WEALTH MANAGEMENT INVESTMENT RESOURCES
APRIL 11, 2018
Geo-Markets SCOTT HELFSTEIN, PhD Executive Director Morgan Stanley Wealth Management
[email protected] +1 212 296-2632 IAN MANLEY Morgan Stanley Wealth Management
[email protected] +1 212 296-0929
Market Impact
Trade: Likelihood of Prolonged Debate?
First-Quarter Review This issue also includes: • Likelihood of a prolonged trade conflict increased as US and China contemplate an additional $100 billion in tariffs; and investors might take short-term refuge in domestic industries even if longer-term economic costs remain modest. • Concern about the second- or third-order effects from escalation of the war in Syria on Lebanon might be overestimated. • India bank-fraud case weighs on financial sector, but does not pose systematic risk to long-term economic or equity stories. • Geo-Dashboard: Markets are pricing high likelihood of moves in oil and base metals, while Latin America energy and materials sectors remain rare bright spots amid the global pullback, suggesting that these gains could be rapidly reversed (pages 6 and 7, top).
First Quarter Geo-Markets Review
Probability
Market Impact
Lebanon: Contrarian View Holding Up
Since launching in the fourth quarter of 2017, Geo-Markets has attempted to shed light on market-relevant issues around the world while identifying flashpoints or opportunities that could impact globally diversified portfolios. At the close of each quarter, we will review some accurate and erroneous calls as well as those that remain open questions.
Ahead of the Curve
Probability
Market Impact
India: Bank Fraud Weighs
China’s Economic Slowdown: This past October’s National Party Congress represented an inflection point and increased the possibility of slowdown for China’s risk assets. China’s leadership allowed credit expansion and government spending to shore up support, consistent with political-economic business cycle arguments. China’s slowdown is not likely to be a large secular event, but a modest cyclical move. In recent months, third-party research outlets like BCA Research and MRB Partners have grown increasingly cautious on China despite recent growth numbers that beat expectations. We believe that the politically driven slowdown is underway and recent global trade concerns add to that risk. Year to date (as of April 6): Shanghai Equity Composite,-6.5%; MSCI All Country World (MSCI ACWI), -2.8%.
Probability 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. Please refer to important information, disclosures and qualifications at the end of this material.
GEO-MARKETS
Social Media Regulatory Concerns: In late 2017, we noted an increase in regulatory risk around social media and technologyoriented consumer discretionary companies. The news emanating from the Mueller probe on the use of social media platforms combined with the discussions around net neutrality raised the possibility that some of the companies could face increased scrutiny. New revelations on social media data breaches and US administration policy have brought this concern to fruition. The likelihood of major policy changes that impact the companies remains low, but volatility driven by uncertainty is high. While many of these are likely passing concerns, tech is looking a little like health care did during the 2014-2016 drug pricing debates. Admittedly, we believed that the impact would be more stockspecific rather than systemic, which looks to be off. Year to date: S&P 500 Internet Software and Services, -8.1%; S&P 500, -3.4%. Mexico’s Tight Spot: Late last year, we raised concern about Mexican equities given the country’s challenges of renegotiating NAFTA and a presidential election set for July 1. The underperformance of equities relative to the MSCI Emerging Markets Index shows the market has priced at least some of that risk. These uncertainties persist. The likelihood of any deal between the National Action Party (PAN) and the Institutional Revolutionary Party (PRI) seems remote, setting up a situation in which the National Regeneration Movement comes to power with a minority victory. Year to date: S&P/BMV IPC, -4.2%; MSCI Emerging Markets -1.4%. Egyptian Equities Strengthen Post-Election: The March presidential election outcome signaled consistency in Egypt. The country has avoided many of the challenges plaguing neighbors to the north such as refugee flows and violence, while achieving reasonable and sustainable economic growth. There are risks ahead as Hamas militants on the Gaza border turn to alternative funding sources around the region and mounting concerns about security in the Sinai. Year to date: Hermes Financial Index, 15.2%; MSCI Emerging Markets, -1.4%.
