Monthly Investment Perspectives. The Global Investment Committee March 2015

Transcription

1 Monthly Investment Perspectives The Global Investment Committee March 2015

2 Our 2015 Thesis: The Great Rebalancing Act Tapering was tightening last year despite the rhetoric it was not. Dollar strength reflects this tightening and allows the Fed to remain as patient as necessary. Flattening of the yield curve, valuation compression, rotation to late-cycle stocks, underperformance of EM and small caps, and a strengthening US dollar all suggest that the markets agree. The initial tightening of monetary policy typically does not kill the economy or the stock market. Instead, it signals self-sustainability. US yield curve has stopped flattening positive signal for growth. Equities should continue to do well in 2015 after markets get comfortable with near-term risks of oil, US earnings and currency volatility is the year of the Great Rebalancing led by the currency and commodity market moves in 2014: US to EAFE, oil producers to consumers, EM investment to consumption, rich to the middle class. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 2

3 US Economy Still in Early Expansion Phase Morgan Stanley Cycle Indicator¹- US As of February 28, % 80% 60% 1987-Rate Hikes Begin 1994-Rate Hikes Begin 2004-Rate Hikes Begin Fed Ends QE 40% 20% 0% Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 NBER Recession Downturn Repair Recovery Expansion Mid Line Source: Morgan Stanley & Co. Research, Bloomberg, Haver, NBER. Grey bars indicate periods of recession. (1) The Morgan Stanley US Cycle Indicator measures the deviation from historical norms for macro factors including employment, credit conditions, corporate behavior and the yield curve. The repair phase occurs due to the lag time between when these factors are beginning to improve and when they turn positive. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 3

4 European and Japanese Economies Just Starting to Grow Morgan Stanley Cycle Indicator-Euro Area As of February 28, % 80% 60% 40% 20% Europe has not begun to expand This is when early cycle stocks have worked best 0% CEPR Recession Downturn Repair Recovery Expansion Mid Line Focus on Banks, Real Estate, Retailers, cyclicals Japan s recovery appears to be at risk of rolling over Abe is using this to accelerate his plan Morgan Stanley Cycle Indicator-Japan As of January 31, % 80% 60% 40% BOJ + GPIF + Snap Election is aggressive Source: Morgan Stanley & Co. Research, NBER, Bloomberg, Haver Analytics. The Morgan Stanley Cycle Indicator Indices measure the deviation from historical norms for macro factors including employment, credit conditions, corporate behavior and the yield curve. The repair phase occurs due to the lag time between when these factors are beginning to improve and when they turn positive. 20% 0% ESRI Recessions Downturn Repair Recovery Expansion Mid Line GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 4

5 Global Growth Has Likely Bottomed There is a trifecta of catalysts to drive global growth higher this year Global monetary policy is more stimulative than any time since the crisis Oil price collapse will serve as a sizeable tax cut for global consumers The era of fiscal austerity may finally be ending around the world Deflation concerns have peaked and reflation trades are working Cyclical stocks are outperforming Inflation expectations are rising Global bond yields are moving higher Commodity prices are stabilizing and even rebounding in some cases GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 5

6 Global Liquidity Is Forecasted to Accelerate in 2015 Central Bank Assets as Percent of GDP As of February 28, 2015 Source: Haver Analytics, Morgan Stanley Wealth Management GIC. Forecasts are based on Morgan Stanley & Co. estimates of both central bank balance sheet and GDP growth. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 6

7 Oil Prices Lead the Leading Indicator of Growth OECD G7 LEI vs. Brent Crude As of February 28, % 4% 2% 0% -2% -4% -6% % -40% -20% 0% 20% 40% 60% 80% 100% 120% OECD G7 LEI (y/y, left axis) Brent Crude (three-month avg., y/y, moved ahead eight months, inverted, right axis) Source: Bloomberg GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 7

8 Ironically, Austerity Is a Bad Strategy if Highly Leveraged Change in GDP vs. Change in Cyclically Adjusted Primary Balance As of January 31, 2015 % IRELAND R² = CHANGE IN GROSS DEBT-TO-GDP RATIO ( ) SWEDEN SLOVENIA JAPAN U.K. ITALY FRANCE U.S. FINLAND EURO AREA AUSTRALIA NETHERLANDS AUSTRIA CZECH REPUBLIC CANADA BELGIUM SINGAPORE GERMANY SWITZERLAND SPAIN PORTUGAL GREECE Austerity Increases Debtto-GDP Levels NORWAY BCA Research % CHANGE IN CYCLICALLY ADJUSTED PRIMARY BALANCE (% OF POTENTIAL GDP) Source: IMF Fiscal Monitor and World Economic Outlook (October 2014). BCA Research Geopolitical Strategy Monthly Report (February 2015). Available at gps.bcaresearch.com. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 8

9 ECB QE Is Getting a Vote of Confidence From Markets Five-Year Inflation Breakevens for US and Europe As of March 12, United States Europe ECB QE 0.0 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 9

10 Global Interest Rates Are Moving Higher in US, Japan and UK Global 10-Year Bond Yields Normalized to November 27, 2014 (when oil prices collapsed) As of March 12, Saudi Decides NOT to Cut Oil Production and Oil Prices Collapse US Japan UK ECB QE Germany 20 Nov-14 Dec-14 Jan-15 Feb-15 Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 10

11 Credit Growth the Key Difference Between US and Europe US vs. European Credit Growth 1 As of December 31, 2014 Source: Haver Analytics. (1) Corporate credit growth excludes Financials. Data includes mortgages. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 11

