15

PETHAI '15

AXIATA '20

GAZPROM '13

RZD '17

TNEFT '14

KZOLKZ '15

KAZATO '15

NAFTO '14

TAQA '14

TDICUH '14

MUBAD '14

ELEBRA '19

PETBRA '18

ENAP '14

CDEL '14

ECOPET '19

PEMEX '19

0

50

100

150

200

250

0.5 1.0 1.5 2.0 2.5 3.0 3.5

Quas

i-S

ove

reig

n v

s S

ove

reig

n (

Z-S

pre

ad)

Stronger Score Weaker Score Source: Morgan Stanley Research


41


Oil & Gas Sector

We maintain our bullish view on the EM O&G sector. The sector is highly strategic to EM economies and in our view is one of the most effective methods to capture the EM growth story (see EM Profile: EM Oil & Gas – Go Long to Capture the EM Growth, October 21, 2010).

Latam O&G names have underperformed. We use our EM O&G composite in Exhibit 47 as the basis to look at the performance of the EM oil and gas sector in the past month. Overall, the EM O&G composite spread has remained flat, with Latam O&G underperforming CEEMEA and Asia. Meanwhile, the DM O&G composite has tightened very marginally (3bp).

Issuance has been significant. EM O&G companies have issued US$14.2 billion in external debt in 2010, of which US$5.0 billion of this has come in 4Q10. The sector has rather modest Eurobond redemptions in 2011 of US$5.0 billion, but looking at potential capex funding requirements in 2011, we can expect external debt supply from the sector to be considerable. Assuming that demand-side dynamics remain relatively unchanged, we estimate that supply from the sector may be in excess of US$10 billion in 2011.

Commodity outlook: supply-side risks. Our commodity research team forecasts a 2011 base case oil price of US$100/bbl, increasing to US$105/bbl in 2012. The key driver of higher oil prices in 2011 and 2012 according to our commodity team is a decline in spare capacity which is expected to pose challenges to increasing global demand. As a result, prices will likely tick higher, driven by the need to ration demand (see Exhibit 46).

CIS region the most attractive. We continue to see the best value in the CIS O&G names, in particular the quasi-sovereign integrated operators. Our top pick in the sector is KZOKZ ’15, currently offered at z+420bp (YTM 5.6%). As highlighted earlier (see page 25), we like Kazakhstan’s macro fundamentals and view the state-owned operator KMG as the most effective way to capture the favourable Kazakh macro dynamics. As highlighted in CIS O&G – KazMunaiGaz: Life Outside the Indices, October 28, 2010, we see fair value of the KMG spread versus Gazprom of 60-75bp flat across the curve. At current prices, KZOKZ ’15 trades 110bp wider than the new GAZPRU ’15 – see Exhibit 48.

Exhibit 46

MS Oil Price Forecast – Bullish Outlook

Bear Case $70

Bull Case $150

$83.76

Yearend 2010$95

$105

11/28/10

$0

$25

$50

$75

$100

$125

$150

$175

Mar-2006 May-2007 Jun-2008 Aug-2009 Sep-2010 Nov-2011 Dec-2012

Historical MS Forecast (starting YE2010)

Current Price Forward Curve

Current Price & Forw ard Curve as of:

Nov-2010 Source: Morgan Stanley Research estimates

Exhibit 47

EM O&G Composite: Attractive Pick-Up vs DM

-100

0

100

200

300

400

500

600

700

800

Mar

-06

Ma

y-0

6

Jul-

06

Se

p-0

6

No

v-06

Jan

-07

Mar

-07

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-07

Jan

-08

Mar

-08

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-08

Jan

-09

Mar

-09

Ma

y-0

9

Jul-

09

Se

p-0

9

No

v-09

Jan

-10

Mar

-10

Ma

y-1

0

Jul-

10

Se

p-1

0

No

v-10

0

100

200

300

400

500

600

EM Oil&Gas Composite vs. DM Oil&Gas Composite (rhs) EM Oil&Gas Composite DM Oil&Gas Composite Source: Bloomberg, Morgan Stanley Research