Off the Mark Middle East Challenges Weigh on Regional Markets: The combination of regional risks from Syria, Yemen, Iran and Turkey seemed sufficient to warrant caution in the region. The political crackdown in Saudi Arabia around succession and growing uncertainty on the nature and commitment of US support added to those concerns. The region has generally underperformed broader emerging markets, but Saudi Arabia has performed well on the back of higher oil prices. The challenges of the royal succession
APRIL 11, 2018
did not turn out to be a major impediment, at least as of yet. Year to date: Tadawul All Share Index, 10.4%; MSCI Emerging Markets, -1.4%. Brazil Election Turmoil Stifles Reforms: With elections ahead and a current regime that is unpopular, there seemed little opportunity for reforms that could improve long-term financial stability. We continue to believe that meaningful progress is far off, but markets ignored the macroeconomic and political risks, sending Brazilian assets higher. The incarceration of former president Luiz Inácio Lula da Silva, who was also running in this year’s election, reduces the likelihood of reformist policies. The relative position of Brazil compared with other large markets such as Mexico and Argentina may have stimulated investor demand on the back of attractive valuations. Year to date: Ibovespa, 8.9%; MSCI Emerging Markets, -1.4%. Round Trip on South Korea: Sentiment has been bullish ever since North Korea announced a constructive stance toward the Olympics. With recent military provocations on hold and an opening of dialogue between North and South, Korean risk assets seemed poised to catch up after underperforming in 2017. This thesis received further support with potential talks between US and North Korean leadership. However, in our view, recent personnel changes in the White House and potential policy shifts reduce the likelihood of meaningful progress. Our bullish call was reversed on that news along with reduced expectations for a good diplomatic outcome. Year to date: KOSPI, -2.0%; MSCI Emerging Markets, -1.4%.
Open Questions Trade Headlines More Bluster than Bite: One of the big fears for 2018 was the potential trade conflict building between the US and China. Reciprocal policy moves between the two countries have jolted trade toward the top of the risk list. That said, the aggregate amounts of the tariffs, sector targeting and the 60-day cooling-off period seem to signal attempts at tactical advantage in negotiations as opposed to a scorched earth policy. The biggest risk we see is that these moves are sufficient to stifle investment and capital expenditures, creating a drag on future growth. Also worth noting is that trade disputes are stagflationary, as they slow growth and potentially raise prices simultaneously. This adds uncertainty to the path of US interest rate hikes. Year to date: S&P 500, -3.4%; Shanghai Equity Composite, -6.5%; MSCI ACWI, -2.8%.
Please refer to important information, disclosures and qualifications at the end of this material.
2
GEO-MARKETS
APRIL 11, 2018
Russia Weakness Post-Elections: President Vladimir Putin’s landslide reelection masks underlying weakness, particularly the regime’s need to stoke Russian nationalism as the primary source of legitimacy. This strategy runs the risk of drawing future competition from the right as opposed to the left of Russian politics, and likely drives Putin to take bigger risks. Potential weakening domestic political circumstances, policies that provoke international confrontations and a difficult long-term economic backdrop cause concern about exposure to the country’s risk assets. Oil prices and the ongoing OPEC supply deal helped support Russian equities, but latest news of potential sanctions following Syria’s gas attack again plays into the theory that Putin
Assets: Domestic Equities
needs to take larger, international gambles. Year to date: MSCI Russia, -4.0%; MSCI Emerging Markets, -1.4%. German Elections Signal Modest Fiscal Expansion: German elections continue to show the fraying of the post-World War II consensus with Europe as all parties lost ground relative to the nationalists. Nonetheless, election turmoil ended with a coalition bringing center-right and left parties to power. This increases the possibility that budget-hawkish Europe could take a modest turn toward fiscal stimulus. This would be most meaningful for the periphery, and we particularly liked Spain after the Catalan challenges. Year to date: EURO STOXX, 600 -3.5%; IBEX 35 -3.9%; MSCI ACWI, -2.8%.
