Академический Документы
Профессиональный Документы
Культура Документы
On the Markets
MICHAEL WILSON
Chief Investment Officer
Dont Get Caught Flat-Footed
Morgan Stanley Wealth Management
Investing is a contact sport. There are times you are going
to get hurt. Still, if you dont play with a purpose, you are
likely to hurt a lot worse. Having a plan can prepare you for
the inevitable ups and downs we experience in our
portfolios. Without one, we are no different than the poor
guy who gets caught standing flat-footed on the field just as
someone else who has a purpose runs him over. I still
remember the words barked by my linebacker coach when I
played high school football: Keep your head on a swivel
and maintain a forward leanor someone is going to knock
TABLE OF CONTENTS
you on your butt!
I didnt realize it at the time, but successful investing is not that different. While
Ready for Reflation
things can move in our favor for long periods of time, we must stay focused on what is
2 Deflation is over, and were repositioning
for a pickup in inflation. in front of us or risk getting run over by the market. That brings us to today, a time
Growth Later, Rate Hike Sooner when many market commentators appear to be overly focused on what just happened
4 We have accelerated our forecast of the rather than what is going to happen. The first-quarter US GDP report is a perfect case in
Fed rate hike to December from March. point. Everyone knew prior to last weeks release that the results would be
Still Bullish on Global Stocks
disappointing, given the harsh winter weather, collapsing oil prices impact on capital
5 On a valuation basis, equities remain
attractive.
spending and the strong dollars drag on exports. Nevertheless, the official numbers
Investing With Impact came in even worse than the already low expectations. What does that mean for the
7 Integrating environmental, social and future?
governance concerns into your portfolio. Typically, when growth surprises are extreme to the upside or downside, they are
Playing the Inflation Game inevitably reversed. We think the first-quarter US results fit that bill. In fact, much like
8 US and global inflation-protected bonds
last year when the first quarter was also hit by harsh weather and other temporary
are a good start, but theres more.
With Munis, Patience Is a Strategy
factors, we think the seeds for recovery are already being sown by the reversal in the US
9 Dont chase the market on the way in or dollars strength. That strength set the stage five or six months ago for the first quarters
out. Wait, and it may come your way. weakness and, somewhat ironically, led to better growth outside the US than within.
The Liquidity Conundrum This means a potential catch-up in US equities is likely as we enter the middle part of
10 Can the bond market handle a potential
the yearsome of which will be the result of weaker international performance, mainly
spike in fund redemptions?
Q&A: Janus Funds Carmel Wellso
in Europe. Ultimately, however, we think this is all part of our global rebalancing
11 The research director/fund manager thesisone that we believe should lead to solid global equity performance for the
discusses global investment opportunities. entirety of 2015.
ON THE MARKETS / STRATEGY
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 2
page 3). On average, however, returns
before the first rate hike have been
Historical Percentage Change in Various Markets
positive more often than negative. Before and After the Feds First Rate Hike in a Cycle
Hiking cycles are hardly harbingers of 1986 1994 2004
Before (%) After (%) Before (%) After (%) Before (%) After (%)
doom, and it is notable that MS & Co.s
MSCI World N/A N/A 10.0 0.1 2.0 10.1
interest rate strategists see the US having S&P 500 2.5 20.6 4.7 -1.8 2.9 5.6
one of the best-behaving rate markets MSCI Europe 7.9 24.8 19.2 -1.1 0.4 16.5
through year end. Conversely, we see US 10-Yr. Treasury 5.5 -2.6 3.3 -4.1 0.6 4.0
emerging markets as more exposed versus US Investment Grade 6.7 -0.4 0.0 -2.0 0.6 5.1
prior cycles, which is one reason we US High Yield N/A N/A 5.6 -2.7 1.2 9.3
Source: MS & Co. Research, Bloomberg, RIMES, The Yield Book Software and Services.
remain cautious on their currencies and 2015 Citigroup Index LLC. Data as of April 12, 2015
stocks. indicators are designed for this, and have been leveled for several years, they
neither the cycle nor the broader measure need to be addressed. Specifically, how far
A Cycle Intact that incorporates Europe and Japan is at has recent central-bank policy pushed
We continue to expect that this cycle extremes (see chart). valuations from their 20-year averages?
