GLOBAL INVESTMENT COMMITTEE AUG.

5, 2019

The GIC Weekly

The GIC Weekly’s tables and

charts start on page 2.
LISA SHALETT
Lisa Shalett’s commentary
Chief Investment Officer
Morgan Stanley Wealth Management returns in the Aug. 12 issue.
Head of Wealth Management
Investment Resources

[email protected]
+1 212 296-0335

Upcoming Catalysts
Aug. 5 ISM Nonmanufacturing Survey
Aug. 6 US JOLTS Survey
Aug. 6 Japan Leading Index
Aug. 7 US consumer credit
Aug. 7 Japan trade balance
Aug. 8 US initial jobless claims
Aug. 8 US Wholesale Trade Report
Aug. 8 US wholesale inventories
Aug. 8 Japan second quarter GDP
Aug. 9 US Producer Price Index

Please refer to important information, disclosures and qualifications at the end of this material.
THE GIC WEEKLY

Chart of the Week: Third Quarter Guidance Points to Earnings Deterioration

One of the assumptions underlying the Global Investment S&P 500 Companies With Downward Revision
Committee’s cautious outlook is that stocks are vulnerable to for Next Quarter/Total Revisions
weakening fundamentals, in particular, peaking profit margins,
60%
rising costs and inventory pressures. In the second quarter 50
earnings reports, investors appear to be focusing on the companies
that beat greatly lowered expectations rather than declining levels 40
and growth rates of profits. History suggests that investors can only 30
ignore such fundamentals for so long. Currently, second quarter
S&P 500 profits are poised to shrink roughly 2.5% year over year. 20
More recently, 60% of the companies that have reported thus far 10
have issued negative guidance, thus reducing expectations for third
quarter (see chart). As earnings estimates fall, price/earnings ratios 0
expand, placing further pressure on the valuation case for stocks. '11 '12 '13 '14 '15 '16 '17 '18 '19
Source: Bloomberg as of July 31, 2019

Asset Class Performance and Heat Map (as of Aug. 2, 2019)

