1. SALES & TRADING COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)
FOR INSTITUTIONAL CLIENTS ONLY DISTRIBUTION
June 6, 2012
ETF Macro Insights
ETF Macro Insights highlights MS’ MultiAsset research views, as well the ETFs that may be
Morgan Stanley
used to implement the investment strategy.
Global Portfolio
MS Research raises probability of Greece exit from 25% to 35%. If Greece exits, strong Products
contagion may follow.
European ETFs
• While a eurozone breakup is not MS’ base case, MS research believes the ramifications of a Greek Jason Warr
+44 20 7425-6361
exit are more serious than the market anticipates. MS research increased the probability of an exit
from 25% to 35% and reduced the timescale from 5 years to 12-18 months. Philip Philippides
+44 20 7677-2819
• Should an exit occur, MS research believes it would most likely be followed by contagion with those
most materially affected being Italy, Spain, Portugal, and Ireland. MS research believes policy Karin Russell
+44 20 7677-8972
response would be essential.
Dorcas Phillips
• Five key policy responses that could limit a resulting escalation of the crisis and make the Eurozone +44 20 7677-8652
more stable in the long term:
US ETFs
1. More aggressive ECB policy action Sanjay Chablaney
+1 212 761-5369
2. Recapitalization of peripheral banks via the EFSF/ESM
3. A Federal Deposit Guarantee scheme
John Davi
4. Fiscal union 1 212 761-5980
5. ECB becomes the official lender of last resort for a federal Europe
Asian ETFs
• Below are select MS research views on the Greece situation. William Tsang
+852 2848-8867
• Huw van Steenis (Head of European Banks Equity Research). Remains very focused on risks Steve King
to bank funding, with the chance of deposit flights from weaker to stronger banks. He remains +852 2848-6772
concerned not only of the intense credit squeeze in Spain and the periphery, but also that
banks are severely cutting back their cross-border lending with implications for Eastern Europe, James Meenan
UK and Asia. The need for further bank recaps is putting more pressure on sovereigns. +852 3963-3297
• Laurence Mutkin (Global Head of Interest Rate Strategy). Stay away from outright duration Subscribe | Unsubscribe
trades during the current environment. However, there are alot of value to be extracted from
positioning along the various sovereign yield curves. In the core German and swap markets,
we expect 2s10s to flatten and 10s30s to steepen, with 2-year yields anchored close to zero,
and 30-year yields susceptible to a dilution of German credit.
• Andrew Sheets (Head of European Credit Research). If Greece were to exit, the GBP market
would look most attractive. A friendly Central Bank, a currency it can control, and a
government apparatus that can react quickly, UK credit and UK RMBS have much less
downside in a divorce scenario, while offering similar spreads under more benign cases.
• Hans Redeker (Global Head of FX Strategy). Maintains his bearish euro forecast of 1.15. In
an ‘Italian Marriage’ scenario, the euro could trade in the 1.15-1.30 range for the next couple of
years, before falling to 0.90 thereafter.
If Greece were to exit and contagion follows, safe haven assets are likely to rally. Below is a list of
Treasury, Equity Volatility, USD, Yen, Low Volatility, Market Neutral, Dividend, and Gold ETFs. We
show each ETF’s performance relative to the S&P500 in May.
In the month of May, long duration US Treasury, Equity Volatility, and select Market Neutral Strategies
outperformed the S&P500 (see table below).
1 Refer to the European Economics & Strategy report, 24-May-2012.
All Returns below computed in USD. ETF Returns are NAV Returns from 30th April 2012 to 31st May 2012.

