Monthly Investment Perspectives: Video

Transcription

1 Monthly Investment Perspectives: Video Michael Wilson Chief Investment Officer Morgan Stanley Wealth Management Morgan Stanley & Co. Chief US Equity Strategist Morgan Stanley & Co. April 17, 2017

2 Monthly Investment Perspectives: Video On Wednesday, April 12, 2017 Chief Investment Officer Michael Wilson hosted the Global Investment Committee Monthly Investment Perspectives call/webcast to discuss the current market conditions and outlook. GLOBAL INVESTMENT COMMITTEE Page 2 of 7

3 Good afternoon, everyone. It's Mike Wilson, chief investment officer for Morgan Stanley Wealth Management and MS & Co. Welcome to April's Monthly Investment Perspectives. It does look like we're into another one of these periods where folks are getting a little bit concerned about geopolitics, whether it be in North Korea or Russia or has to do with the French elections, which are coming up. And then of course this concern around Donald Trump, President Trump and the administration's ability to get legislation done. The economic and earnings recovery that began is still going. You know, it started a year ago, and actually it's surprising on the upside. In fact, I'm going show some data today, which shows that the breadth of the data that we're getting, not just in the US but globally, is about as strong as we've seen since I know there's some concern about the first quarter in the US, but we think there's actually a snapback in Q2 that's going to be pretty strong. Some of the leading indicators are suggesting that as well. As far as the target we have now for the US, we're looking for a target of 2,700. That is 15% upside. I was very surprised over the course of the last couple days. I did some spots in the media. You know, folks are saying, "Wow, 15% upside," and they acted as if this was some booming target. Now, that is the high target on the Street, but at the same time it's 15% upside. We're not talking about 20%, 30%, 40% upside. 15% is not a crazy number. And so, it speaks volumes to kind of where sentiment is today, which is fairly, you know, pessimistic about, you know, a potential upside. And I think a lot of it has to do with valuation. We're overweight, financials, industrials, technology and energy. It's a nice balance between growth and value. We still have value bias in some of our models because some of the value stuff has underperformed this year. So, we're probably not going to re-weight that necessarily until we could see some catch up, but we do think it's going to be a more broad market in terms of value and growth. Last year, value definitely outperformed dramatically. This year growth has outperformed. We think there'll be some catch-up as we go into the middle part of this year as people start to feel better about that synchronous growth that's happening in the global economy. The one market that's really underperformed is Japan. It's been probably the weakest performing market year to date in local currency terms. You know, the dollar has been weak against the yen. So, in dollar terms, it's actually been pretty good. The yen is going to start to weaken again this quarter. Japan has had the biggest earnings upside in the fourth quarter, and we think in the first quarter, once we get the results to come in. And therefore Japan looks like it has probably the best risk-reward for the rest of this year. We're standing just tall on that call. We have not backed off of that. And that's the one market that's sort of underperformed in here. So, if you're looking for a laggard, well, Japan is the laggard. And for those of you who need a top up, those positions or kind of maybe got out of those positions last year, this could be an opportunity to do that. And I would just point out that, you know, with the French elections coming up, April 23 is the first round. There is risk of hedging going into that, and so the European markets have been very strong. For folks looking for an opportunity to buy European stocks, we think you might get an opportunity over the next two weeks as people get nervous finally about this French election, which is coming to a conclusion. So, let's talk about the data itself. This is the global economic and inflation surprises combined. So, why do we do that? We think it's important because, first of all, this goes back to And you can see we haven't had this kind of level really ever in the history of this index. Why are we looking at economic growth and inflation together? Because that's a pretty good proxy for nominal GDP. Nominal GDP is basically real GDP plus inflation. So, this is surprises for inflation and economic growth. This is a proxy for nominal GDP. Not real GDP. Nominal GDP. And that gets back to the point I made earlier around this idea that nominal GDP drives revenue growth. The other important point I want to make is that every region, okay, is turning up. Unlike 2013, where it was kind of a mixed bag. We didn't really get this global impetus. This is something our economists have been talking about as well, which is that we're seeing more synchronicity in the data globally, which means this could be a more sustainable recovery. So, this is very important from both a nominal standpoint and from a sustainably standpoint. And this is why we believe valuations can continue to expand. All right, next 12-month earnings forecast. This is bottoms up. This is the way we look at it. It's a little bit unorthodox. We think it's right. And we think this is the best way to think about what markets are pricing in. Forward earning estimates have continued to move higher. 122 at the low. Today it's 135. So, that's a pretty big increase. Importantly, growth rates have also been increasing and we're going to see about 10% growth this quarter. And we should probably continue to see about 10% growth on a year-over-year basis for the next couple quarters. We feel very good about the next few quarters. GLOBAL INVESTMENT COMMITTEE Page 3 of 7