will be a long oneperhaps the longest Yes, US mergers-and-acquisitions Look at the past 20 years, and most are in
global expansion in recent memory. It volume is near previous-cycle highs, but the middle of the range. Price/earnings and
should be unusually long because it has other measures, from US consumer price/book ratios for the MSCI All
been unusually weak, followed an confidence to corporate loan growth, are Country World Index (MSCI ACWI) are
unusually severe downturn, and is far more normal. Global activity, below their 20-year medians, while the
unusually unsynchronized on a global meanwhile, is still well short of the same measures for the S&P 500 have been
basis. More tangibly, we do not think it yet intensity that made the downturns of 2000 richer about 40% of the time over the same
possesses the level of optimism or hubris and 2008 so severe. All contribute to our period. Credit spreads in US investment
wed associate with late cycle behavior, view that the global expansion has further grade and high yield credit are pretty
which is a message we see borne out in to go. average over this range. Government bond
our cycle indicators. The disjointed nature valuations, in contrast, look highly
of the current cycle makes it easy to find Valuation: How Extreme? distorted by central bank policy, which is
indicators that make conditions look Levels of activity may not be extreme, one reason we are underweight.
particularly good (or bad), depending on but what about valuations? Asset prices We continue to believe that the market
ones point of view. We think the most fair are routinely described as being could melt upthat is, trade to richer,
and least emotional approach is to focus manipulated and inflated by central more ill-advised valuationbefore it
on a broad array of measures. Our cycle bank policy and, although these charges melts down. The upside left in our cycle
indicators is one reason for this, as is the
Morgan Stanley & Co. Cycle Indicators Point Toward gap between US nominal growth and bond
Both US and Developed Market Growth yields, a measure frequently cited by our
currency strategists. When long-term rates
100 % are below nominal GDP, growth-sensitive
Morgan Stanley US Cycle Indicator assets are attractive relative to their
90 Morgan Stanley Developed Market Cycle Indicator
financing costs, and asset booms are
80
common. We saw that in the 1997-to-1999
70 and 2003-to-2007 periods, which ended at
60 valuations higher than those of today.
50
40
30
20
10
0
1980 1987 1994 2001 2008 2015
Source: MS & Co. Research, Bloomberg as of April 12, 2015
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 3
ON THE MARKETS / ECONOMICS
Rate Hike a Little Sooner costs have lifted consumer liquidity this
year but have also raised the personal
savings rate, as consumers are using much
of their savings to pay down debt.
ELLEN ZENTNER Jobs. Labor market improvement seems However, we expect the savings rate to
Chief US Economist in train to deliver full employment by the gradually drift back to its previous trend of
Morgan Stanley & Co. around 5% during our forecast horizon.
fourth quarter of 2015 as unemployment
A dverse weather, West Coast port
disruptions, caution by budget-
conscious households and an earlier-than-
falls to an average 5.1% in our forecast.
We expect average wage growth to climb
Demand for consumer revolving credit has
strengthened, and improving wage
to an average 2.5% this year from last growthalong with higher aggregate
expected start to cuts in energy capital income from job gainsshould provide
years 1.9%. The housing recovery
spending appear to be locking in a slower support for consumer spending. A
remains sluggish, but we see demographic
first half than we had previously persistently higher savings rate poses the
trends, coupled with rising employment
anticipatedthus reducing our outlook for greatest risk to our outlook.
and wages, resulting in higher household
economic growth. In this forecast round, Dollar Impact. The impact of the
formation. We look for home-price
the quarterly growth profile has changed dollar's rapid appreciation has led us to
appreciation of 4% to 6% and housing
with a stronger back half versus front half revise our expectation for net trade wider
starts of 1.2 million to 1.3 million in 2015.
of the year. We have taken down our 2015 this year, while continuing to point to
Capital Spending. The hit to energy
fourth-quarter-to-fourth-quarter GDP further downside to core inflation, as
capital spending we had expected in the
forecast to 2.3% from 2.8% for 2015 (see measured by the personal consumption
second half has come through earlier and
chart). expenditure price index, in coming
is much larger than expected. The result is
Even so, the economy continues to months. Looking ahead, our currency
a drop in oil and gas investment that
show strength in many areas, notably the strategists expect further dollar
shaves an additional percentage point from
labor market, which is a particular focus at appreciation, but at a more moderate pace;
our growth estimate for business fixed
the Federal Reserve. At its March meeting, in addition, we expect core inflation to fall
investment. We are optimistic on
the Federal Open Market Committee further but stabilize during the summer
nonresidential investment, though the
(FOMC) revised its expectation for this before turning up in the fall.
