MORGAN STANLEY RESEARCH

November 29, 2010

European Strategy

Exhibit 57 6) The EM story is not played out, though future

Top 30 most USD sensitive stocks – stocks ranked outperformance is likely to be more modest
by correlation to USD/EUR, fair value sensitivity to We have been recommending investors overweight European
USD and revenue exposure to the US stocks with high EM exposure throughout 2010 given the
superior fundamental growth story to which the former are
% of 2009 Revenues % Impact of 10% Rise in % Correlation with the
Company Name
Nestle
Sector
Consumer Staples
Price
SFr 52.40
MS Rating
Equal-Weight / C
Exposed To US
28
USD on Fair Value
+2
USD
+53
exposed. Although it is possible we may be at the start of a
Swedish Match Consumer Staples SEK 177.50 Underweight / A 30 +0 +50
GlaxoSmithKline
Novo Nordisk
Health Care
Health Care
£ 12.99
DKK 582.00
Equal-Weight / A
Equal-Weight / A
44
39
0
0
+44
+44
more significant interest rate tightening phase than we had
EADS
Smith & Nephew
Industrials
Health Care
€ 17.51
£ 5.73
Overweight / I
Equal-Weight / A
20
45
+10
+9
+42
+42 previously expected, we still believe that the region is attractive
Roche Health Care SFr 140.10 Equal-Weight / A 47 0 +41
AstraZeneca
Compass
Health Care
Consumer Discretionary
£ 32.95
£ 5.18
Overweight / A
Overweight / I
46
40
+10
+6
+41
+40
in a global economy with limited growth prospects elsewhere.
Syngenta Materials SFr 282.80 Equal-Weight / I 24 +3 +38
Anheuser-Busch InBev Consumer Staples € 44.32 Overweight / I 46 +0 +35
Securitas Industrials SEK 76.55 Overweight / I 36 +2 +34
Novartis
SAP AG
Health Care
Information Technology
SFr 54.65
€ 35.84
Overweight / A
Equal-Weight / I
32
26
+10
+4
+34
+34
We prefer to gain our exposure to the region through
Synthes Health Care SFr 113.00 Equal-Weight / A 59 +10 +34
MTU Aero Engines Holding
Experian
Industrials
Industrials
€ 43.85
£ 7.43
Equal-Weight / I
Equal-Weight / I
50
55
+4
+7
+32
+29
commodity-related stocks given their less demanding
Safran
STMicroelectronics
Industrials
Information Technology
€ 24.51
€ 6.73
Equal-Weight / I
Equal-Weight / C
30
12
+10
+39
+27
+27 valuations. While we cannot argue that EM-focused stocks are
Sodexo SA Consumer Discretionary € 47.70 Equal-Weight / I 33 +3 +26
Daimler
ARM Holdings Plc
Consumer Discretionary
Information Technology
€ 45.93
£ 3.94
Underweight / I
Overweight / C
20
38
+10
+19
+26
+24
cheap, we do not find their valuations excessive given the
Autonomy
BMW
Information Technology
Consumer Discretionary
£ 12.71
€ 49.87
Underweight / I
Overweight / I
65
18
+8
+15
+23
+22 superior growth prospects for the region. As illustrated in
Luxottica Consumer Discretionary € 19.99 Equal-Weight / I 65 +8 +20
Sage
Smiths Group
Information Technology
Industrials
£ 2.59
£ 11.52
Equal-Weight / I
Underweight / I
42
48
+5
+6
+17
+17
Exhibit 59, the 2011 P/E for our basket of stocks with high EM
Misys Information Technology £ 2.91 Equal-Weight / I 50 +6 +11
InterContinental Hotels Group Consumer Discretionary £ 11.59 Overweight / I 55 +6 +11 exposure is less than 1 P/E point above that of the overall
Actelion Health Care SFr 48.22 Equal-Weight / I 45 +7 +10
Source: Datastream, FactSet, Morgan Stanley Research market.

The main scenario in which we see EM underperforming is if

the recovery in DM gathers pace, as this would then likely give
investors the confidence to look for some undervalued
opportunities closer to home. However, absent this scenario
we believe the excess liquidity that the Fed is going to inject
into the system via QE2 is more likely to find its way into EM
given superior growth prospects and return profiles. Perhaps
the most compelling case for EM is simply what we illustrated
earlier in Exhibit 34, which showed a mid-teens rate of nominal
GDP growth against mid-single-digit government bond yields.