Correlation to
Asset Class Annualized Returns (%) Yield Valuation Volatility (%)
Global Equities
Current Current Avg.
Cash YTD 1-Yr. 2018 3-Yr.1 5-Yr.1 10-Yr.1 20-Yr.1 30 Days 20 Yrs.1 30 Days 20 Yrs.1
YTM YTM YTM2
90-Day US Treasury Bills 1.4 2.3 2.0 1.5 0.9 0.5 1.7 2.14 2.14 1.73 0.08 0.55 -0.05 -0.06
Current Current Avg.
Global Equities 2
Div. Yld. P/E P/E
US Large-Cap Growth 27.1 7.5 -0.9 17.6 14.7 15.9 5.3 0.98 22.3 20.5 9.9 17.0 0.89 0.89
US Large-Cap Value 17.2 5.0 -6.5 9.9 8.5 12.0 6.0 2.99 13.7 13.7 8.3 13.8 0.85 0.88
US Mid-Cap Growth 29.8 5.0 -7.9 12.8 10.3 15.0 7.1 0.59 23.5 26.2 10.5 22.6 0.88 0.81
US Mid-Cap Value 19.7 1.3 -11.4 9.7 8.8 14.0 9.3 2.73 14.0 14.3 10.1 15.9 0.77 0.88
US Small-Cap Growth 26.7 1.8 -6.6 15.0 11.5 15.3 9.8 0.54 27.7 24.0 11.7 21.3 0.76 0.83
US Small-Cap Value 15.3 -8.6 -13.3 7.6 7.1 12.8 9.3 2.76 15.5 17.3 13.5 17.1 0.65 0.85
Europe Equity 15.5 -3.0 -14.3 7.6 2.3 6.4 4.5 3.65 13.4 13.8 9.7 17.9 0.69 0.95
Japan Equity 8.5 -4.4 -12.6 6.2 4.7 5.7 2.0 2.52 12.6 18.5 11.6 16.1 0.19 0.70
Asia Pacific ex Japan Equity 18.6 5.1 -10.2 9.3 3.3 7.8 8.2 3.70 15.3 14.5 10.1 19.3 0.60 0.88
Emerging Markets 10.7 -3.2 -14.2 8.8 2.2 4.9 7.7 2.86 12.2 11.1 10.2 21.6 0.67 0.87
Current Current Avg.
Global Fixed Income
YTM Spread Spread2
Short-Term Fixed Income 2.6 4.4 1.6 1.6 1.5 1.5 3.2 1.92 15.0 31.0 1.5 1.4 -0.05 -0.15
US Fixed Income 6.1 9.0 0.0 2.2 3.0 3.8 5.0 2.39 44.0 54.0 3.4 3.4 -0.20 -0.04
International Fixed Income 4.4 5.6 -1.9 0.8 0.4 2.0 4.0 0.77 44.0 49.0 4.4 7.9 -0.18 0.32
Inflation-Protected Securities 7.2 6.3 -4.2 2.9 1.4 3.5 5.7 - - - 5.0 7.7 0.06 0.45
High Yield 9.9 6.4 -4.1 6.1 4.4 8.5 8.1 6.30 445.0 499.0 1.7 9.5 0.61 0.75
Emerging Markets Fixed. Inc. 9.6 7.2 -6.2 4.4 -0.1 3.0 7.7 5.49 284.0 327.5 6.0 11.5 0.36 0.65
Current
Alternative Investments
Div. Yld.
Real Estate/REITs 16.2 8.8 -5.5 4.7 5.9 10.0 8.9 3.95 - - 7.8 17.8 0.44 0.80
MLP/Energy Infrastructure3 18.4 -8.0 -12.4 -0.7 -6.6 6.9 - 7.51 - - 11.3 17.3 0.50 0.46
Commodities ex Prec. Metals 3.0 -10.2 -12.5 -0.2 -9.7 -5.3 0.5 - - - 16.1 16.7 0.35 0.47
Precious Metals 9.3 15.4 -4.6 -2.1 -0.7 2.7 7.5 - - - 10.9 19.0 0.09 0.19
Hedged Strategies4 4.1 -1.9 -6.7 1.6 0.1 1.3 - - - - 1.3 5.6 0.63 0.66
Managed Futures5 2.4 0.6 -3.2 -0.4 0.4 -1.1 - - - - 4.3 7.5 0.42 0.14
S&P 500 22.1 5.8 -4.4 13.4 11.3 14.0 6.1 1.89 16.7 15.6 8.74 14.5 0.90 0.95
Russell 2000 18.0 -7.5 -11.0 10.4 8.5 12.5 8.0 1.46 25.9 20.3 13.05 19.4 0.65 0.82
MSCI EAFE 14.1 -2.4 -13.4 7.4 2.9 6.3 4.2 3.37 13.4 14.5 7.61 16.3 0.72 0.96
MSCI AC World 18.4 2.0 -8.9 10.8 7.1 9.8 5.4 2.49 15.0 15.1 7.05 15.2 1.00 1.00
Note: Performance values calculated using USD. 1. As of July 31, 2019. 2. 20-year average as of July
Cheap Low Low
31, 2019. 3. Volatility and Correlation: June 30, 2006 – Present. 4. Volatility and Correlation: Jan 31,
1998 – Present Hedged strategies consist of hedge funds and managed futures 5. Volatility and
Correlation: February 28, 1998 – Present. Cheap = Below -0.5 standard deviation; Moderate = Moderate High High
Between +0.5 standard deviation and -0.5 standard deviation; Expensive = Above +.5 std dev.
Standard deviation (volatility) is a measure of the dispersion of a set of data from its mean. Expensive
Source: Factset, Bloomberg, Morgan Stanley Wealth Management GIC.