cumulative effects of rapid dollar
years growth and inflation significantly
lower, yet policymakers did not indicate
the expected timing of the first rate hike
MS & Co.s US Economic Forecast: Downward
would be in 2016. Thats a strong message Revisions for 2015, Upward for 2016
rates will go up this year and implies that New Forecast Previous
it would take a sizable negative surprise to 4Q/4Q Percent Change 2014 2015 2016 2015 2016
alter that course. As such, we have brought Real GDP 2.4 2.3 2.5 2.8 2.1
forward our rate-hike expectation by one Final Sales 2.4 2.5 2.5 3.0 2.3
quarter to December 2015 from March Final Domestic Demand 2.9 2.6 2.6 3.2 2.3
2016, and we expect a cautious FOMC is PCE* 2.9 2.7 2.3 3.2 2.3
likely to allow the first hike to be digested Business Fixed Investment 6.2 2.3 3.9 3.6 4.1
before it hikes a second time. Our forecast Residential Fixed Investment 2.5 8.5 7.2 11.8 5.2
includes another 25-basis-point rate hike Exports 2.4 3.2 4.0 3.9 5.6
in March. From there on, we expect the Imports 5.6 3.5 4.1 4.9 4.9
Fed to tighten policy with a blend of hikes Government 0.8 1.3 1.7 1.4 0.5
and tapering of reinvestments in its CPI 1.2 0.5 2.1 0.3 2.3
mortgage-backed securities. Core PCE 1.4 1.2 1.8 1.2 1.8
Heres how the economy is looking as Unemployment Rate** 5.7 5.1 4.9 5.1 4.8
we approach midyear: *Personal consumption expenditures
**Four-quarter average
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, MS & Co. Research as of
April 12, 2015
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 4
ON THE MARKETS / EQUITIES
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 5
Asia Pacific ex Japan yields are very low or even negative, the Fed rate hikes post the first one becomes a
We remain more constructive on Asia dividend yield is modestly below its long- concern if the economy accelerates into
Pacific ex Japanforecasting higher run average and also trades at an all-time the second quarter and remains relatively
upside than for EM and preferring China, high relative to European credit yields. All strong. Given our view that the Feds first
India, Taiwan and Australia to Korea and told, our new base-case 12-month price action isnt until December, we think we
the Southeast Asia countries. This regions target for the MSCI Europe Index is 1,730. will have some time to observe Fed
economies generally have demonstrated a This is predicated on EPS growth of 12% commentary on pace. The third risk could
greater monetary-policy autonomy than this year and 9% in 2016, and we apply a be a continued deterioration in Greece
Europe/Middle East/Africa or Latin target 12-month P/E ratio in 12 months and/or a corresponding material further
Americaand they are cutting rates. At time of 15.5, down from the current 16.4. strengthening of the US dollar. Consumer
the same time, reform agendas are staples, machinery, chemicals, select
relatively more advanced. Thus, the US technology and select health care are most
earnings outlook should remain more Our S&P 500 target for the end of the impaired by a strong dollar, and we are not
resilient than for the emerging markets. first quarter of 2016 is 2,275, offering overweight any of these groups. Lastly, we
about 9% potential upside from todays find few investors are asking about China
Europe price, based on 4% earnings growth in so far this year, despite the apparent
Much has changed in just four months. 2015, 6% growth in 2016 and modest slowdown there. A couple of years ago
At the end of last year, sentiment toward further multiple expansion to just over 17 fear of a China hard landing was a
Europe was depressed and expectations for times forward earnings. commonly cited risk, yet as economic
economic growth and European Central Our thesis is that we are in the middle conditions have weakened, the fears have
Bank (ECB) action were low. Now, there of a long US expansion that may last until abated, at least among US investors. We
are strong inflows coupled with rising 2020. Economic factors such as consumer are hoping that our underweight in
growth expectations and signs that ECB confidence, financial obligations and industrials will help mitigate risk in the
policy is gaining traction. It is plausible delinquencies are all improving. In event that China fears grow.