Exhibit 58
Sectors with above-average exposure to EM
Relative
Eps Eps Sales Sales performance
Developed Emerging Number P/E P/E Growth Growth Growth Growth last 12
Industry Group Markets Markets of Co's 2010e 2011e 2010e % 2011e % 2010e % 2011e % months %

Autos 68 32 11 12.9 10.0 - 29.3 15.4 5.7 16

Capital Goods 72 28 46 15.8 12.8 44.8 23.2 3.8 5.3 12
Consumer Durables & App 73 27 5 20.1 17.2 73.3 16.4 9.5 6.5 43
Energy 77 23 31 10.3 9.0 34.1 14.8 18.4 5.5 -5
Food Beverage & Tobacco 61 39 18 15.8 14.2 2.0 11.2 1.6 5.7 12
HPP 68 32 5 18.7 17.4 26.3 7.5 9.9 5.7 15
Materials 64 36 46 13.9 10.5 105.1 32.5 19.2 10.2 16
Semis 41 59 3 16.7 13.2 - 26.1 41.7 9.5 20
Technology 38 62 4 15.5 12.2 11.1 27.2 3.6 5.3 -17
Europe 77 23 482 12.9 11.0 43.4 18.0 8.9 5.5 NA
NA = Not applicable Source: MSCI, IBES, Morgan Stanley Research

Exhibit 59
Stocks with high EM exposure do not appear to be
that expensive relative to wider market
Median Stock
PE PE DY EPS DY EPS Sales Sales YTD
Growth Growth Growth Growth Relative
2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e Performace

Stocks with EM Exposure

>23% 15.0 12.9 2.2 2.6 19.5 14.2 9.5 6.3 14.4
Stocks with Developed
Europe Exposure >60% 12.6 11.1 3.9 4.2 9.0 9.5 4.5 3.8 -1.5
Stocks with North America
Exposure >15% 15.8 13.0 2.2 2.5 19.2 14.5 9.0 6.0 17.8

MSCI Europe 14.7 12.3 2.3 2.8 12.9 14.7 7.2 6.1
Source: MSCI, IBES, Morgan Stanley Research

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 MORGAN STANLEY RESEARCH

November 29, 2010

European Strategy

Exhibit 60 Exhibit 62
If EM is a bubble, it is a cheap one so far… Sectors ranked by correlation to EM outperformance
Sector correlation to EM Rel Perf vs World
300
Materials 0.95
Japanese Equities Capital Goods 0.90
Shiller PE Relative to Global Equity Market

250 Health Care Equipment & Services 0.87

Utilities 0.85
Food Beverage & Tobacco 0.82
200 Household & Personal Products 0.75
Automobiles & Components 0.74
Transportation 0.66
150
Energy 0.55
Food & Staples Retailing 0.35
Commercial & Professional Services 0.34
100
Consumer Durables & Apparel 0.27
Global TMT Retailing 0.24
50 Real Estate 0.15
Emerging Markets
Consumer Services -0.31
Telecommunication Services -0.39
0 Pharmaceuticals Biotechnology & Life Sciences -0.41
Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Software & Services -0.55
Source: Datastream, Morgan Stanley Research
Banks -0.70
Technology Hardware & Equipment -0.76
Exhibit 61 Diversified Financials -0.77
Insurance -0.78
… even on a Shiller basis Media -0.84
Semiconductors & Semiconductor Equipment -0.84
120.0
Japanese Equities Note: Table shows correlations over last 10 years. Source: MSCI, Morgan Stanley Research
Global TMT
Emerging Market
100.0

80.0
Absolute Shiller PE

60.0

40.0

20.0

0.0
Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Source: Datastream, Morgan Stanley Research

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 MORGAN STANLEY RESEARCH

November 29, 2010

European Strategy

Exhibit 63
Top 50 European companies with the highest exposure to emerging markets
EPS EPS Sales Sales
Market Rev Exp to Growth Growth Growth Growth
Company Name Country Sector Cap $mn Price MS Rating EM (%) PE 2010e PE 2011e DY 2010e DY 2011e 2010e 2011e 2010e 2011e YTD Perf