Exhibit 48

Focus Trade: Buy KZOKZ ’15

$ '21 KZOKZ

$ '20 KZOKZ$ '18 KZOKZ

$ '15 KZOKZ

$ '13 KZOKZ

$ '37 GAZ

$ '34 GAZ

$ '22 GAZ

$ '19 GAZ

$ '18 GAZ

$ '16 GAZ

$ '15 GAZ

$ Jul-'14 GAZ$ 25-Mar-'14 GAZ

$ '20 GAZ

$ Mar-'14 GAZ

$ Jul-'13 GAZ

$ Apr-'13 GAZ

$ Mar-'13 GAZ

200

230

260

290

320

350

380

410

440

0 2 4 6 8 10 12 14

Duration

Sp

read

Source: Bloomberg, Morgan Stanley Research


42


Exhibit 49

EM Oil & Gas: Benchmark Regional Curves

GAZPRU 9.625% '13

GAZPRU 7.343% '13

GAZPRU 7.51% '13

GAZPRU 8-Mar-14

GAZPRU'20GAZPRU 25-Mar-14

GAZPRU 8.125% '14

GAZPRU'15

GAZPRU'16 GAZPRU'18

GAZPRU'19

GAZPRU'22 GAZPRU'34

GAZPRU'37

PEMEX'14

PEMEX Mar-'15

PEMEX 5.75% Mar-'18PEMEX'19

PEMEX'20

PEMEX'21

PEMEX'35PEMEX'38

PETROL'12

PETROL'14

PETROL'15 PETROL'19

PETROL'22

PETROL'26

RASGAS'14

RASGAS'12

RASGAS'16RASGAS'14

RASGAS'20

RASGAS'19

RASGAS 6.332% '27

RASGAS 5.838% '27

PETBRA'13

PETBRA'14

PETBRA'16

PETBRA Mar-'18PETBRA Dec-'18PETBRA'19

PETBRA'20

PETBRA'40

40

90

140

190

240

290

340

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0Modified Duration

Z-s

pre

ad


Exhibit 50

Spreads versus Fundamentals (Free Cash Flow/Debt)

RILIN'20

SKENER'13

GSCCOR'17PETHAI'15IOCLIN'15

KOROIL'14

CNOOC'13

PETROL'19

PETRTT'19

ENAPCL'19 ECOPET'19

PEMEX'18PETBRA'18

QGTS'33RASGAS'19

QPETRO'11

DOLNRG'19

NAFTO'14

MOLHB'17KZOLKZ'18

VOSTOK'15

TNEFT'18

TMENRU'18

LUKOIL'19GAZPRU'18

RDSALN'18

TOTAL'16

BPLN'19

COP'18

REPSM'17

XOM'18

0

100

200

300

400

500

600

700

800

-75% -65% -55% -45% -35% -25% -15% -5% 5% 15% 25% 35% 45% 55% 65% 75% 85% 95%

FCF/Debt

Z-s

pre

ad



43


Appendix

EM Funds Technicals

EM Exposure Indicator (EMEI): This index tracks the beta risk exposure of EM debt-dedicated funds relative to their benchmark. EMEI is constructed

using a basket of 73 dedicated EM fixed income or FX funds. A reading of 0 represents a significant underweight, 50 is equivalent to a neutral stance and

100 reflects a substantial overweight in the part of fund managers relative to their benchmarks. A rising EMEI indicates that exposure of funds, collectively,

is rising relative to the market. Levels below 25 tend to be followed by rallies and levels above 75 tend to be followed by sell-offs. For a detailed description

of the model, see EM Profile: The Second Generation of EM Exposure Indices, November 9, 2010.

SovRank Model This model combines macro fundamentals, valuations and market risks using the results of SCRM, CC-MR and C-VOL in order to give a model-driven

assessment on the attractiveness of sovereign CDS. The sub-components of SovRank are detailed below:

The Sovereign Credit Rating Model (SCRM) focuses on fundamental changes. It aims at predicting the future level of sovereign credit ratings based

on key macro inputs; eventually we gauge in which extent the market is pricing-in these rating changes.