that European equities take a breather, but addition, the consumer may be more In addition, we c believe that small-cap
we see a positive macro backdrop. insulated than investors think from a back- stocks will outperform. After lagging the
For starters, MS & Co.s economics up in yields, given 75% of their financial mega caps through early last fall, small
team just raised its GDP growth forecasts obligations are in mortgages, close to 90% caps have modestly outperformed recently.
significantly for the Euro Zone for 2015 of all mortgages are 30-year fixed and the The potential for an increase in M&A,
and 2016, while European earnings mortgage is termed out at the lowest rate particularly tender offers for small-cap
revisions have just turned positive for the ever. Corporate behavior also may lead to stocks, more margin-expansion potential
first time since 2012. We think the a long expansion. Capital spending and better relative revisions drive our
ongoing depreciation in the euro will remains constrained, inventory levels look preference for small caps. As for style, we
are balanced on growth versus value. In
provide a fertile background for EPS under control, hiring remains muted and
running simulations on portfolios derived
upgrades through the rest of the year. mergers-and-acquisitions (M&A) activity
from alpha models, we do not see style as
Equally important is the ECBs aggressive has a different makeup as deals are
a large differentiator for subsequent
monetary policy. We cannot find a prior immediately accretive and thus embed less
performance today. On the other hand,
period in which European net earnings risk than in the past. Furthermore, credit quality is an important differentiator. Our
revisions havent turned positive while the metrics dont look late cycle in many bias is toward high-quality small-cap
ECB was in an easing mode. cases. Financial obligations have been stocks.
Whats more, while inflows have pushed out several years, and the interest- Our main change in todays work is to
rebounded strongly, we believe the global bearing portion of todays loans looks upgrade the financial sector. Reasons for
investor base is underexposed to the region quite manageable given high interest the upgrade include high growth in
and will add funds if the economic coverage. All told, we generally think it shareholder return post generally
recovery continues. Domestic investor pays to remain sanguine. successful regulatory reviews, limited
exposure to equities also remains modest. That said, the biggest risk to our view historical exposure to a strengthening
For example, EU hedge funds net would be a dramatic shift in the US dollar and our expectations of reasonable
exposure is 45% currently, in the middle economic growth rate. A run of bad data risk-reward related to the slope and level
of its two-year range of 30% to 60%. would leave us staring at less liquidity and of the yield curve. We are also overweight
Finally, though European equities look less growth, likely instilling some the energy and consumer discretionary
expensive on current earnings, they trade incremental fear of an earnings plateau or sectors. Our underweights are consumer
at their long-run average on normalized decline. A second riskone that may staples, industrials and telecoms.
valuation metrics. While government bond emerge later this yearis that the pace of
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 6
ON THE MARKETS / EQUITIES
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 7
ON THE MARKETS / FIXED INCOME
30
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 8
ON THE MARKETS / FIXED INCOME
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 9
ON THE MARKETS / FIXED INCOME
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 10
ON THE MARKETS / Q&A
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 11
tensions start to affect countries like We've also started shifting some US thempharmaceuticals, for example. The
Turkey, or if there's any sort of attack in industrial exposurecompanies where strengthening dollar obviously helps the
any of the other markets. margins are at peakto similar European European and Japanese companies that
TK: What is your outlook for China, and companies whose margins are closer to export to the US. The companies or
how might Europe and Japan be affected? mid range. With falling euro costs against countries hurt the hardest are in the
CW: Ive been getting questions on US dollar revenues, there's opportunity for emerging markets that have issued so
what China is trying to do. Whereas other earnings upgrades. much debt in US dollars recently but do
countries have very few instruments they And we're looking at European not have US dollar revenues. That debt is
can use in monetary policy, China has a financials, which were left behind in this expanding in local currency terms and will
lot. Chinas more like a surgeon as rally. There are many financials, especially be increasingly hard to service.
opposed to someone using blunt tools. I banks, where industry consolidation TK: What do you think it will take for
think they're trying to ease liquidity in creates a significant potential for increases the emerging markets story to turn around?