12 ECB Will Likely Have a Meaningful Impact on Money Supply EMU Money Supply Growth Is Accelerating As of January 31, 2014 Euro Area Money Supply Growth YoY (%) M1 M3 Loans... And, money supply is a strong leading indicator for economic growth Source: Morgan Stanley & Co. as of February M1 = cash and assets that can quickly be converted into currency. M3 = less liquid assets referred to as near, near money. After several years of contraction, money supply is growing again in Europe Accelerating EMU Money Supply Growth Is a Positive Indicator for GDP As of January 31, Real GDP Growth (LHS) Real M1 Growth (12M Lead, RHS) GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 12 Euro Area Real GDP Growth YoY (%) Euro Area Real M1 Growth 12M Lead (%)

13 European Economic Data Surprise Already Beating US Citi Economic Surprise Indices As of March 6, 2015 Spread: Europe vs. US Citi Economic Surprise Indices As of March 6, Europe US Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 13

14 European Earnings Revisions Breadth Also Already Beating US Relative Earnings Revisions Breadth (vs. S&P 500; three-month average) As of February 28, % 20% MSCI Japan 15% 10% 5% MSCI Europe MSCI EM 0% -5% -10% -15% Source: FactSet, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 14

15 Operating Leverage Is Greatest In Japan and Europe Historical Operating Leverage of Japanese, European and US Corporations As of February 28, 2015 Data Spans 1Q Q 2014 (Europe GDP data as of 3Q 2014) 60% 50% Japan Most Operating Leverage Next 12 Month Earnings per Share Growth Y/Y 40% 30% 20% 10% 0% -10% -20% -30% Europe US -40% -50% R² = y = x R² = y = x R² = y = x % -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% Nominal GDP Y/Y Source: FactSet, Haver Analytics GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 15

16 Outside the US, Dividend Yields Are Higher Than 10-Year Rates Dividend Yields vs. 10-Year Interest Rates As of March 12, % 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Australia UK Switzerland France Canada Germany US Japan Dividend Yield Government 10-Year Bond Yield Source: FactSet, Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 16

17 US Equities Have Underperformed With Earnings Estimates S&P 500 vs. Actual and Estimated Earnings As of March 12, US equities have underperformed this year as earnings estimates have been reduced by the stronger US dollar and weaker energy prices. We believe these estimates are now too low so US equities should perform better from here S&P 500 Price (left axis) S&P 500 Actual Quarterly Earnings (annualized, right axis) S&P 500 Next 12-Month Earnings Estimate (right axis) Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 17

18 US Equity Risk Premium Is Still Elevated Stocks are Cheap US Equity Risk Premium (Spread: S&P 500 Forward Earnings Yield vs. US 10-Year Treasury Yield) As of March 12, Bps Valuation Bubbles Source: FactSet, Morgan Stanley Wealth Management GIC. Equity risk premium is the excess return that an individual stock or the overall stock market provides over a risk-free rate. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 18

19 The Secular Bull Market Is Only a Few Years Old S&P 500 in Gold Prices vs. Consumer Sentiment As of February 28, 2015 Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 19

20 S&P 500 in Real Terms Follows Consumer Comfort S&P 500 in Gold Prices vs. Consumer Comfort As of March 12, S&P 500 in Gold Price Terms (left axis) Bloomberg US Consumer Comfort Index (right axis) Is This Like 1995 or 2007? Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 20

21 Bottom Line: Our Recommendations We continue to recommend equities over fixed income. Furthermore, active managers are starting to outperform this year in the US, which should continue. In the US, we prefer Healthcare, Tech, Financials, select Consumer Discretionary and Energy. Smalland mid-capitalization stocks are set for a rebound with greater margin upside and less US dollar exposure. We prefer mid caps, in particular. Japan still in the early stages of new bull market skepticism remains high, valuations are low. Europe is finally getting the support from the ECB with QE, which paves the way for the end of fiscal austerity we expect European equities (currency hedged) to continue to outperform. Emerging markets are very idiosyncratic with some performing very well. We prefer oil-importing Southeast Asia over oil-exporting Latin America. We also like China and India. In fixed income, we still recommend below-benchmark duration*. Don t get complacent. US high yield looks increasingly attractive. Municipal bonds cheap to Treasuries. We still like Master Limited Partnerships* (MLPs), but need to be extremely selective. Six-percent yields from many higher-quality securities appear compelling in a low interest rate environment. Commercial real estate in the US remains an attractive yield play with rents growing 4%-6% in a strong economy. Similarly, international real estate appears favorable as the recovery broadens. Source: Morgan Stanley Wealth Management GIC. *For more information about the risks to Duration and Master Limited Partnerships (MLPs), please refer to the Risk Considerations section at the end of this material. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 21

22 Asset Class Risk Considerations For index definitions to the indices referenced in this report please visit the following: Index Definitions Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. Investing in foreign markets entails risks not typically associated with domestic markets, such as currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, and the potential for political instability. These risks may be magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies. Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more established companies. The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer. High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio. 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. Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative-like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not suitable for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. 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 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. 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. Risks of private real estate include: illiquidity; a long-term investment horizon with a limited or nonexistent secondary market; lack of transparency; volatility (risk of loss); and leverage. 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. Asset-backed securities generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments. 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. GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK Page 22

23 Asset Class Risk Considerations (cont d) 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. 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. 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. Besides the general risk of holding securities that may decline in value, closed-end funds may have additional risks related to declining market prices relative to net asset values (NAVs), active manager underperformance, and potential leverage. Some funds also invest in foreign securities, which may involve currency risk. 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 GIC CHARTBOOK Page 23