SPECIAL REPORT: PPC GLOBAL MARKET ANALYSIS

Morgan Stanley has cut the 2011 Global GDP estimate to 3.9% vs 4.2% and 2012 Global GDP estimates to 3.8% vs 4.5%. The Bank Says revised estimates show US and the euro area are dangerously close to recession over the next 6-12 months.

• Cuts Asia ex-Japan 2011 GDP growth forecasts to 7.6% vs 7.7%; lowers 2012 est. to 7.3% vs 7.8%

• Balance of risks remains firmly skewed to downside

• Bumpy and brittle recovery and near stagnation in developed world means wouldn’t take much to tip the balance toward recession

• Further shocks to developed world economies would imply further downside risk to Asia’s growth outlook

In a Latest Report, Morgan Stanley has cut its stock-index forecasts for the Association of Southeast Asian Nations, reducing a target of a 13 percent gain for Indonesia to 1 percent by the end of the year and predicting a 5 percent decline for Singapore from an estimate of a 22 percent gain.

Morgan Stanley: “We believe it will be challenging for ASEAN markets to deliver absolute returns through December 2011, despite their potential relative earnings resilience.”. “A combination of potential earnings downgrades and strong trailing performance is likely to limit market performance from the current levels through December 2011. In an environment of a slowdown in global growth, we think absolute valuations are likely to track historical averages, with limited likely re-rating potential.”

What has caused this 'downgrade' in anticipated performance, in our opinion , is the inability of Asia and the Emerging markets to decouple from the events in the U.S. and Europe. Since May 2009, we have been preaching that Asia and the Emerging markets would be the drivers for Global Economic Growth and that the U.S., Europe and Japan would be in the 'passenger seat' trailing behind. Indeed, the recent events in U.S. and Europe has clearly shown the accuracy of our hypothesis. The plates are moving -
As we predicted, Europe and U.S. are indeed weakening in realtion to Asia and the Emerging markets.

Asia and the Emerging markets are now at a crossroad and have to acknowledge and face the truth. They have to learn to decouple, otherwise they will be dragged down together with the West. We cannot afford that to happen.

In light of the catastrophic "Eurobond" issue in Europe and Morgan Stanley's recent downgrade of Global Growth, in our opinion, 2012 will be a fixed income investment year. Of Course, there will be companies doing well in pockets of growth where the stock markets are concerned. however, we expect the rout in Europe to worsen and therefore markets to seek shelter in fixed income instruments.

Even though Morgan Stanley has downgraded Asia's stock market performance, an interesting thing to note is that Morgan Stanley is still bullish on Asian Currencies and so are we. The Fundamental point we must not forget is that Asian Currencies are currently being driven in value by the Chinese Yuan and we expect this to continue in 2012. We have been bullish on Asian Currencies since 2009 on the back of our Asian and Emerging Markets hypothesis and completely support Morgan Stanley's view.

Morgan Stanley: Fundamental support from Asia’s balance of payments position, reinforced by capital flight from developed markets, equity valuations and interest-rate differentials, remain firm, according to Morgan Stanley.

• "We still see Asia ex-Japan appreciation ahead, albeit perhaps at a slightly more moderate pace,’’ write Morgan Stanley analysts Stewart Newnham and Yee Wai Chong in note dated 18 Aug. “In terms of our top picks, we continue to favor SGD and CNY”
• Morgan Stanley believes CNY will outperform during market turmoil because of a catch-up in its exchange-rate tightening and pressure to decouple from USD following S&P’s downgrade of U.S. rating
• Morgan Stanley’s recent stress tests indicate SGD is one of most robust currencies in region
• Morgan Stanley: SGD will especially benefit from its sovereign’s AAA credit rating; it could be regarded as the ‘Switzerland’ of the East, and therefore, a potential beneficiary of safe-haven flows
• Morgan Stanley sees USD/SGD at 1.18 at end-2011 vs 1.19 before, and keeps USD/CNY year-end forecast of 6.20
• Morgan Stanley: USD/KRW will be at 1,055 at end-2011 vs 1,060 previously, USD/IDR will trade at 8,500 vs 8,650, and USD/PHP will be at 42.0 vs 42.3

Investors have to realise that the fact that Morgan Stanley is still bullish on Asian Currencies clearly lends support to our analysis that Asia and the Emerging Markets will lead global economic growth. Where equities are concerned, Investors should invest in U.S. and European companies that are exporting their goods and services heavily to Asia and the Emerging markets. This should be the strategy where the stock markets are concerned. For 2012, in our opinion, key demand will come from Asia and the Emerging markets and NOT from the U.S. and Europe UNLESS the U.S. suddenly decides to raise interest rates in 2012. That will cause a flight to quality to American assets if they do. We do not see that happening.

In a Latest Report, An index of hedge fund assets from International Strategy & Investment Group dropped to 45.8 on Aug. 16, showing the most short selling in two years, down from a 2011 high of 54.2 in February. The research company and broker-dealer surveys 35 firms with about $84 billion under management every week. The index from ISI, based in New York, tracks hedge-fund investments on a zero through 100 scale. Readings of zero show “maximum” short selling, the sale of equities with the hope of profiting by buying them at lower prices later, while 100 means “maximum” bullish bets. At 50, hedge funds are deploying a “normal” allocation to short and long investments.

The ratio of bullish to bearish investments in U.S. equities has dropped to 11.7 from this year’s peak of 13.2 in May, according to New York-based Data Explorers, which provides research on short sales and stock lending. The measure sank to 6.5 in September 2008 after Lehman Brothers Holdings Inc.’s bankruptcy spurred the worst financial crisis since the 1930s.

Profit at S&P 500 companies is forecast to rise 17 percent to $99.08 a share in 2011 and 14 percent to $112.90 in 2012, according to average analyst estimates compiled by Bloomberg.

Warren Buffett’s Berkshire Hathaway Inc. accelerated stock purchases on Aug. 8 as the S&P 500 plunged the most since December 2008, the billionaire investor said during an Aug. 15 interview with Charlie Rose on PBS. He bought as this month’s decline drove the price-earnings ratio for the S&P 500 down to 12.2, the lowest since March 2009 and below its average since 1954 of 16.4, according to data compiled by Bloomberg. “I like buying on sale,” said Buffett, Berkshire’s chief executive officer. “Last Monday, we spent more money in the stock market buying than any day this year.”

History shows the S&P 500 may sink after closing at 1,140.65 on 18 Aug, up 1.9 percent from the 11-month low of 1,119.46 reached on Aug. 8. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York-based research company.

This Is Our Summary Of Plans For 2012's Strategy:

• Invest In Asian Currencies and the Australian & New Zealand Dollars (Spot FX Or ETF)
• Invest In Emerging Market Currencies (Spot FX)
• Invest In The Euro and the British Pound At Strategically Low Levels (Spot FX)
• Invest In Gold, Silver and Copper (Physical Or ETF)
• Invest In Companies That Export Their Goods And Services To Asia and the Emerging markets

To Profit From Increased Volatility In The Global Stock Markets, Invest In:

1. Bonds (Physical Or ETF)
2. The Chicago Board Options Exchange SPX Volatility Index (Futures Or ETF)
3. The Swiss Franc (Spot FX Or ETF)
4. The Japanese Yen (Spot FX Or ETF)
5. The Swedish Kroner (Spot FX)
6. The Norwegian Krona (Spot FX)