Cairn Energy United Kingdom Energy 8,171 £ 3.68 ++ / A 100 26.7 12.1 0.0 0.0 1966.6 120.9 474.2 83.4 10.9
Lonmin Plc United Kingdom Materials 5,421 £ 16.88 Equal-Weight / A 100 40.5 24.9 0.5 0.4 - 62.6 22.2 20.4 -11.5
Raiffeisen International Austria Financials 10,172 € 38.73 - 100 15.7 8.6 0.6 1.8 230.9 83.5 - - 2.3
Vedanta United Kingdom Materials 8,918 £ 21.20 ++ / I 98 9.4 5.0 1.3 1.6 85.5 89.4 41.2 43.2 -14.9
Standard Chartered Bank United Kingdom Financials 57,470 £ 17.37 Equal-Weight / I 95 14.2 13.1 2.5 2.7 29.5 8.8 - - 17.7
Oriflame S.A Sweden Consumer Staples 2,998 SEK 366.50 Overweight / I 94 18.7 15.4 3.7 4.1 22.5 21.5 15.3 7.9 -12.2
Anglo American United Kingdom Materials 59,367 £ 28.34 Equal-Weight / I 83 11.2 8.3 1.3 2.1 127.4 34.6 34.6 17.3 6.6
ASML Holding NV Netherlands Information Technology 14,620 € 25.24 Underweight / C 83 11.9 10.1 1.0 1.2 - 17.6 169.7 11.3 5.3
SABMiller United Kingdom Consumer Staples 51,816 £ 20.60 Equal-Weight / I 79 18.4 16.1 2.2 2.6 14.1 14.2 7.7 5.9 15.7
Eurasian Natural Resources C United Kingdom Materials 17,866 £ 8.74 Overweight / I 77 - - 1.9 2.4 - - 72.1 11.1 -1.9
Petrofac United Kingdom Energy 7,831 £ 14.27 Overweight / I 76 19.1 17.1 1.8 2.1 20.8 11.8 18.1 15.0 51.5
Technip France Energy 8,797 € 59.89 Overweight / I 76 16.3 15.2 2.2 2.3 -1.7 6.8 -7.2 11.0 22.6
New World Resources B.V. United Kingdom Materials 2,920 £ 6.96 Equal-Weight / I 75 - - 4.0 5.4 - - 43.2 13.1 30.4
Seadrill Norway Energy 12,848 NOK 189.80 Overweight / A 72 11.2 9.4 7.5 8.1 18.1 19.8 21.7 16.7 31.4
Nokia Finland Information Technology 36,146 € 7.19 Overweight / I 72 12.8 10.8 5.5 5.5 -12.7 19.3 2.7 5.5 -17.9
Tullow Oil United Kingdom Energy 16,464 £ 11.68 Overweight / A 70 114.0 31.6 0.5 0.5 533.6 260.4 14.5 95.1 -8.2
Acergy Norway Energy 4,072 NOK 127.20 Underweight / I 69 20.1 18.7 1.1 1.1 -14.3 7.5 0.7 11.4 41.5
Saipem Italy Energy 18,939 € 31.95 Overweight / I 68 18.0 16.1 1.8 2.0 9.1 11.5 6.4 7.5 33.0
Ericsson Sweden Information Technology 30,909 SEK 71.50 Underweight / I 64 13.7 12.3 2.9 3.2 6.1 11.7 -2.8 4.8 9.2
British American Tobacco United Kingdom Consumer Staples 75,407 £ 23.79 Equal-Weight / A 63 13.8 12.6 4.7 5.1 15.2 9.4 5.8 3.4 19.6
BHP Billiton Limited United Kingdom Materials 79,422 £ 22.68 Overweight / I 55 16.7 9.7 2.4 2.5 15.0 71.1 78.2 28.0 16.3
STMicroelectronics France Information Technology 8,055 € 6.59 Equal-Weight / C 55 12.3 11.0 2.6 3.3 - 11.5 21.3 5.3 4.0
SGS S.A. Switzerland Industrials 12,564 SFr 1594.00 Underweight / I 53 20.6 19.3 2.5 2.7 6.8 7.0 2.2 6.4 20.1
Investec Plc United Kingdom Financials 4,239 £ 4.97 Equal-Weight / I 51 11.1 8.8 3.8 4.9 7.8 26.6 - - 19.6