TRADE Win, Lose or Draw: US, China, or Investors
Markets are underappreciating the prospects of a long, drawn-out trade war, but the implications still represent a relatively modest headwind to global growth. Trade disputes are unlikely to be resolved before May or early June. In the meantime, companies with high revenue from China like industrials and tech are likely to suffer, and companies with low exposure like real estate and media offer safer opportunities.. The US’ latest round of proposed tariffs would bring the total to $153 billion of imports from China, should the latest threat of $100 billion come to fruition. This is 1.2% of China’s GDP. If China were to retaliate with proportional reciprocity, the resulting $153 billion in tariffs would encompass nearly all of China’s imports from the US. Even under this all-in scenario, the maximum damage inflicted is only 0.8% of US GDP. With no more dry powder for tariffs, the Chinese government may resort to unconventional trade warfare. For example, China can devalue the renminbi in an attempt to stimulate exports to offset the loss from US tariffs. Trade tensions are likely to continue until the US demand from China for stronger intellectual property protection finds some resolution. US officials are concerned that China has been taking trade practices from US firms that operate in Chinese markets as a cost of doing business. Former heads of US intelligence agencies Dennis Blair and Keith Alexander estimated that Chinese theft of US intellectual property is $600 billion per year, running the gamut from computer games to advanced fighter plane technology. This tech transfer has allowed China to leapfrog to the forefront of industries like data and artificial intelligence. Adding to the
Action: Long
complexity, securing US intellectual property in high tech is not just an economic concern, but one of national security. Pentagon strategists are discussing the future of autonomous drones and robotics in warfare, and some consider data to be the most valuable resource since oil. Given the stakes, the US is unlikely to rescind demands or tariffs soon. The Chinese also do not appear interested in backing down. Chinese exports to the US contributed only 6% to China’s GDP growth last year. The calculus is not immediately clear why the Chinese government would give up their current practices for cheaper soybeans and automobiles. Our assessment of each country’s position makes us believe that the market underappreciates the probability of a long, drawn-out trade war. The Chinese will require a concession from the US in return for agreeing to the intellectual property terms, possibly in other strategic arenas such as North Korea or the South China Sea. As such, we believe the trade disputes are unlikely to be resolved before progress is made on those issues, likely in May or early June. For investors looking to position portfolios for a possible protracted US-China trade war, Morgan Stanley & Co.’s proprietary global exposure database shows that among US companies, industrials and information technology have the largest revenue exposure to China at 16% and 14% of revenues, respectively. The industries with the most revenue exposure to China are semiconductors, 39%; transportation, 29%; consumer services, 13%; and energy, 11%. Industries with the least revenue exposure to China—and possible safer areas for investors if tariffs
Please refer to important information, disclosures and qualifications at the end of this material.
3
GEO-MARKETS
APRIL 11, 2018
are implemented—are US real estate, media, insurance and professional services companies.
$300 billion in goods are modest compared to the size of the global economy and strong growth rates. As a defensive tactic, investors can position in domestic industries.
Conclusion: The trade conflict with China is likely to be prolonged, but the economic implications of reciprocal tariffs on
Assets: Equities and Debt
MIDDLE EAST Contrarian View on Lebanon Despite Escalation in Syria
Institutional investors have taken notice of Lebanon as a means of shorting the quagmire in Syria and the second-order effects on its neighbors. The regional conflict has taken a toll on all of the surrounding countries including Jordan and Turkey, but Lebanon has gained investor attention given some weak underlying economic fundamentals and recent political intrigue. While we do not necessarily share such a dim view of Lebanon, the recent gas attacks outside Damascus and airstrike against Homs does show that contagion risks remain elevated. Lebanon is among the more complicated political landscapes in the region—a ruling combination of Muslims from different sects and Christians. Arguably, the most important political player is Hezbollah, which is known for carrying out terrorist attacks as well as supplying basic services to those in the country’s south. With a challenging political environment, and with interest payments as a percent of expenses that is the highest in the world (36% according the World Bank), a small spark could drive the country into financial trouble. Risks grew after Lebanon Prime Minister Saad Hariri reportedly fled to Saudi Arabia late last year after learning that his life was in danger. An alternative explanation for Hariri’s trip is that Saudi Arabia wanted to send a message to Iran to limit meddling or support for Hezbollah. In either case, the clear winner was
Assets: Indian Equities
Hezbollah leader Hassan Nasrallah, whose popularity seemed to spike after the incident with Hariri. While the US moved to support the current administration of President Michel Aoun, the $110 million offered in military aid to support infrastructure development was well below the $6 billion requested over 10 years. The most recent incidents, the chemical weapons attack presumably launched by embattled Syrian President Bashar alAssad, was countered with a foreign airstrike against the military facility at Homs where Russian troops were co-located. The US has denied involvement. No one has claimed responsibility for the strike. Lebanon faces increasing pressure, but the country does not look primed to disintegrate into civil war. Fatigue over domestic and regional battles helps Lebanon get through this current period while avoiding the worst case scenario of default. Since the recent low on Nov. 20, 2017, the BLOM Stock Index has outperformed MSCI Emerging Markets by 6.2 percentage points. Conclusion: Remain cautious on Middle East investing, where higher oil prices have been the one bright spot. Countries like Lebanon and Jordan may avoid the worst-case scenario from Syrian fallout, but more time is needed to tell.