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 2
THE GIC WEEKLY

Short-Term Stock and Bond Indicator

Current Week Last Week

Bonds More Stocks More

Attractive Attractive

Macro Policy Fundamentals Sentiment and Technicals

Growth Inflation Rates Liquidity Valuation & Market Earnings Sentiment Technicals
Current Neutral Neutral Very Positive Very Negative Neutral Neutral Very Negative Very Negative
Last Week Neutral Neutral Very Positive Neutral Very Positive Neutral Neutral Neutral

Indicator Category Reading

PMI (+) Risk Off
Durable Goods (+) Neutral
Growth
Retail Sales (+) Neutral
Manufacturing Hours Worked (+) Risk Off
Commodity Prices (+) Inflation Neutral
Yield Curve: 10-Yr./Three-Mo.(-) Risk On
Yield Curve: Two-Yr./Three-Mo.(-) Risk On
Rates
Pace of Interest Rate Hikes (-) Risk On
Term Premium Model (-) Risk Off
High Yield Spreads (-) Neutral
Investment Grade Spreads (-) Liquidity Neutral
Financial Conditions (-) Risk Off
S&P 500 Earnings/Baa Yield (+) Neutral
Large vs. Small Performance (-) Neutral
High- vs. Low-Quality Performance (-) Valuation & Market Behavior Neutral
High- vs. Low-Beta Performance (+) Neutral
S&P 500 Forward Price/Earnings Ratio (+) Neutral
Earnings Revisions Breadth (-) Earnings Neutral
Global Risk Demand (+) Risk Off
Implied Currency Volatility (-) Sentiment Risk Off
Five-Yr. Macro Sensitivity (-) Risk Off
% Stocks Above 200-Day Moving Avg. (+) Neutral
Cumulative Advance/Decline (+) Risk Off
S&P 500 Put/Call Ratio (-) Technicals Risk Off
Emerging Market Fund Flows (+) Neutral
Smart Money Flow Index (+) Neutral
Positive for Stocks Relative to Bonds
Note: + Indicates that a rise in the indicator is linked to a more favorable outlook for risk assets;
- indicates that a rise in the indicator is linked to a less favorable outlook for risk assets. Color coding is Neutral
set in accordance with the impact on risk assets.
Negative for Stocks Relative to Bonds

Note: Commodity prices are represented by the Bloomberg Commodity Index; pace of interest rate hikes by the Morgan Stanley Pace of Rate Hikes
Index; high yield spreads by the Bloomberg Barclays Aggregate US High Yield Index; investment grade spreads by the Bloomberg Barclays US
Aggregate Index; financial conditions by the Morgan Stanley Financial Conditions Index; global risk demand and implied currency volatility by the
Morgan Stanley Standardized Global Risk Demand Index. For more information on our Term Premium Model, please refer to our special report,
Using the Term Premium to Manage Portfolio Duration, March 2016.
Source: Morgan Stanley Wealth Management GIC, Morgan Stanley & Co., Haver Analytics, Bloomberg, FactSet as of Aug. 2, 2019

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 3
THE GIC WEEKLY

Fixed Income Insight: Individuals Take a Different View of the Fed’s Action
While stock investors have continued to bid up equity prices as the $4.5 Trillion
odds for Federal Reserve interest rate cuts have increased, the US Money Market Mutual Fund Assets
prospect of a lower federal funds rate has not deterred individual 4.0
investors from holding cash. To the contrary, data from the
Investment Company Institute shows individuals’ money market
3.5
mutual fund holdings at $3.3 trillion, the highest level since 2009 (see
chart). While some may suggest this level of cash is a contrary
indicator, we view the development as appropriate given the growing 3.0
risk of recession.
2.5

2.0

1.5
'03 '05 '07 '09 '11 '13 '15 '17 '19
Source: Bloomberg as of July 31, 2019

Government Debt Monitor Fixed Income Spread Dashboard

US Duration Yield-to- OAS OAS Range**
Yield (%) Total Return (%) (Yrs.) Worst (%) (bp) Rich Cheap
Treasury Benchm ark Current ΔWTD ΔYTD YTD MBS* 4.08 2.54 41 20 49
Investment Grade