certain parts of the economy, and there in returns. CW: The pessimism is probably
will be beneficiaries. I would expect bank TK: What are you avoiding? overdone in China, and things will start to
margins to rebound dramatically. At CW: We're still hesitant on exploration turn around there soon. We've already seen
current rates, if banks lower the base rate and production energy stocks. We don't a stabilization in Russia, where I believe
enough, I think we'll even see credit know which way oil's going to go in terms theres still a geopolitical risk, so I think
demand start to flow again. of pricing, and we're not going to make a the stabilization may be only a temporary
There are a number of companies, from big call on that. issue. The official Petrobras audited
Australia to the UK, that are heavily A lot of scenarios would make us less accounts are supposed to be released in
exposed to any pickup in infrastructure excited about oil. Not yet seeing a cut in Brazil, and if that comes through and we
spending in China. So we're sending production in the US is probably the key dont see a lot of indictments of
people over to China to get a sense of one, although we believe it will slow politicians, we could potentially get more
what's really happening with all the down. We would become more bullish if upside from that market.
changes in the various policies that have some geopolitical event caused oil prices The other Asian markets are still highly
occurred in the last month. to go much higher. dependent on China, with a few
We don't know yet if we'll play it Greece deciding to leave the Euro Zone, exceptions. India, which I think will make
through China or look toward global or just a default, and seeing that spread progress on structural reform, will
companies that supply the resources for across Europe, basically offsetting any continue to be a good market.
the building we anticipate will come. structural reform they've had, would be Otherwise, most emerging markets are
TK: Looking at the past 12 months, very negative for that market. not that cheap right now; their currencies
what has been most surprising? TK: If one of those scenarios played have come under pressure. Many of their
CW: It's more a degree of magnitude out, how might your strategy change? currencies are trading close to where they
than outright unexpected numbers. The CW: Were always testing the current should in terms of purchasing power
uptick in Europe was lower than we environment, and all the stocks we like, parity. It doesn't strike me as any of the
expected. With oil prices having dropped against those scenarios. If oil drops to X, smaller emerging markets are heavily
so much, we thought we'd start to see what's the impact? If oil rises to X, what undervalued, but if we start to see global
growth pick up faster than it did. should we own? growth pick up, and the US dollar starts to
TK: Where are you seeing the most We can't get out of Europe entirely, but ease a bit, then those markets will pick
attractive investment opportunities? we would shift to more large-cap, stable, upbut we are not finding a lot of stocks
CW: We're starting to look at Japanese slow-growth companies less likely to be that are undervalued in the emerging
companies that I don't think weve even affected by changes in the macro markets right now.
considered buying for at least10 years: environment, and shift out of periphery
older large-cap companies that, if they names because those would come under Carmel Wellso is not an employee of
start to deploy capital [more efficiently] the most pressure if the Greek situation Morgan Stanley Wealth Management.
and think about return on invested capital, were to escalate. Opinions expressed by her are solely her
I think they will be fairly interesting TK: How has the strengthening dollar own and may not necessarily reflect those
companies. Now that they are selling affected investment opportunities? of Morgan Stanley Wealth Management or
poorly performing assets, they can focus CW: In terms of US companies, or its affiliates.
on products that are going to make them global companies with a lot of non-US
money going forward. earnings, the translation effect is hurting
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 12
Global Investment Committee
Tactical Asset Allocation
The Global Investment Committee provides guidance on asset allocation decisions through its various model
portfolios. The eight models below are recommended for investors with up to $25 million in investable
assets. They are based on an increasing scale of risk (expected volatility) and expected return. Hedged
strategies include hedge funds and managed futures.
CONSERVATIVE >>> MODERATE >>>
AGGRESSIVE >>>
MODEL 7 MODEL 8
4% MLPs 11% Hedged Strategies 4% MLPs 11% Hedged Strategies KEY
and Managed Futures and Managed Futures
3% 3% 3% Cash
Commodities Commodities
CASH
36% US
2% REITs 40% US 2% REITs Equity
Equity GLOBAL FIXED INCOME
9%
Emerging 10% Emerging
Markets Markets
31% 34% GLOBAL EQUITIES
Equity Equity
International International
Equity Equity
ALTERNATIVE INVESTMENTS
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 13
Tactical Asset Allocation Reasoning
Relative Weight
Global Equities Within Equities
US Equal Weight While US equities have done exceptionally well since the global financial crisis, they still offer attractive upside potential,
particularly relative to bonds. We believe the US and global economies continue to heal, making recession neither
imminent nor likely in 2015 or 2016. This is constructive for global equities, including the US.
