Morgan Stanley Research Reports

[Berniece Domnick]

Analystreports are frequently written to provide guidance to investors as to whether to invest in specific companies or industry sectors. Reports are focused on recent financials or expected share price movements, sometimes relative to competitors in the same industry. Sometimes, reports may be referred to as: Broker research; Broker reports; Equity research; Sell-side reports; Aftermarket research. These terms are often used interchangeably.

In addition to the censure and fine, Morgan Stanley must review a sample of its research reports and certify to FINRA that they comply with FINRA's research analyst conflict-of-interest rules. These reviews and certifications must take place every six months for two years.

"This case strikes at the heart of FINRA's research disclosure requirements, which were written in response to scandals involving research analyst conflicts of interest," said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. "Here, thousands of Morgan Stanley research reports did not include accurate information about the firm's relationships with the companies it covered, depriving potential investors of important information."

FINRA found that from April 2006 to June 2010, Morgan Stanley issued equity research reports that failed to disclose accurate information about the relationships Morgan Stanley, or its analysts, had with companies covered in its research reports. Overall, these inaccuracies resulted in approximately 6,836 deficient disclosures in about 6,632 equity research reports and 84 public appearances by research analysts. Among the deficient disclosures were:

Morgan Stanley also did not disclose in approximately 127,600 monthly account statements sent to customers from August 2007 to February 2008 that it had available independent, third-party research. The requirement to provide customers with this notification was part of the Securities and Exchange Commission's final agreement with Morgan Stanley as part of the 2003 Research Analyst Settlement and was incorporated into a separate agreement with FINRA.

In determining the appropriate sanctions in this matter, FINRA considered Morgan Stanley's self-review and self-reporting of some of its disclosure violations and remedial steps taken by the firm, as well as a prior FINRA settlement in 2005 that found the firm violated FINRA's research analyst disclosure rules.

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The move to sourcing from Asia, combined with the rise of value retailers, has seen clothing prices fall significantly over the last two decades. Despite falling prices, clothing markets continued to grow in value terms, because consumers responded to lower prices by acquiring clothing in ever-larger quantities.

A combination of reduced shipping costs and regulatory changes, for example China entering the World Trade Organisation in 2001, made it possible for developed-market retailers to shift their sourcing locally to countries with much lower labour costs, mostly in East Asia.

Since labour is the largest component in the cost of most apparel garments, this lowered the cost price of most garments significantly. Compounded by channel mix changes, such as the growth in discount channels, this has resulted in steady reductions in average selling prices in apparel in most developed markets.

Morgan Stanley Research predicts clothing is likely to continue to become cheaper to produce. In the near term, production may continue to shift from relatively expensive countries like China to countries such as Vietnam and Bangladesh, while in the long term, technology - particularly the rise of 'sewbots' - could significantly reduce the amount of labour required to make clothing. This could potentially increase speed to market and reduce transportation costs.

So why is per-capita consumption of apparel stabilising (or in the case of the UK and Japan, even falling slightly), when it had been increasing steadily for so long? Morgan Stanley Research believes there are two main reasons why clothing volumes are no longer growing:

Even in the most developed countries, apparel retailing remains a fragmented industry with few retailers enjoying double-digit percentage market shares. So it is possible that some retailers will prosper, however, Morgan Stanley Research predicts the majority of the big retailers, are likely to struggle.

This article does not purport to identify the nature of any specific market or other risks associated with a particular investment and contains only general advice. General advice is prepared without taking into account your objectives, financial situation or needs, and because of this, you should, before acting on the advice, consider the appropriateness of the advice having regard to your own objectives, financial situation and needs. This may refer to research produced by Morgan Stanley Wealth Management or its affiliates. Any research content contained in this article may be incomplete or condensed. Readers should request copies of the full research reports and disclosures, and seek financial, as well as tax advice based on their own individual circumstances before making an investment decision.

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Trade tensions, political uncertainty and softening global growth are contributing to a volatile market. While the future is uncertain, diversification helps to manage risk and reduce the impact in the event of a significant market dislocation.

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