The Global Investment Committee (GIC), which meets monthly to review the economic and political environment and asset allocation models for Morgan Stanley Wealth Management clients, also discusses favored long-term trends that it believes offer worthy investment opportunities. Listed below are the GIC’s favored themes and rationale for investing in them. To learn more about investment opportunities that track these themes, please contact me.
Continue to pursue Value Opportunities Within Financials
The global economic recovery has shifted from asynchronous yet steady, to reflationary. Such a pick-up in inflation expectations has helped steepen yield curves globally and the potential for a pendulum swing on industry regulation and capital requirements could provide more leeway for lending growth and shareholder-friendly actions like share repurchase. We prefer US capital market leaders but would overweight banks globally. While US commercial real estate/ REITs are mature and unattractive at this point in the cycle, we see opportunities in insurance companies as well as global real estate related securities. Preferreds, bank loans and/or subordinated debt of some of the larger US financial institutions are still overweight.
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Japanese Equities to Ride “Abenomics”
Japan continues to represent an emerging growth story. The reason: the confluence of monetary and fiscal stimulus with political and structural reform. The GIC favors broad market exposure now that the yen is re-priced. We recommend splitting between active and currency-hedged passive exposures. READ MORE >
Consider Getting more Aggressive about Cash Management
Over the past year the short end of the yield curve has steepened materially as both the Fed’s actions and their forward guidance has driven rates over 1% inside a 2-year maturity. We think fixed income investors could exploit this opportunity while potentially reducing volatility and exposure to rising rates by shortening duration and rolling up the curve with 1 month and 3 month CDs and t-bills. READ MORE >
Opportunities in Emerging Market Equities
EM currencies have re-priced and may no longer be vulnerable to FED hikes. Global reflation, improvement in trade and the potential for real yields to decline from here could set up a multi-year bull market.
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Focus on Momentum Strategies which are now Cheap
We are overweight momentum exposure, or equities that have outperformed over the last 6-12 months, which are currently priced at a discount to market valuations for the first time in our 30-year data history. During previous periods when momentum has been attractively valued, the stocks have a record of outperforming. Driving these valuations are an unusually high exposure to value sectors, including Financials, Materials, and Industrials, which complement traditional high-growth companies. We believe this constituency may also benefit from our view of continuing global reflation. READ MORE >
Manage Risk of Rising Rates and Spread Widening: Use Credit Long/Short and Structured Credit Funds
The GIC believes interest rate normalization will most likely be a slow and measured affair, but will provide a meaningful headwind for investors using bonds for principal preservation. In particular, as rates rise, the GIC expects prices of longer-duration bonds to fall. Target zero or very low bond duration and minimal equity beta. Particularly attractive opportunities are focused on CMBS and CLO credit niches. Market neutral total return strategies should benefit from the current active security selection environment that the GIC envisions in 2016—delivering total return with bond-like volatility. Recommended correlation range: 0.30 to 0.50 to S&P 500; volatility range: < 8%. READ MORE >
Manage Broad Global Volatility: Consider Global Macro and Managed Futures
The GIC believes market volatility, which is at multi-decade lows, will normalize, potentially increasing volatility by as much as 30% over the next three-to-five years across asset classes. Global slowdown fears could lead to additional volatility across developed and emerging markets. Balanced growth investors should focus on adding to global macro and managed futures strategies to mitigate this volatility. These strategies should deliver uncorrelated returns with normalization in the rates, currency and commodities markets, our most opportunistic trends. Recommended correlation range: < 0.50 to S&P 500; volatility range: < 12%. READ MORE >
Focus on Private Credit to Capture the Illiquidity Premium
Private credit markets continue to be impacted by a deleveraging banking system, financial austerity and limited non-bank sources of capital. The current supply/demand imbalance in private lending provides a reasonably rich illiquidity premium and presents attractive risk-adjusted investment opportunities for patient capital. Also, relative value credit hedge fund managers can take advantage of movements across yield curves and credit spreads based on the present macro picture and supply/demand dynamics.
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International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.
Alternative investments 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.
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.
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.
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.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
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.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.
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.
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