International Equities Overweight We maintain a positive bias for Japanese and European equity markets given the political and structural changes taking
(Developed Markets) place in Japan and our expectation for an improving economic outlook in Europe. European and Japanese central
banks are now engaged in much more aggressive monetary policy than the US, while also moving away from fiscal
austerity. This should be relatively more stimulative for growth on a rate-of-change basis and lead to continued
outperformance in these equity markets.
Emerging Markets Overweight Emerging market (EM) equities have been a mixed bag for the past few years and we expect that to continue. While the
broad emerging market equity asset class remains vulnerable to Federal Reserve Bank tightening and US dollar
strength, emerging market equities have performed better year to date with a more synchronous global economic
recovery and more aggressive central-bank activity outside the US. We think this outperformance can extend further
but recommend a selective approach, focusing on India, China H-shares, Taiwan and Korea.
Relative Weight
Global Fixed Within Fixed
Income Income
US Investment Grade Overweight We have recommended shorter-duration* (maturities) since March 2013 given the extremely low yields and potential
capital losses associated with rising interest rates from such low levels. We have subsequently reduced the size of our
overweight in short duration with short-term interest rates now expected to move higher with the Feds tightening cycle
later this year. Within investment grade, we prefer BBB-rated corporates and A-rated municipals over US Treasuries.
International Underweight Yields are extremely low globally, leaving very little value in international fixed income, particularly as the global
Investment Grade economy begins to recover more broadly. While interest rates are likely to stay low, the offsetting diversification
benefits do not warrant much, if any, position, in our view.
Inflation-Protected Overweight We have been underweight inflation-protected securities since March 2013 given negative real yields across all
Securities maturities. However, with deflationary fears having become extreme in the first quarter of 2015, we believe these
securities now offer relative value in the context of our forecasted acceleration in global growth and rise in oil prices.
High Yield Overweight The sharp decline in oil prices has created some dislocations in the US high yield market. Broadly speaking, we believe
default rates are likely to remain muted as the economy recovers, while corporate and consumer behavior remain
conservative. We prefer higher-quality (B to BB) issues and vigilance on security selection at this stage of the credit
cycle. With energy-related issues, investors should remain selective.
Emerging Market Underweight We remain underweight as the Feds rate-hike cycle will likely be a disproportionate headwind for emerging market
Bonds (EM) debt. Much like EM equities, EM debt exposure should be selective. The GIC recommends US-dollar-based EM
debt with a focus on China, India, Russia, Mexico and Brazil.
Relative Weight
Alternative Within Alternative
Investments Investments
REITs Underweight With our expectation for rising interest rates, we believe REITs are now fairly to slightly overvalued, especially relative to
other high-yielding asset categories. Therefore, we recently reduced our tactical asset allocation. Non-US REITs
should be favored relative to domestic REITs at this point.
Commodities Overweight Most commodities have underperformed in the past few years, with energy leading the charge lower. We believe
commodities are likely to perform better for the remainder of 2015 as global growth reaccelerates and the oil market
comes into better supply/demand balance.
Master Limited Equal Weight Master limited partnerships (MLPs) should do better in 2015 if oil prices recover as we expect. With interest rates still
Partnerships* low and average yields on MLPs close to 6%, significant relative value has been created in this asset category. We
continue to favor midstream assets.
Hedged Strategies Equal Weight This asset category can provide uncorrelated exposure to traditional risk-asset markets. It tends to outperform when
(Hedge Funds and traditional asset categories are challenged by growth scares and/or interest rate volatility spikes. Within this asset
Managed Futures) category, we favor event-driven strategies, given our expectation for increased mergers and acquisitions activity.