The CC-MR model focuses on mean-reversion patterns. In this model, rating upgrades and downgrades are assumed to be slow to take place so that

short-term movements in CDS are mainly driven by market considerations (e.g. supply/demand, risk appetite, etc.). To the extent that the model

assumes no changes in fundamentals (in the short term), the CDS of each country is meant to revert to the level it usually trades versus the credit

curve once technical factors also mean-revert.

The C-VOL model reflects the market risks on each country. We adjusting the CDS of each country by its level of volatility. Concretely, we divide CDS

levels by the volatility and normalise the result multiplying by the average volatility of the market. We then assess if the country is trading “rich” or

“cheap” taking into account its level of volatility.

For a detailed description of the models, see EM Profile: SCRM and SovRank, July 22, 2010.

Credit View pages

Credit rating. The credit rating shown in the top left corner (next to the country’s name) is the simple average of foreign currency long-term issuer rating

by S&P, Moody’s and Fitch.

Rich & Cheap model: For each bond, we calculate the difference between market z-spread and fair value on the fitted curve (i.e. the regression line). As

we keep an historical of this spread, a Z-score indicator is computed to gauge how far each bond is trading relative to its average spread versus the curve.

Depending on their Z-score level, bonds are then assessed as “cheap” or “rich” with a certain degree, as follows:

The ‘Cheap+’ status (very cheap) is given for bonds which meet two conditions simultaneously: 1.) their current spread (in absolute terms) trades

above the fitted curve and 2.) their current spread trades more than 1.5 standard deviation above their average level versus the regression line.

A ‘Cheap-’ (cheap) status is given for bonds which Z-score indicator is positive but does not meet the previous two conditions.

Symmetrically, the ‘Rich+’ status (very expensive) is given for bonds whenever they meet two conditions: 1.) their current spread (in absolute terms)

trades below the fitted curve and 2.) their current spread trades less than -1.5 standard deviation below their average level versus the regression line.

Bonds are given the ‘Rich-’ status (expensive) when their Z-score indicator is negative but it does not meet the previous two conditions.

It is important to stress that the model is linear. Although this can appear as an imperfect fit compared to other types of regressions (such as a logarithmic

or a polynomial), the linear regression is intended to capture the changes in the shape of the curves (i.e. changes in convexity) and the attractiveness of

each bond for a given duration exposure. From this point of view, the regression line is more a reference point rather than an actual ‘fit’. Note also that the

liquidity and the high (or low) dollar price of a bond are taken indirectly into account to the extent that we do not consider the spread relative to the

regression as the relevant variable (a bond can be systematically trading above or below the curve given its higher or lower coupon, or because of better

or worse liquidity levels), but rather the spread versus historical average. By doing so, these particular features are neutralised to a large extent to only

consider the volatility of the spread versus its average point.

Asset Preference: Our asset preference is based on our Rich & Cheap model (see above) but also takes into account our view on the curves (typically,

steepening or flattening). Note that our asset preference for each country does represent a trade recommendation per se; instead, we highlight the best

risk-reward opportunities for fund managers willing to get exposure on the credit.


44


Spread to Fair Value: Our country fair value estimate is derived from the SCRM model (see above under SovRank model). The chart shows the

difference between the 5-year CDS and the fair CDS level implied by the model given the SCRM projected rating.

Technicals – Exposure vs. Average: We show EM funds’ exposure versus 12-month historical average relative to benchmark. This is a better reflection

of shifts in exposure for countries which have been historically over-/underweight for a long period of time.

Macro Fundamentals: We represent macro forecasts in a radar chart, including GDP growth, inflation, fiscal balance (% of GDP), government debt (% of

GDP) and current account balance (% of GDP). The wider the radar chart (i.e. the wider the “web”), the better the fundamentals of the country relative to

other EM credits. We rank each indicator among EM countries and represent the ranking value in the chart. For growth, fiscal balance and current

account, the ranking is in ascending order (i.e. the higher these indicators, the better for the country); for inflation and debt/GDP the ranking is in

descending order (i.e. the lower these indicators, the better for the country). These indicators are Morgan Stanley forecasts, unless specified otherwise.