INDIA Bank Fraud Case Unlikely Systematic
India was one of the top-performing equity markets in 2017, but it’s off to a slow start this year. Lofty expectations for growth and reform collided with some difficult news around banks and markets. A rolling crisis has weighed on India’s banking sector for the past two months as revelations surrounding fraud in the financial system dominated headlines and sparked sell-offs in the affected banks. Concerns over the financial sector’s ability to support the rapidly growing economy are reasonable, but we do not believe it is time to abandon Indian equities. In fact, this case could lead to beneficial reform.
Action: Neutral
Action: Long
The catalyst for the crisis was revelation of India’s largest-ever instance of bank fraud. The $2 billion scam involves the secondlargest state-run bank, a high-profile jeweler and several rogue bank employees. Ultimately, the system should be able to absorb this episode of fraud; the $2 billion price tag is roughly equivalent to three days of interest for the country’s banking sector. The more pressing question is how future fraud will be prevented. Though it will be arduous to achieve lasting reform, we believe the long time
Please refer to important information, disclosures and qualifications at the end of this material.
4
GEO-MARKETS
horizon investors should have with Indian equities allows for interim fluctuations and that this case should help pave the way for constructive reform. Drama aside, the episode has highlighted some notable deficiencies in the banking system that need to be addressed. For one, rogue employees at the bank appear to have taken advantage of outdated systems that were not fully integrated with the SWIFT global financial network. As India continues to grow at a rapid clip and become more integrated into global trade and commerce, it is essential to invest in technology to help combat security lapses. Maintaining systems and procedures that are updated with trading partners’ is essential and we would be most interested in the firms willing to make such investments. Second, audit quality and internal controls need to improve. Public-sector banks, such as the one involved with the $2 billion
APRIL 11, 2018
fraud case, on average spend more on auditing than their privatesector peers. Even so, public-sector banks report higher instances of fraud, reflecting a deficiency in audit quality and internal governance. Reform in these areas will be needed to reduce these instances and inspire greater confidence in the banking system. This could also help to justify further opening and privatization of the financial system in the long run. Conclusion: As it stands, this fraud case mostly represents stockspecific risk and should not derail the long-term outlook on Indian equities. Monitor financial sector exposure but do not abandon the overall story. Matthew Brookman contributed to this article.
Please refer to important information, disclosures and qualifications at the end of this material.
