>GLOBAL STRATEGY (MORGAN STANLEY)

Buy Large Cap "Quality” (stocks to own through the cycle)

• As we look through to year-end 2010, we think the backdrop for equities will be one where sentiment swings from periods of extreme optimism (selling the market) to extreme pessimism (buying the market). We think the best way to position in this environment is to be overweight themes that look through the volatility of the cycle, but to also be prepared to take on and shed
additional risk as market condition dictate.

• There is clarity on the start of growth recovery but not on its strength. For this reason we want some exposure to the cycle, but look for areas/industries which will still stand to benefit even if growth disappoints. In this regard, our investment themes out to year-end 2010 are a mix of those which help determine “core” portfolio holdings (stocks to be held through the cycle) and those which are more growth leveraged.

• If a key feature of the 2008/09 equity market sell-down was the indiscriminate de-rating of high and low quality stocks alike, then a key feature of the rally has been the significant re-rating of the low quality names. Many measures (forward earnings yield, PEG) now show the valuation dispersion below normalized levels.

• In our view, the intensity of financial and credit market disruptions continues to impact growth visibility, and a tight valuation distribution implies that you can now buy higher quality, stable growth names with low earnings risk, strong franchise values, dividend sanctity, and a strong balance sheet at similar valuation levels to lower quality, more cyclical stocks. We think the high quality names have the potential to be strong outperformers - not for the near term but over a number of years.

• To date, the risk rally has nearly corrected the entire underperformance of low quality/cyclical stocks through 2008 and early 2009 (page 5). However, the rally has been driven almost entirely by multiple expansion – clearly most evident at the low quality end of the market (page 5). Historically, the multiple expansion phase of the cycle has lasted around a year and has seen the average P/E expand by approximately 50%. From the low of 666 on the S&P to the current level ~1000, we have now seen this occur.

• While there still remains a reasonable dispersion across “Value” factors (all value is not equal), a number of valuation metrics (forward earnings yield, price for growth) are now supportive of high over low quality stocks.

• With Valuation, Sentiment and Fundamentals still reasonable, the equity market may climb higher. We would look to see a deterioration in breadth and for technical factors to become more overbought before we would become more concerned. However, we think the low valuation dispersion between high and low quality stocks means the best value is found in the former.

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