3-Month 2.05 -0.06 -0.31 1.43 AAA 5.49 2.13 18 11 21

2-Year 1.71 -0.14 -0.78 2.60 AA 6.58 2.44 56 46 76

5-Year 1.66 -0.19 -0.85 5.33 A 7.76 2.77 87 68 122

10-Year 1.85 -0.23 -0.84 8.97 BBB 7.86 3.41 149 111 201
High Yield

30-Year 2.38 -0.21 -0.63 15.43 BB 3.84 4.39 245 187 365

2-Yr./10-Yr. Spread (bp) 13 -8.50 -6.30 - B 3.24 6.12 404 299 542

10-Yr. TIPS Breakeven (bp) 166 -12.19 -5.64 - CCC 3.28 10.31 834 512 997
Interest Rate Volatility† (bp) 66 7.21 -0.47 -
Unless stated, indexes utilized are FTSE Broad Investment Grade, FTSE High Yield, and FTSE Global Indexes
†Interest Rate Volatility measured by Merrill Lynch Option Volatility Estimate (MOVE) Index
*MBS distills high grade agency-rated mortgage-backed securities, a substantial subsector of investment grade indexes.
**OAS stands for Option-Adjusted Spread or spread over the Treasury. Grey diamond denotes current OAS; blue circle denotes two-year average.
Source: Bloomberg, The Yield Book® Software and Services. © 2019 FTSE Index LLC. All rights reserved. Data as of Aug. 2, 2019

Government Debt Monitor Benchmark Returns

Global
Yield (%) Total Return (%)* Total Returns (%)
10-Year Govt. Bond Current ΔWTD ΔYTD YTD Index YTD MTD 2018
France -0.24 -0.12 -0.95 9.65 Bloomberg Barclays US Aggregate 7.14 0.74 0.01
Germany -0.50 -0.12 -0.74 7.82 Bloomberg Barclays US MBS 4.90 0.30 0.99
Japan -0.17 -0.02 -0.17 3.17 Bloomberg Barclays US IG Corporate 11.34 0.79 -2.51
Spain 0.24 -0.13 -1.17 12.17 Bloomberg Barclays Municipal 6.39 0.43 1.28
UK 0.55 -0.14 -0.73 7.18 Bloomberg Barclays US High Yield 10.20 -0.32 -2.08
3-Month LIBOR 2.29 0.02 -0.52 - Bloomberg Barclays Global Aggregate 5.90 0.60 -1.20
US Tax Exem pt JPMorgan Emerging Market 11.94 0.06 -4.61
10-Year AAA Muni 1.45 -0.71 -0.87 6.39
10-Yr. Muni/UST Ratio 78.58 -3.46 -7.74 -
*Global total returns reflect Citigroup 7- to 10-year bond indexes and Muni total returns reflect Bloomberg Barclays Municipal Bond Index Total Return
Source: Bloomberg, Thomson Reuters Municipal Market Data (MMD) as of Aug. 2, 2019
34

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 4
THE GIC WEEKLY

S&P 500 Earnings Estimates MS & Co. S&P 500 Price Target: Midyear 2020
Consensus Price/Earnings Upside /
Morgan Stanley
Landscape Earnings Price Target
$186 Multiple Downside

Bull Case $182 16.7 3,000 2.3%

$166
$162 $162
Base Case $166 16.5 2,750 -6.2%

Bear Case $149 16.1 2,400 -18.1%

Current S&P 500 Price 2,932

2019E 2019E 2020E 2020E
Source: FactSet, Thomson Reuters, Morgan Stanley & Note: Price targets are based on estimated June 2021 earnings.
Co. Research as of Aug. 2, 2019 Source: Thomson Reuters, Morgan Stanley & Co. Research as of Aug. 2, 2019

S&P 500 Sector Performance and Valuation (as of Aug. 2, 2019)