Gas Natural Spain Utilities 13,385 € 10.81 - 50 9.1 9.2 7.9 8.1 -8.0 -0.5 19.4 3.0 -27.7
Vienna Insurance Group Austria Financials 6,475 € 37.66 Equal-Weight / I 50 12.7 11.2 2.6 2.9 13.7 13.1 - - 6.7
Clariant Switzerland Materials 4,223 SFr 18.21 Underweight / I 49 11.3 10.4 0.8 1.5 351.9 8.5 7.8 1.3 52.2
EADS France Industrials 18,286 € 16.68 Overweight / I 48 25.7 17.1 0.9 1.2 -68.3 50.0 3.4 4.0 20.5
Erste Bank Austria Financials 16,054 € 31.60 Equal-Weight / I 47 14.2 9.8 2.0 2.1 12.6 45.7 - - 25.0
Xstrata PLC United Kingdom Materials 59,768 £ 12.70 Overweight / I 47 11.5 8.7 0.7 1.0 96.3 31.3 27.7 12.6 15.9
DSM Netherlands Materials 8,544 € 39.21 Underweight / I 47 12.4 11.7 3.3 3.5 121.3 5.3 12.1 -0.2 14.5
Holcim Switzerland Materials 21,555 SFr 65.40 Underweight / I 47 18.1 14.8 2.3 2.4 -18.3 22.3 4.1 3.6 -17.5
Syngenta Switzerland Materials 26,481 SFr 277.80 Equal-Weight / I 46 18.7 16.0 2.1 2.3 -1.8 17.0 3.8 6.7 -2.8
ABB Switzerland Industrials 45,371 SFr 19.52 Overweight / I 46 17.6 14.5 2.5 2.7 -8.6 21.3 -2.0 6.2 0.8
Alfa Laval AB Sweden Industrials 7,379 SEK 121.80 Equal-Weight / I 46 17.1 15.8 2.2 2.5 15.3 8.1 -6.3 4.2 28.0
Scania AB Sweden Industrials 8,078 SEK 140.70 ++ / I 46 13.0 11.4 2.8 3.5 683.7 13.7 25.0 12.0 55.1
Heineken Netherlands Consumer Staples 27,809 € 35.94 Underweight / I 46 14.8 13.0 2.0 2.3 39.4 13.8 10.9 7.8 9.4
Old Mutual United Kingdom Financials 10,630 £ 1.23 Equal-Weight / I 45 8.5 7.9 2.7 3.2 35.9 7.1 - - 14.0
Bureau Veritas S.A. France Industrials 8,148 € 55.60 Equal-Weight / I 45 19.7 17.1 1.7 1.9 14.1 14.7 9.5 14.8 54.5
Intertek Group plc United Kingdom Industrials 4,438 £ 17.53 Underweight / I 45 20.2 17.6 1.6 1.7 10.0 14.6 9.0 8.1 43.3
Philips Netherlands Industrials 29,420 € 22.21 Overweight / I 45 12.4 10.8 3.3 3.7 167.5 14.4 10.6 4.4 11.0
Portugal Telecom Portugal Telecommunication Services 12,079 € 10.03 ++ / I 44 18.6 14.0 5.7 6.2 -26.7 33.3 -44.9 79.5 18.8
Santander Spain Financials 87,262 € 7.80 Equal-Weight / I 44 8.3 6.9 7.3 7.6 -6.4 21.3 - - -29.1
BBVA Spain Financials 46,099 € 7.63 ++ / I 44 6.8 6.4 5.3 5.7 0.1 5.8 - - -35.1
Linde Germany Materials 24,257 € 106.80 Equal-Weight / I 44 16.5 15.2 1.9 2.1 41.8 8.6 12.8 6.0 26.8
Atlas Copco Sweden Industrials 18,049 SEK 149.80 Overweight / I 43 18.6 16.0 2.3 2.6 61.6 16.0 8.7 10.3 44.3
Carlsberg (B) Denmark Consumer Staples 11,778 DKK 550.00 Overweight / I 42 14.9 13.2 0.8 1.1 30.0 13.0 1.7 3.9 41.7
Endesa Spain Utilities 26,902 € 18.92 Overweight / C 42 - - - - - - - - -
MAN Germany Industrials 16,834 € 88.89 Overweight / l 42 22.2 15.6 1.4 2.0 172.2 42.5 20.8 7.4 63.4
Telenor Norway Telecommunication Services 24,516 NOK 91.15 Overweight / I 42 14.2 11.5 3.7 4.6 20.0 23.3 -2.8 5.1 15.5