5
GEO-MARKETS
APRIL 11, 2018
Regional Cross-Sector Returns Sector Cons. Disc. Cons. Stap. Energy Financials Healthcare Industrials Materials Tech Telecom Utilities
Pacific Two Week Year to Date -1.9% -0.5% 2.7 4.1 -1.3 -7.2 -3.3 -4.6 -2.3 6.8 -2.7 -3.0 -3.5 -7.7 -5.7 -1.3 -4.5 -2.4 -0.2 1.8
Latin America Two Week Year to Date 1.6% -7.3% 0.6 0.7 -1.4 22.0 2.5 16.1 -1.6 -9.7 0.8 2.0 3.6 9.4 -9.1 -15.0 2.6 11.3 -0.3 4.4
Europe Two Week Year to Date 2.3% 0.1% 4.4 -5.5 5.6 -0.4 0.2 -3.5 2.9 -5.1 0.5 -4.1 0.5 -4.6 -0.9 -1.4 3.7 -5.9 4.1 -1.5
US Year to Date 4.1% -7.0 -4.6 -0.3 -1.0 -1.1 -4.2 3.7 -7.4 -3.6
Two Week 0.6% 2.9 2.2 0.5 0.3 1.3 1.4 -1.0 2.6 2.2
Two Week 0.4% 3.1 3.2 -0.5 0.6 0.2 -0.2 -1.4 1.1 2.2
World Year to Date 2.8% -4.8 -3.7 -1.9 -1.1 -2.0 -4.5 3.1 -5.5 -2.0
Source: Morgan Stanley Wealth Management, Bloomberg as of April 5, 2018
Best Performers
Worst Performers
Last Two Weeks 5.98% Oman 3.26 Egypt Greece 3.11 Mongolia 2.63 Pakistan 2.55 Turkey 2.27 2.26 Malta 2.05 Jordan Croatia 1.90 China 1.79
Last Two Weeks Italy -8.50% Japan -7.00 Spain -6.44 Portugal -6.15 Norway -5.60 Russia -4.77 Australia -4.63 Germany -4.27 France -4.05 Qatar -4.00
Last 12 Months 82.2% Jamaica Latvia 41.9 35.1 Slovakia 31.0 Hungary 26.1 Kazakhstan Malta 23.8 New Zealand 15.0 Argentina 12.7 Estonia 10.8 9.4 Botswana
Last 12 Months Greece -26.2% Nigeria -25.60 Saudi Arabia -25.41 Spain -25.05 Italy -24.59 Germany -20.09 China -19.73 Laos -18.62 Sweden -17.83 Japan -17.56
Green/red indicates a country is in the top/bottom 10 of world equity index total returns in local currencies for both the last two weeks and the last 12 months. Source: Morgan Stanley Wealth Management as of April 5, 2018
Top 10/Bottom 10 Global Equity-Macro Correlations 10-Year US Treasury
US Dollar
Oil
Colombia
0.79
Switzerland
0.62
UAE
United States
0.60
France
0.60
Serbia
Peru
0.55
Belgium
0.54
Argentina
0.42
Britain
0.54
Gold 0.68
Peru
0.51
0.58
Laos
Russia
0.56
Vietnam
0.36
Malta
0.55
Nigeria
0.34
0.36
Zambia
0.39
Spain
0.51
Brazil
0.44
Namibia
0.34
Austria
0.37
Netherlands
0.51
Peru
0.43
Mongolia
0.33
Mexico
0.30
Germany
0.50
Poland
0.42
Indonesia
0.31
Brazil
0.28
Finland
0.45
Kazakhstan
0.39
Jamaica
0.31
Canada
0.28
Portugal
0.44
Turkey
0.37
South Africa
0.31
Romania
0.26
Italy
0.42
Slovakia
0.34
Malta
0.29
Saudi Arabia
-0.23
Peru
-0.19
Croatia
-0.16
Chile
-0.23
Japan
-0.24
Slovenia
-0.19
Taiwan
-0.21
Italy
-0.26
Lebanon
-0.26
Slovakia
-0.21
India
-0.22
Denmark
Taiwan
-0.29
Namibia
-0.21
Japan
Nigeria
-0.30
Vietnam
-0.23
Vietnam
Egypt
-0.30
Malta
-0.24
Egypt
-0.27
Britain
-0.30
-0.27 -0.35
Netherlands
-0.36
-0.38
Germany
-0.37
Estonia
-0.36
Egypt
-0.25
Slovenia
-0.40
Belgium
Laos
-0.39
Kenya
-0.28
Laos
-0.44
France
-0.44
Botswana
-0.45
Spain
-0.44
Bahrain Phillipines
-0.41 -0.45
Mongolia -0.44 Jamaica -0.47
Phillipines -0.52
-0.39
Switzerland -0.49
Note: Calculated using correlation of 30-day rolling returns on 82 global equity indices. Source: Morgan Stanley Wealth Management, Bloomberg as of April 5, 2018 Please refer to important information, disclosures and qualifications at the end of this material.