Other

Macro-Dynamic Trend Indicator (MDTI): MDTI measures the momentum in underlying EM macro fundamentals. The model tracks 30 EM

countries at present. The indicator tracks the rate of change in the year-on-year change in inflation, industrial production, trade balance and FX

reserves. Each of the four component series are equally weighed to derive the overall index reading. A rising MDTI suggests improving macro

fundamentals momentum, a falling MDTI deteriorating macro fundamentals momentum.


45


EM Strategy and Economics Teams

EM Fixed Income and Foreign Exchange Strategy

London

Rashique Rahman Team Head, EM Macro Strategy [email protected] +44 (0)20 7677 7295

Paolo Batori, CFA Head of EM Credit Strategy, CEEMEA [email protected] +44 (0)20 7677 7971

Regis Chatellier Global EM Credit Strategy [email protected] +44 (0)20 7677 6982

Vanessa Barrett EM Corporate Credit Strategy [email protected] +44 (0)20 7677 9569

Chuan Lim, CFA CEEMEA Local Markets Strategy [email protected] +44 (0)20 7677 7597

James Lord CEEMEA Macro Strategy [email protected] +44 (0)20 7677 3254 +44 (

Robert Tancsa Credit Relative Value, EM Analytics [email protected] +44 (0)20 7677 6671

Meena Bassily EM Strategy [email protected] +44 (0)20 7677 0031

New York

Rogerio Oliveira Head of EM Trade & Quant Strategy [email protected] +1 212 761 1204

Vitali Meschoulam Head of Latin America Strategy [email protected] +1 212 761 1889

Juha Seppala EM Quantitative Strategy [email protected] +1 212 761 1949

Rosa Velasquez Latin America Credit Strategy [email protected] +1 212 761 8278

Andrew Slusser EM Strategy [email protected] +1 212 761 0383

Hong Kong

Viktor Hjort Head of AXJ Credit Strategy/ [email protected] +852 2848 7479

Fixed Income Research

Stewart Newnham AXJ Currency Strategy [email protected] +852 2848 5320

Yee Wai Chong AXJ Currency Strategy [email protected] +852 2239 7117

Pieter Van Der Schaft Head of AXJ Rates Strategy [email protected] +852 3963 0550

Rohit Arora AXJ Rates Strategy [email protected] +852 2848 8894

Kelvin Pang AXJ Credit Strategy [email protected] +852 2848 8204

Nishant Sood AXJ Credit Strategy [email protected] +852 2239 1597

EM Economics

Manoj Pradhan Global [email protected] +44 (0)20 7425 3805

Tevfik Aksoy Head of CEEMEA Economics [email protected] +44 (0)20 7677 6917

/ Turkey, Israel and MENA

Mohamed Jaber MENA [email protected] +44 (0)20 7677 8189

Michael Kafe South Africa, Nigeria [email protected] +27 11 587 0806

Andrea Masia South Africa [email protected] +27 11 587 0807

Pasquale Diana Poland, Hungary, Czech, Romania [email protected] +44 (0)20 7677 4183

Alina Slyusarchuk Russia, Kazakhstan, Ukraine, Baltics [email protected] +44 (0)20 7677 6869

