Monthly Investment Perspectives. The Global Investment Committee July 2015

Transcription

1 Monthly Investment Perspectives The Global Investment Committee July 2015

2 The Great Rebalancing Faces Bumps Not Roadblocks As of July 15, 2015 Our primary investment thesis for 2015 remains intact. To review, we called for a rebalancing of growth from the US to other parts of the world spurred by a stronger US Dollar, lower commodity prices and more generous monetary policies outside the United States. As evidence, we have witnessed better economic data in Europe, Japan and select emerging market countries, while US data has been mixed. As a result, international equity markets have performed exceptionally well this year and much better than United States equities. Recently, concerns over a possible Greek exit from the Eurozone and extreme volatility in Chinese equity markets have weighed on risk assets and our original thesis. The Global Investment Committee remains undeterred in its view that global growth and deflationary fears likely troughed in the first quarter setting us up for a stronger second half. Importantly, the United States economy remains on solid footing at this point this is why the Fed is tightening monetary policy starting with the exit from QE last year. Interest rates are rising and the yield curve is steepening we think this is a positive signal for growth and important to recognize from a portfolio standpoint. Source: Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 2

3 Global Risk Appetite Reached Extreme Fear Levels on "Grexit" Morgan Stanley Global Risk Demand Index As of July 13, 2015 Source: Morgan Stanley & Co. GLOBAL INVESTMENT COMMITTEE Page 3

4 European Equities Sentiment Is Bearish That s a Good Thing Morgan Stanley Europe Combined Market Timing Indicator 1 As of July 9, Sell Buy Combined Market Timing Indicator (CMTI) Source: Morgan Stanley & Co. (1) There is one composite market timing indicator (CMTI) and four components: the valuation, risk, fundamentals and capitulation indicators. They help decide the tactical outlook for equity markets for the next three-six months. (2) This is a composite valuation tool of MSCI Europe relative to bonds and inflation. A variety of weighted indices on real and nominal bond yields, dividend yields, short rates, and some equity valuation factors like PE and PBV are used to construct this index. GLOBAL INVESTMENT COMMITTEE Page 4

5 Greek Conflict Resolution Should Lead to Valuation Recovery Forward Next Twelve-Month P/E Ratios As of July 13, 2015 Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 5

6 Investors Remain Skeptical of US Equities Too Morgan Stanley Equity Risk Indicator As of July 10, 2015 Sell Buy S&P 500 Performance Following -1 Readings on the ERI 1W 1M 3M 6M 1Y Avg. Total Return 1.3% 4.0% 6.4% 10.6% 10.8% Percent Positive 73% 91% 82% 80% 78% Source: Morgan Stanley Wealth Management GIC. Note: Performance is ex-crisis. Equity Risk Indicator is a standardized measure of investor sentiment and positioning and earnings revision factors, compiled using a statistical Z-score methodology. A Z-Score is a statistical measurement of a score's relationship to the mean in a group of scores. A Z-score of 0 means the score is the same as the mean. A Z-score can also be positive or negative, indicating whether it is above or below the mean and by how many standard deviations. GLOBAL INVESTMENT COMMITTEE Page 6

7 Financial Conditions Tightened Last Year, but Have Eased Morgan Stanley Financial Conditions Index¹ As of July 13, QE QE1.5 Tighter Twist ECB BOJ QE QQE+ 1 QE2 LTRO Draghi 0 QE3 BOJ QQE² -1-2 Looser LTRO II Fed Ends QE Morgan Stanley Financial Conditions Index¹ Source: Bloomberg, Morgan Stanley Wealth Management GIC. (1) The y-axis measures the Morgan Stanley Financial Conditions Index, a weighted index comprised of changes in equities, short-term interest rates, long-term interest rates & USD currency. (2) Bank of Japan Quantitative and Qualitative Easing (QQE). GLOBAL INVESTMENT COMMITTEE Page 7

8 Historically Speaking, Bond/Equity Relative Volatility Not Extreme VIX Index Vs. MOVE Index As of July 13, MOVE Index (left axis) VIX Index (right axis) Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 8

9 Global Economic Data and Credit Growth Improving Citi G-10 Economic Surprise As of July 13, 2015 Private Credit Growth As of June 30, 2015 (US) and May 31, 2015 (Euro Area and Japan) 60 15% 40 10% Citi G-10 Economic Surprise 5% 0% -5% -10% US Private Credit Growth Y/Y Euro Area Private Credit Growth Y/Y Japan Private Credit Growth Y/Y Source: Bloomberg, Haver Analytics, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 9

10 US Economy Still in Early Expansion Phase Morgan Stanley Cycle Indicator¹ - US As of June 30, % 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 Analytics, 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 Page 10