4 Beyond September and into December, that's when we're going have to start really, you know, pressing sort of the flesh a little bit with respect to understanding what the, you know, where the trigger points are for a potential rollover next year in terms of rate of change, but either way we think we have plenty of time on the clock for growth to continue to be supportive of higher equity prices. This is a new model we introduced in our initiation. It's our leading indicator. And it tends to do a very good job of forecasting actual last 12-month earnings per share growth. So, right now, the leading indicator's suggesting that we are moving towards a 20% revenue growth/earnings growth number on a year-over-year basis sometime later this year. Today we're just breaking through zero. We're going to be probably close to 10 by the first quarter. And remember, the forecast kind of goes like this. So, this is a pretty good sign this is a macro leading indicator for earnings growth that suggests that the consensus numbers are not too high. And that's what we're really trying to figure out are the consensus numbers achievable or are they too high? And we think right now even though they're showing pretty good growth for the rest of this year, we think they're achievable based on some of our macro leading indicators, and we think that's a very important point. If you look at the last 40 years, going back to 1976, you could see the equity risk premium moves all over the place. And so, sometimes it gets overvalued, like down here in We had a negative equity risk premium over negative 200 basis points. Obviously, the TMT bubble was another period where valuations just got extreme. Beyond September and into December, that's when we're going have to start really, you know, pressing sort of the flesh a little bit with respect to understanding where the trigger points are for a potential rollover next year in terms of rate of change, but either way we think we have plenty of time on the clock for growth to continue to be supportive of higher equity prices. This is a new model we introduced in our initiation. It's our leading indicator and it tends to do a very good job of forecasting actual last 12-month earnings per share growth. So, right now, the leading indicator's suggesting that we are moving towards a 20% revenue growth/earnings growth number on a year-over-year basis sometime later this year. Today we're, just breaking through zero. We're going to be probably close to 10 by the first quarter. And remember, the forecast kind of goes like this. So, this is a pretty good sign this is a macro leading indicator for earnings growth that suggests that the consensus numbers are not too high. And that's what we're really trying to figure out; are the consensus numbers achievable or are they too high? And we think right now even though they're showing pretty good growth for the rest of this year, we think they're achievable based on some of our macro leading indicators, and we think that's a very important point. If you look at the last 40 years, going back to 1976, you could see the equity risk premium moves all over the place. And so, sometimes it gets overvalued, like down here in We had a negative equity risk premium over negative 200 basis points. Obviously, the TMT bubble was another period where valuations just got extreme. Okay, that's not where we are. We're up here at 332 basis points. But, what I really want you to focus on here is that I think more importantly we are leaving a period here of excessively high equity risk premiums. This is not just a US phenomenon. This is happening in Japan. It's happening in India. It's happening in parts of Europe now, Spain being a good point. Potentially, the UK and now maybe even the EU after some of these elections get passed we could see more unification. Brazil seeing major political change. So, there's a real push going on around the world for more fiscal support taking advantage of these abnormally low interest rates to fund it. That makes a lot of sense. And so, the equity risk premiums are just normalizing, right? The normal equity risk premium over the last 100 years is 242 basis points. Today, we're at 330. So, why can't we go back to just a normal equity risk premium? So, let's talk about the Trump trades because this seems to be the other concern now with the market, is that President Trump and the Republicans are essentially a lame duck administration already. They can't get anything done. They're bickering with each other. There's definitely some truth to that. This sort of repeal and replace Obamacare didn't get done, so that means none of the good stuff's going to get done either. We need tax cuts, infrastructure, deregulation. So, we've-- looked at these three trades specifically. We view the small caps as a sort of proxy for tax cuts; we view deep cyclicals as a proxy for infrastructure spending; and we view the banks as a proxy for deregulation. This chart is all relative to the S&P 500. Now, you'll notice that going back to last year, small caps and the infrastructure stocks bottomed in February at the lows of And they've been in an uptrend since. The financials here didn't bottom until post-brexit. And that makes sense because that's when everything kind of bottomed in terms of rates, everything else, and this fear around deflation. Now, here's the interesting part. The election, okay, they all got a pretty good pop in the election. These are the three biggest beneficiaries of the Trump Republican win. Small caps, banks, infrastructure spending and related stocks. Right? Since then, though, they've basically given back almost 100% of their performance. The banks have only given back about 50%, but the infrastructure stocks and the small caps have given back about 100% of their relative outperformance since the election. GLOBAL INVESTMENT COMMITTEE Page 4 of 7