Gray Newman LatAm [email protected] +1 212 761-6510

Luis Arcentales Chile, Mexico [email protected] +1 212 761-4913

Daniel Volberg Argentina [email protected] +1 212 761-0124

Qing Wang Greater China [email protected] +852 2848 5220

Denise Yam China, Hong Kong [email protected] +852 2848 5301

Sharon Lam Korea, Taiwan [email protected] +852 2848 8927

Steven Zhang China, Hong Kong [email protected] +86 21 2326 0015

Ernest Ho China, Hong Kong [email protected] +852 2239 7818

Jason Liu Korea, Taiwan [email protected] +852 2848-6882

Chetan Ahya Asia ex-Japan, India [email protected] +65 6834 6738

Deyi Tan Singapore, Malaysia [email protected] +65 6834 6703

Shweta Singh ASEAN [email protected] +65 6834 6739

Tanvee Gupta India [email protected] +91 22 2209 7927

Morgan Stanley entities: London/South Africa – Morgan Stanley & Co. International plc; New York – Morgan Stanley & Co. Incorporated.; Hong Kong/Shanghai – Morgan Stanley Asia Limited.; Singapore – Morgan Stanley Asia (Singapore) Pte.; Japan – Morgan Stanley MUFG Securities Co., Ltd.; Dubai – Morgan Stanley & Co International plc (DIFC Branch); India – Morgan Stanley India Company Private Limited.


46


Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley & Co. Incorporated and/or Morgan Stanley C.T.V.M. S.A. and/or Morgan Stanley & Co. International plc and/or RMB Morgan Stanley (Proprietary) Limited and/or Morgan Stanley MUFG Securities Co., Ltd. and/or Morgan Stanley Asia Limited and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H) 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 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.

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: Regis Chatellier. 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 Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Mexico, Panama, Peru, The Philippines, Korea Electric Power, Petrobras. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Brazil, Panama, Peru, The Philippines, Turkey, Gazprom, Korea Electric Power, Petrobras, Pemex. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Argentina, Brazil, Chile, Colombia, Panama, Peru, Turkey, Gazprom, Halyk Bank of Kazakhstan, Korea Electric Power, Petrobras, PTT Public Company, VTB Bank JSC, Alfa Bank, Pemex.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Brazil, Bulgaria, Korea, Panama, Peru, Russia, Gazprom, Halyk Bank of Kazakhstan, Korea Electric Power, Petrobras, PTT Public Company, VTB Bank JSC, Alfa Bank, Pemex. 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: Argentina, Brazil, Chile, Colombia, Panama, Peru, The Philippines, Turkey, Gazprom, Halyk Bank of Kazakhstan, Korea Electric Power, Petrobras, PTT Public Company, VTB Bank JSC, Alfa Bank, Pemex. 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: Brazil, Bulgaria, Korea, Panama, Peru, Russia, Gazprom, Halyk Bank of Kazakhstan, Korea Electric Power, Petrobras, PTT Public Company, VTB Bank JSC, Alfa Bank, Pemex. Morgan Stanley & Co. Incorporated makes a market in the securities of Petrobras. 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 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, 2010)

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.


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Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 1122 40% 413 44% 37%

Equal-weight/Hold 1158 41% 411 43% 35%

Not-Rated/Hold 121 4% 22 2% 18%

Underweight/Sell 393 14% 103 11% 26%

Total 2,794 949

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 or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.

Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.

Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Brazil, Bulgaria, Chile, Colombia, Hungary, Indonesia, Kazakhstan, Korea, Lithuania, Mexico, Panama, Peru, The Philippines, Poland, Romania, South Africa, Turkey, Venezuela, Gazprom, Halyk Bank of Kazakhstan, Korea Electric Power, Petrobras, PTT Public Company, VTB Bank JSC, Alfa Bank, Pemex. The model portfolio is a hypothetical portfolio and is not intended to reflect actual trading performance. As a hypothetical model, the portfolio does not necessarily represent a portfolio of securities that the Firm holds or trades. Any references to losses, gains or positions with respect to the portfolio represent hypothetical not actual losses, gains or positions. 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 individual financial circumstances and objectives of persons 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 a particular investment or strategy will depend on an investor's individual 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. The fixed income research analysts or strategists 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' or strategists' 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.


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With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage 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. 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. 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. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Certain information in Morgan Stanley Research was sourced by employees of the Shanghai Representative Office of Morgan Stanley Asia Limited for the use of Morgan Stanley Asia Limited. Morgan Stanley Research is disseminated in Japan by Morgan Stanley MUFG Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by the Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Services Authority, also disseminates Morgan Stanley Research in the UK. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. 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Financial Pacific: Emerging Market Credit (third party), december 14.2010

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Transcript of Financial Pacific: Emerging Market Credit (third party), december 14.2010