3. MS MultiAsset Research Views & Actionable ETF Trade Ideas*
Cross Asset
• Greg Peters believes Euro centric stresses along with global growth concerns warrant further de-
risking. He is reducing macro bets by selling commodities and EM assets. Tail risks remain alive in
Europe. Greg views are:
1. Prefer credit (although not overly compelling) over equities and favor yield & carry strategies.
2. In DM, US (IUSA LN, SPXS LN, SPY5 GY) over Europe (IMEU LN, ERO FP, SMSEUR GY),
despite more expensive valuations; AxJ (XAXJ GY, AEJ FP) equities cheap, but wait for China
(IDFX LN, MXCS LN, ASI FP) stimulus.
3. Neutral on Bunds and Treasuries, the flight to safety bid should keep yields low.
4. Bullish on USD (SEUR LN, EUS3 IM), bearish EUR (SEUP LN, XBJP GY); capital flight
diminishes EUR's appeal as a reserve currency
5. Cautious on commodities (DJCOMEX GR, LGCU LN, AIGC LN) due to weakness in EM growth
and a stronger USD.
US Equity
• Adam Parker main 4 points for owning dividend paying stocks (1) Historical importance: 40% of total
return in past century comes from dividends (2) Economic landscape: Dividends outperform in low growth
environments (3) Low payout ratios: Payout ratios are near historical lows and have room to increase (4)
Attractiveness relative to 10 year: Many dividend paying stocks yield far more than the 10 year. Long
Dividends / Short Equities is one of our ETF Desk Best Trade Ideas. ETFs: DJDVPEX GR, SPYD GY
EM Equity
• EM has corrected 16.5% from the peak on March 2, 2012 on weak China data in April and the increased
possibility of Greece’s exit from the eurozone. That correction has led MXEF to trade close to Jonathan
Garner’s bear case target price of 900. There is a 31% upside to his scenario weighted target price of
1,210. Overall a "W"-shaped market trough looks likely on valuations (current P/B of 1.44x, forward P/E of
9.0x and ERP of 990bp), which back-tests for returns in the range of 22% to 44% six months out with hit
ratios of 83-100%). OW countries: China (FXC LN, MXCS LN, LCHU LN), Russia (RUSS LN, RDXS LN,
RUS FP), Korea (IKOR LN, HKOR LN, KRW FP), Indonesia (XMID LN, HIDR LN, INDO FP) and Malaysia
(XCS3 LN, MAL FP, HMYR LN). UW countries: Mexico ( D5BI GY, CSMXCP SW, HMEX LN ), India (NFTY
LN, MXIS LN, CI2 FP, CSIN SW), Turkey (ITKY LN, TUR FP, HTRD LN), Thailand (XCS4 LN, THA FP),
Egypt (VEFG GR, EGPT US), Czech, and Hungary (BUXETF HB)
European Equity
• Graham Secker remains cautious in absence of positive catalysts. He remains a modest OW in
defensives vs. UW in cyclicals. For the last few years, he has advocated a structural preference for quality
and growth stocks against backdrop of anemic growth and macro volatility, similar to the environment of the
Nifty Fifty stocks of the 1960s and 1970s. It is also worth looking at select tactical opportunities in the value
space given strong outperformance of growth in recent months and historical signal for rotation back into
value. MSCI Europe ETFs: IMEU LN, ERO FP, SMSEUR GY. European Financials ETF (STZ FP, SXFPEX
GY, XFPS GR).
FX
• EUR stabilization suggests markets are focusing on the global growth, which has been disappointing.
Weak global growth & banks tightening standards means one common theme, balance-sheet contraction.
UK banks announced tighter standards & have increased lending rates, the GBP impact should be
negative. With the BoJ easing and global rebalancing taking place, do not get JPY bearish too early. Our
FX Strategists maintains their bearish euro forecast of 1.15. EUR ETFs: SEUP LN, XBJP GY
US IG Credit
• Rizwan Hussain remains neutral on US investment grade credit but is incrementally bullish. Factors
could get to his bull case are (1) UST yields grinding higher with low levels of rate vol (2) US growth closer
to 3% (3) earnings estimates continuing to trend upwards (4) falling excess return volatility (5) a return to
pre-crisis valuations based on current levels of leverage. ETFs : LQDE LN.
US HY Credit
• The short term risks in HY are binary but on a longer term basis (6-12 mo), Adam Richmond maintains an
OW position and believes high yield credit is the relative winner in the current low-growth/low-yielding
environment. Despite rising risk aversion on the back of renewed European sovereign fears, Adam remains
a buyer of high yield as valuations are still fairly positive. HY continues to offer among the most attractive
yields relative to its volatility. ETFs: SHYU LN, STHY LN

4. EM Fixed Income
• Rashique Rahman has been cautious on EM fixed income for most of this year and particularly since
March. Greece, debt sustainability in the Eurozone, and moderation in global growth were the primary
catalysts. EM Fixed Income ETFs: IEMB LN, SYBM GY, EMLB LN, XEMB GY, LEMB LN, AGEB FP
Asian Credit
• Viktor is overweight in Asia high yield, and it now stands beside US HY as the team’s favorite segment
within credit. Data increasingly suggest that we’ve passed an important inflection point in China after nearly
two years of tight credit. China high yield has historically been very sensitive to turns in credit growth
cycles, and with credit conditions improving, as we saw with the March loan growth numbers, Viktor
believes recovery is supported. Viktor estimates that China HY is the biggest underweight among
institutions involved in Asian credit markets. EM Credit ETFs: EMHY US, CEMB US, EMCB US, DSUM
US
Commodities
• Hussein Allidina believes the path of least resistance for oil is down, especially as bearish catalysts
continue to emerge. European sovereign debt issuers, easing global tension, and bearish fundamentals
have started to weigh on oil prices. ETPs : SOIL LN, XETA GY, XETW GY. He remains a buyer of Gold
(PHAU LN, SGLD LN, SGLN LN) and thinks the recent market activity is consistent with distressed
selling and long liquidation. Negative real interest rates, the prospect of further unconventional
monetary policy in the US and Europe to confront uncertainties on the growth outlook, and heighted
political tensions in Middle East are all expected to underpin strong investment demand.

5. Disclaimer: The information provided herein was prepared by Morgan Stanley & Co. LLC (“Morgan Stanley”), but is
not a product of Morgan Stanley's Equity or Fixed Income Research Departments. This communication is not a
research report, though it may refer to a Morgan Stanley research report or the views of a Morgan Stanley research
analyst. We are not commenting on the fundamentals of any companies mentioned. Unless indicated, all views
expressed herein are the views of the author’s and may differ from or conflict with those of the Morgan Stanley Equity
or Fixed Income Research Departments or others in the Firm. We do not represent that this publication is accurate
or complete and we do not undertake to advise investors of changes in the opinions or information contained herein.
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http://www.morganstanley.com/etfperformance/etfperformance20111025.htm
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