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 14
MSCI ALL COUNTRY WORLD INDEX This index MSCI EUROPE INDEX This free-float-adjusted,
Index Definitions captures large-cap and mid-cap representation market-capitalization-weighted index has large-,
MORGAN STANLEY CYCLE INDICATOR This is across 23 developed markets and 21 emerging mid- and small-cap representation across 16
weighted average of each metrics reading as a markets. developed markets in Europe.
percentile of its own history. The metrics
MSCI ASIA PACIFIC EX JAPAN INDEX This index PERSONAL CONSUMPTION EXPENDITURE PRICE
include employment/unemployment, industrial
captures large-cap and mid-cap representation INDEX This a measure of price changes in
production, consumer confidence, the two-
across four of five developed market countries consumer goods and services. Personal
year/10-year yield-curve spread, corporate and
(excluding Japan) and eight emerging market consumption expenditures consist of the actual
consumer loan growth, announced mergers-and-
countries in the Asia Pacific region. and imputed expenditures of households. The
acquisitions transactions and capacity
measure includes data pertaining to durables,
utilization.
MSCI EAFE INDEX This is a capitalization- nondurables and services.
MORGAN STANLEY INFLATION/DEFLATION weighted index that tracks the total return of
INDICATOR This is a market-based indicator of common stocks in 21 developed market countries S&P 500 INDEX Regarded as the best single gauge
global inflation expectations. It is calculated within Europe, Australia and the Far East. of the US equities market, this capitalization-
using an equally weighted average of annual weighted index includes a representative sample
growth rates of copper, gold and oil prices; MSCI EMERGING MARKETS INDEX This index of 500 leading companies in leading industries in
levels of US and emerging market two-year captures large-, mid- and small-cap the US economy.
breakeven inflation rates; and one-year/two- representation across 21 emerging market
countries. TOPIX (TOKYO STOCK EXCHANGE INDEX) This
year interest rate spreads for the G4 and China.
free-float-adjusted index tracks all domestic
companies of the exchanges First Section.
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 15
Risk Considerations
MLPs
Master Limited Partnerships (MLPs) are limited partnerships or limited liability companies that are taxed as partnerships and whose interests (limited
partnership units or limited liability company units) are traded on securities exchanges like shares of common stock. Currently, most MLPs operate in
the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally applicable to companies in the
energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk.
Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance
on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity
volume risk.
The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is
deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for
distribution to the fund which could result in a reduction of the funds value.
MLPs carry interest rate risk and may underperform in a rising interest rate environment. MLP funds accrue deferred income taxes for future tax
liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as
capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP funds after-tax performance
could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.
Duration
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio.
The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates. Generally, if interest rates rise, bond prices
fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing
interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as
compared to the price of a short-term bond.
International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and
economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets,
since these countries may have relatively unstable governments and less established markets and economies.
Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures
funds, and funds of hedge funds, private equity, and managed futures funds, are speculative and entail significant risks that can include losses due to
leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack
of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less
regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor.
Managed futures investments are speculative, involve a high degree of risk, use significant leverage, have limited liquidity and/or may be generally
illiquid, may incur substantial charges, may subject investors to conflicts of interest, and are usually suitable only for the risk capital portion of an
investors portfolio. Before investing in any partnership and in order to make an informed decision, investors should read the applicable prospectus
and/or offering documents carefully for additional information, including charges, expenses, and risks. Managed futures investments are not intended
to replace equities or fixed income securities but rather may act as a complement to these asset categories in a diversified portfolio.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to,
(i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events,
war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence,
technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary
distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.
Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long
term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold
in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest
or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities
that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (SIPC) provides
certain protection for customers cash and securities in the event of a brokerage firms bankruptcy, other financial difficulties, or if customers assets
are missing. SIPC insurance does not apply to precious metals or other commodities.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk.
Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date.
The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the
maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the
risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk
that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater
credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives
and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 16
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax
(AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if
securities are issued within one's city of residence.
Treasury Inflation Protection Securities (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation
by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is
linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.
The initial interest rate on a floating-rate security may be lower than that of a fixed-rate security of the same maturity because investors expect to
receive additional income due to future increases in the floating securitys underlying reference rate. The reference rate could be an index or an
interest rate. However, there can be no assurance that the reference rate will increase. Some floating-rate securities may be subject to call risk.
Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect the monthly
income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds. Yields and average lives are estimated
based on prepayment assumptions and are subject to change based on actual prepayment of the mortgages in the underlying pools. The level of
predictability of an MBS/CMOs average life, and its market price, depends on the type of MBS/CMO class purchased and interest rate movements.