5 This is just a nice dashboard to look at the things that we're focused on. First is a relative earnings revision, second is valuation, third is positioning and sentiment, and fourth is relative strength. But, then we also have this sort of macro environment, which is more of a subjective input. What's the macro environment mean for these different sectors? But, this is what we're going to be using. There are a lot of data behind this. But, right now we've got this sort of barbell between value and growth. And the biggest driver here is really relative earnings revisions. Three of the four sectors have pretty constructive relative earnings revisions. As you can see on the bottom, it's mostly negative relative earnings revisions. That has a very heavy weight in our sector selection. This is a very powerful chart, in my view, what's going on. The markets are recognizing all the things that we've been talking about, which is that there is a shift. Right? That policy's changing. The secular stagnation may be over and, by the way, buying a bond with a negative real yield is a bad deal. People are now actually shifting money and shifting assets in that direction. This is an important chart for a lot of the asset owners in the world, not just individual investors, but pension funds, endowments, etc. And so, we believe the next secular bull market for stocks relative to bonds because over time stocks versus bonds goes up. This was the secular bear. We are now into the secular bull, not only in terms of stocks, absolutely, but stocks versus bonds. And we think these moves recently confirm that point. Thanks for joining us for April s Monthly Investment Perspectives. We hope to see you in May. Have a great day. GLOBAL INVESTMENT COMMITTEE Page 5 of 7

6 Asset Class Risk Considerations For index, indicator and survey definitions referenced in this report please visit the following: Hypothetical Performance General: Hypothetical performance should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. Hypothetical performance results have inherent limitations. The performance shown here is simulated performance not investment results from an actual portfolio or actual trading. There can be large differences between hypothetical and actual performance results. Despite the limitations of hypothetical performance, these hypothetical performance results may allow clients and Financial Advisors to obtain a sense of the risk / return trade-off of different asset allocation constructs. Investing in the market entails the risk of market volatility. The value of all types of securities may increase or decrease over varying time periods. This analysis does not purport to recommend or implement an investment strategy. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations in this analysis. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. No analysis has the ability to accurately predict the future, eliminate risk or guarantee investment results. As investment returns, inflation, taxes, and other economic conditions vary from the assumptions used in this analysis, your actual results will vary (perhaps significantly) from those presented in this analysis. The assumed return rates in this analysis are not reflective of any specific investment and do not include any fees or expenses that may be incurred by investing in specific products. 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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. Master Limited Partnerships (MLPs) 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 fund s value. MLPs carry interest rate risk and may underperform in a rising interest rate environment. 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 nonregulated 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. 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. 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. Floating-rate securities 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 security s 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. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. Credit ratings are subject to change. Companies paying dividends can reduce or cut payouts at any time. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. GLOBAL INVESTMENT COMMITTEE Page 6 of 7

7 Asset Class Risk Considerations and Disclosures 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 Wealth Management retains the right to change representative indices at any time. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. 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. 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. 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. 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 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 investor s 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. 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 and our third-party data providers make no representation or warranty with respect to the accuracy or completeness of this material. Past performance is no guarantee of future results. 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 the United States of America by Morgan Stanley Smith Barney LLC. 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. 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 Morgan Stanley Smith Barney LLC. Member SIPC. GLOBAL INVESTMENT COMMITTEE Page 7 of 7