6
GEO-MARKETS
APRIL 11, 2018
Probability of +5%/-5% One-Month Change in Global Asset Prices 60% 42
40 20
26 25 22 19 18 18 18 17 17 16 15 15 14 14 14 13 13 13 12 12 12 11 11 10 10 10 9
9
8
8
7
7
7
7
7
7
6
6
6
6
6
6
5
5
5
3
2
2
0
0
0
0
Note: Probability of a +5%/-5% move calculated using implied probability on ETF options by calculating the standard deviation on month expiration call contracts and using the prior day close for the mean. Source: Morgan Stanley Wealth Management as of April 5, 2018
Global Hotspots Additional Risks: Cybersecurity Space Climate Change Proliferation Global Health
Germany: Shifting Political Consensus US: Polarized Politics
Canada/Mexico /US: NAFTA Renegotiation
Mediterranean/ EU: Refugees Ukraine: Civil Violence
UK: Brexit; Scottish Referendum
Iran: Nuclear Agreement
Spain: Catalonia
Civil Violence: Algeria/Mali Cent. African Rep. Congo Nigeria Somalia Sudan
No. Central America: Criminality
Af/Pak: Extremism
Japan: Military Policy Shift
China: NPC Aftermath Philippines: Counter Narcotics
Libya: Warlords Yemen: Civil War Brazil: Presidential Approval; Lula Return
Venezuela: Collapsing Regime
North Korea: Nuclear Crisis
Turkey: EU Relations PostCrackdown
Austria/Bulgaria/ Romania/Hungary: Nationalist Governance Mexico: 2018 Presidential Election
Russia: External Interests
Argentina: Economic Modernization; Kirchner Return
India: Reforms and Election
Saudi Arabia: Succession Syria: Civil War; ISIS
Iraq: ISIS; Kurdish Separatism
South China Sea: Island Building Thailand: Military Regime
Source: Morgan Stanley Wealth Management.
Media and Internet Search Scores on Political Violence
Source: Morgan Stanley Wealth Management, GDELT (Google Database of Events, Language, and Tone). Indicates number of global news articles about material conflict published in last two weeks, as a percent of those published in last 12 months. Top 15 investable markets as of April 5, 2018 Please refer to important information, disclosures and qualifications at the end of this material.
7
GEO-MARKETS
APRIL 11, 2018
Definitions BLOM Stock Index (BSI) is a capitalization-weighted index of all the listed companies on the Beirut Stock Exchange. The index was developed by
Blominvest Bank with a base level of 1000 as of January 22nd, 1996. HERMES FINANCIAL INDEX This index tracks the movements of the most-active stocks traded on the Cairo and Alexandria Stock Exchanges. The index
is capitalization-weighted, and is a total return index that includes dividend reinvestment. IBEX 35 is the official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous market. It is
calculated, supervised and published by the Sociedad de Bolsas. The equities use free float shares in the index calculation. S&P/BMV IPC This index measures the performance of the largest and most-liquid stocks on the Bolsa Mexicana de Valores. The index is broad and representative. The constituents are weighted by modified market cap subject to diversification requirements. TADAWUL ALL SHARE INDEX This index is disseminated by the Saudi Stock Market. Volume in the index excludes small trades with a value of less than 15,000 Saudi riyals, or about $4,000. IBEX 35 is the official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous market. It is
calculated, supervised and published by the Sociedad de Bolsas. The equities use free float shares in the index calculation For other index, indicator and survey definitions referenced in this report please visit the following: http://www.morganstanleyfa.com/public/projectfiles/id.pdf
Risk Considerations 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 firm’s 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. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. Companies paying dividends can reduce or cut payouts at any time. 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. Please refer to important information, disclosures and qualifications at the end of this material.
8
GEO-MARKETS
APRIL 11, 2018
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. Credit ratings are subject to change. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. 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. 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. 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, and 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 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. 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
Please refer to important information, disclosures and qualifications at the end of this material.
9
GEO-MARKETS
APRIL 11, 2018
Code of 1986 as amended in providing this material except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. 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, 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); Switzerland: Morgan Stanley (Switzerland) AG regulated by the Swiss Financial Market Supervisory 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. © 2018 Morgan Stanley Smith Barney LLC. Member SIPC.
Please refer to important information, disclosures and qualifications at the end of this material.
10