In general, as interest rates fall, prepayment speeds are likely to increase, thus shortening the MBS/CMOs average life and likely causing its market
price to rise. Conversely, as interest rates rise, prepayment speeds are likely to decrease, thus lengthening average life and likely causing the
MBS/CMOs market price to fall. Some MBS/CMOs may have original issue discount (OID). OID occurs if the MBS/CMOs original issue price is
below its stated redemption price at maturity, and results in imputed interest that must be reported annually for tax purposes, resulting in a tax
liability even though interest was not received. Investors are urged to consult their tax advisors for more information.
Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy.
Investors should consult with their tax advisor before implementing such a strategy.
An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an
exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in
interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not
typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks.
These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established
markets and economics. For specifics and a greater explanation of possible risks with ETFs along with the ETFs investment objectives, charges and
expenses, please consult a copy of the ETFs prospectus. Investing in sectors may be more volatile than diversifying across many industries. The
investment return and principal value of ETF investments will fluctuate, so an investors ETF shares (Creation Units), if or when sold, may be worth
more or less than the original cost. ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually
redeemable from an ETF.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk,
significant stock price fluctuations and illiquidity.
Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market
volatility than securities of larger, more-established companies.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the
performance of any specific investment.
The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan
Stanley Smith Barney LLC retains the right to change representative indices at any time.
REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited
diversification and sensitivity to economic factors such as interest rate changes and market recessions.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency,
economic and market risks.
Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and
market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and
domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied
economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These
risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in
countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.
Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their
business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 17
Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these
high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.
Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not
be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase,
holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This
material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or
other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors,
including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors.
Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this
material.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own
independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision,
including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain
material information not contained herein and to which prospective participants are referred. This material is based on public information as of the
specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or
warranty with respect to the accuracy or completeness of this material. Morgan Stanley Wealth Management has no obligation to provide updated
information on the securities/instruments mentioned herein.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy
will depend on an investors individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors
independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and
income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates,
securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future
performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions
may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the
projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any
projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.
Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not
materially differ from those estimated herein.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is
not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not
acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue
Code of 1986 as amended in providing this material.
Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client
should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about
any potential tax or other implications that may result from acting on a particular recommendation.
This material is disseminated in Australia to retail clients within the meaning of the Australian Corporations Act by Morgan Stanley Wealth
Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813).
Morgan Stanley Wealth Management is not incorporated under the People's Republic of China ("PRC") law and the material in relation to this report
is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or
the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must
be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities.
If your financial adviser is based in Australia, Dubai, Germany, Italy, Switzerland or the United Kingdom, then please be aware that this report is
being distributed by the Morgan Stanley entity where your financial adviser is located, as follows: Australia: Morgan Stanley Wealth Management
Australia Pty Ltd (ABN 19 009 145 555, AFSL No. 240813); Dubai: Morgan Stanley Private Wealth Management Limited (DIFC Branch), regulated by
the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA; Germany: Morgan Stanley
Private Wealth Management Limited, Munich branch authorized by the Prudential Regulation Authority and regulated by the Financial Conduct
Authority and the Bundesanstalt fuer Finanzdienstleistungsaufsicht; Italy: Morgan Stanley Bank International Limited, Milan Branch, authorized by the
Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, the Banca d'Italia and the
Commissione Nazionale per Le Societa' E La Borsa; Switzerland: Bank Morgan Stanley AG regulated by the Swiss Financial Market Supervisory
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 18
Authority; or United Kingdom: Morgan Stanley Private Wealth Management Ltd, authorized and regulated by the Financial Conduct Authority,
approves for the purposes of section 21 of the Financial Services and Markets Act 2000 this material for distribution in the United Kingdom.
Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section
15B of the Securities Exchange Act (the Municipal Advisor Rule) and the opinions or views contained herein are not intended to be, and do not
constitute, advice within the meaning of the Municipal Advisor Rule.
This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.
Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they
provide and shall not have liability for any damages of any kind relating to such data.
This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.
Please refer to important information, disclosures and qualifications at the end of this material. May 2015 19