Note: Data refer to our analysts’ 2009 estimates, based on company information in combination with our analysts' estimates where disclosure is not detailed enough. Emerging markets are defined as
World ex Developed Europe, North America and Japan.
++ The rating for this company has been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such
information with respect to this company at this time. For important disclosures regarding companies that are the subject of this screen, please see the Morgan Stanley Research Disclosure Website at
www.morganstanley.com/researchdisclosures. Source: FactSet, Morgan Stanley Research estimates

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 MORGAN STANLEY RESEARCH

November 29, 2010

European Strategy

Exhibit 64
European Model Portfolio
Benchm ark Portf olio Benchmark Portfolio Benchmark Portfolio
OVERWEIGHTS
OVE RWEIGHTS Weight (%) O W / UW NEUTRALS Weight (%) OW / UW UNDERWE IGHTS Weight (%) OW / UW

Materia ls (Basic Re sources SXPP & Cons Staples (SX3P) 12.4 0.0 Cons Discr (Autos S XAP & Media SXMP*) 8.8 -4.0
Chem ic als SX4 P) 10.4 +4.0 Di ageo, Danone, Imperial Tob acco, SES, Fiat, Adidas, IHG
Rio Tinto, Xstrata, Akzo Nobel , BAT, Reckitt Benckiser
BASF, Li nde Utilit ies (S X6P) 5.5 -4.0
Industrials (SXNP) 10.6 0.0 National G rid, EDF
Insurance (SXIP)
(SXIP ) 4.8 +2.0 EADS, TNT, Lu fthansa,
Axa, Aeg on, Leg al & G eneral Siemens, SKF, Atlantia, He althcare (SXDP) 9.8 -2.0
Astrazeneca, Sanofi², GlaxoSmithKline
Energy (SXEP) 10.4 +2.0 Tec hnology (SX8P) 2.7 0.0
BG, Tullow Oil, Repsol, Cap Gemi ni, Dassault Systems
Saip em, BP, Pe trofac,
Ba nks (SX7P) 12.5 0.0
Tele com s ( SXKP) 6.9 +2.0 Barclays, Cred it Agricole, Dan ske,
KPN, Telefonica, BT, FT SocGen, DnB NOR

Div Fin & Rea l Esta te (SXFP & SX86P) 5.1 0.0
ING, Schroders, British La nd

MSCI Sect ors

Materials 10.4 +4.0 Consumer Staples 12.4 0.0 Consumer Discretionary 8.8 -4.0
En ergy 10.4 +2.0 Industrials 10.6 0.0 Uti lities 5.5 -4.0
Telecommunication Ser vices 6.9 +2.0 Information Technology 2.7 0.0 Health Care 9.8 -2.0
Financials 22.5 +2.0

* The mappin g be tween GICS S ectors (such as Heal thcare) and DJ Stoxx Sup erSectors – Level 3 (such as SXDP ) is i mp erfe ct at places. In pa rticular , less than two-thirds of market cap of Consumer Discretionary,
Consumer Staples and Diversified Financials is co vere d by the cor resp onding DJ Stoxx Supersectors.
1. This stock is cur rentl y not covered in Europe by a Morgan Stanley industry analyst. 2. Although the shares o f this company re mai n in the model portfo lio, Morga n S tanley & Co. In tern atio nal plc poli cy p recludes the
exercise of investment management d iscretion or the rendering of investment advi ce on the sha res at this ti me by the str ateg ist and/or the Morgan Stanl ey anal yst who fol lows the shares. 3 . The e quity positio n is
al located as the Euro pean Equity Mode l Portfolio. Bonds are allocate d eq ually between France, Ge rma ny, th e Netherlan ds and the UK . The bond position is i nvested in ten -yea r p aper of these cou ntries.
Source: MSCI/Exshare, Morg an S tanl ey Rese arch

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