11 European Fundamentals Continue to Turn Higher Euro Area Real M1 Growth Vs. Real GDP Growth As of May 31, % 14% 4% 12% 10% 2% 8% 0% 6% 4% -2% 2% -4% 0% -2% -6% -4% Real GDP Growth (left axis) Real M1 Growth (12M Lead, right axis) Europe Economic and Earnings Surprise As of July 13, 2015 (econ. surprise) and June 30, 2015 (earnings surprise) % Citi Economic Surprise- Eurozone (left axis) MSCI Europe Earnings Surprise (right axis) 30% 20% 10% 0% -10% -20% -30% -40% -50% Europe Private Credit Growth As of May 31, % 12% 10% 8% 6% 4% 2% 0% -2% -4% Euro Area Private Credit Growth Y/Y European Peripheral Bond Spreads Vs. German Bund (in bps) As of July 10, Italy (left axis) Spain (left axis) Portugal (right axis) Source: Morgan Stanley & Co., Bloomberg, Haver Analytics, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page

12 US Equities Have Underperformed With Earnings Estimates S&P 500 vs. Estimated Earnings As of July 13, 2015 US equities have underperformed this year as earnings estimates were reduced by stronger US dollar and weaker energy prices. These estimates are now recovering and should lead to better US equity market performance in the second half Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 12

13 Financials Have Outperformed Months After First Fed Hike Four-Period Avg. Total Return: Months After Previous Four Initial Fed Rate Hikes 1 35% 100% 30% 29.6% 26.8% 90% 80% 25% 24.0% 23.8% 22.7% 21.9% 21.6% 70% 20% 20.2% 20.1% 18.3% 60% 15% 14.6% 50% 40% 10% 30% 5% 20% 10% 0% 0% 4-Period Avg. Absolute Total Return (left axis) Positive Relative Total Return Hit Rate (right axis) Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC. (1) Encompasses 1983, 1986, 1994, 2004 rate hikes first Fed hike in new interest rate cycle. Top 500 stocks by market cap used. GLOBAL INVESTMENT COMMITTEE Page 13

14 US Consumers Are Regaining Their Footing US Consumer Confidence As of July 5, Bloomberg US Weekly Consumer Comfort Index (four-week avg.) US Household Formations As of March 31, US Household Formations (thousands, six-month avg.) US Employment Cost Index As of March 31, % 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% US Civilian Workers Employment Cost Index Y/Y US Revolving Consumer Credit As of May 31, % 5% 0% -5% -10% US Revolving Consumer Credit Outstanding Y/Y Source: Bloomberg, Haver Analytics, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 14

15 However, Operating Leverage Is Greater in Japan and Europe Historical Operating Leverage of Japanese, European and US Corporations As of June 30, 2015 Data Spans 1Q Q % Most Operating Leverage 50% Japan Next 12 Months Earnings per Share Growth Y/Y 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Europe US 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, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 15

16 And Dividend Yields Still More Attractive Outside the US Dividend Yields vs. 10-Year Interest Rates As of June 13, % 4.5% 3.5% 2.5% 1.5% 0.5% -0.5% Australia UK Switzerland France Canada Germany US Japan Dividend Yield Government 10-Year Bond Yield Source: FactSet, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 16

17 Chinese Equities Set Up Differently Than They Were in As of July 13, 2015 Source: Bloomberg, Morgan Stanley Wealth Management GIC GLOBAL INVESTMENT COMMITTEE Page 17

18 Right on Schedule? Recent Oil Plunge Looks Like the 1986 Episode the Last >50% Decline Without a Recession Brent Crude (USD/Barrel) As of June 30, 2015 $140 $40 $35 $120 $30 $100 $25 $80 $20 $15 $60 $10 $ Months 2011-Present (left axis) (right axis) $5 Source: Haver Analytics, Morgan Stanley Wealth Management GIC. Y-axis indexed to 0 at November 1, 1985 and June 1, GLOBAL INVESTMENT COMMITTEE Page 18

19 Bottom Line: Our Recommendations As of July 15, 2015 We continue to recommend equities over fixed income. Furthermore, active managers are outperforming this year in the US along with small/mid caps. We think this continues. In the US, we prefer Financials, Healthcare, Energy, Tech and Housing-Related. Small- and midcapitalization stocks still positioned ok with greater margin upside potential and less US dollar exposure. Japan potentially in the early stages of secular bull market skepticism is still high / valuations 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 to continue to outperform in Emerging markets are very idiosyncratic with some performing very well. We prefer oil-importing Southeast Asia over oil-exporting Latin America. We like China H -Shares, India, Korea and Taiwan. In fixed income, we still recommend below-benchmark duration*. US high yield attractive and municipal bonds cheap to Treasuries. Consider TIPS and WIPS as inflation expectations recover. We still like select Master Limited Partnerships* (MLPs) given our short-term positive view for oil prices. Six-percent yields from many higher-quality securities appear compelling in a low interest rate environment. We favor midstream plays. Given our reflationary view and expectation for higher interest rates, we are less sanguine about REITs, particularly in the US. We remain tactically underweight until rates reach higher levels. 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 Page 19

20 Asset Class Risk Considerations For index definitions to the indices referenced in this report please visit the following: 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 Page 20

21 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 Page 21