>Equity & Commodities (MORGAN STANLEY)

What to Look for in the Equity and Commodities Environment in 2009......

KEY HIGHLIGHTS
●We continue to expect a fight back from EM equities in 2009 and a resumption in the secular trend to outperform DM equities.

● Our base case for MSCI EM EPS in 2009 is -25%, but +20% in 2010. On this basis, MSCI EM is currently valued at 7.7x 2010E P/E and 1.1x P/Book.

● Our key trade idea for the year is Asia to outperform EMEA and LatAm within EM.

● Asia has stronger sovereign and corporate balance sheets, more flexibility in applying countercyclical monetary and fiscal policy, and is leveraged positively to lower commodity prices. Its earnings cycle tends to trough before EMEA and LatAm.

● In 2H 2008 we rotated out of late-cycle Materials, Industrials and Energy and increased exposure to early-cycle IT, defensive Telcos, and Financials and real estate in Asia.

● Our largest country overweight is now China, which scores #1 on our 15-factor quant model. Other overweights are Taiwan, Malaysia, Brazil, Egypt and Israel. Underweights are India, Indonesia, Mexico, Argentina, Hungary, Thailand and Philippines.

● We also recommend building exposure to physical gold and gold equities.

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