Total Return Dividend 20-Year Avg. Forward 12-Mo.
Index Name Beta
WTD (%) YTD (%) 1-Year (%) Yield (%) Forward 12-Mo. PE P/E*
S&P 500 -3.07 18.32 5.83 1.89 15.6 16.7
Energy -3.34 7.12 -17.48 3.64 1.02 17.1 16.2
Materials -2.94 14.76 -0.23 2.06 0.96 13.9 17.4
Industrials -3.42 19.02 2.36 1.94 1.05 16.0 15.8
Consumer Discretionary -4.57 20.30 6.62 1.23 1.18 17.9 21.0
Consumer Staples -1.91 18.65 13.99 2.77 0.52 16.7 19.4
Health Care -1.07 6.28 3.81 1.71 0.88 16.4 14.9
Financials -3.82 17.13 0.86 2.05 0.93 12.6 11.9
Information Technology -4.35 28.46 10.57 1.40 1.37 20.0 19.2
Telecommunication Services -3.49 21.52 13.22 1.35 1.03 15.7 17.7
Utilities 0.31 15.61 18.11 3.16 0.21 14.3 18.8
Real Estate 2.09 23.78 18.58 2.96 0.47 15.4 19.6
*Dark blue/light blue/gray fill denotes whether current relative forward 12-month P/E is low/neutral/high relative to history.
Source: Morgan Stanley & Co. Research

Performance of Style and Cap Pairs (as of Aug. 2, 2019)

Small Cap vs. Large Cap Growth vs. Value
1.09 1.20
Small Cap
1.06
Outperforming ↑ 1.16
1.03
1.12 Growth
1.00
1.08 Outperforming ↑
0.97
Large Cap 1.04
0.94
Outperforming ↓
0.91 1.00 Value
0.96 Outperforming ↓
0.88
Aug '17 Dec '17 Apr '18 Aug '18 Dec '18 Apr '19 Aug '19 Aug '17 Dec '17 Apr '18 Aug '18 Dec '18 Apr '19 Aug '19

1.28
Cyclicals vs. Defensives Quality vs. Junk
1.06
Cyclicals
1.21 Quality
Outperforming ↑ 1.03
1.14 Outperforming ↑
1.07 1.00
1.00 0.97
Defensives
0.93 Junk
Outperforming ↓ 0.94
0.86 Outperforming ↓
0.79 0.91
0.72 0.88
Aug '17 Dec '17 Apr '18 Aug '18 Dec '18 Apr '19 Aug '19 Aug '17 Dec '17 Apr '18 Aug '18 Dec '18 Apr '19 Aug '19

Source: Morgan Stanley & Co. Small Cap is represented by the Russell 2000 Index; Large Cap represented by the Russell 1000 Index; Growth
represented by the Russell 1000 Growth Index; Value represented by the Russell 1000 Value Index.Cyclicals and Defensives, and Quality and Junk
are based on Morgan Stanley & Co. Research analysis.

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 5
THE GIC WEEKLY

Morgan Stanley & Co. Forecasts (as of Aug. 2, 2019)

10-Yr. Govt. Bond
Real GDP Growth (%) Headline Inflation (%) Currency Versus US Dollar
Yield (%)
2018 2019E 2020E Q4 ’19E Q2 ’20E 2018 2019E 2020E Q3 ’19E Q1 ’20E Q3 ’20E
Global 3.7 3.0 3.2 2.8 2.6 2.7
US 2.9 2.3 1.7 2.0 2.0 2.4 2.0 2.6
Euro Zone 1.9 1.1 1.0 1.8 1.2 1.2 1.13 1.18 1.23
UK 1.4 1.1 1.0 1.10 1.20 2.5 1.9 1.8 1.24 1.30 1.40
Japan 0.8 0.4 0.0 -0.08 -0.08 1.0 0.4 0.0 104 100 96
Emerging Markets 4.8 4.1 4.5 3.4 3.3 3.4
China 6.6 6.3 6.2 2.1 2.5 2.3 6.92 6.81 6.73
Source: Morgan Stanley & Co. Research
Macro Factor Heat Map (as of Aug. 2, 2019)
Economic Inflation / Sentiment
Rates Liquidity Valuation Earnings GIC Conclusion
Growth Deflation And Risk

China ↑
1 ↓
-1 ↑
0 ↑
-1 ↓
0
↓
0 ↓
-1
Soft Landing Better
1
than Expected
Negative Earning
Revision

Japan ↓
-1 ↓
-1 ↑
0 ↓
0 ↑0 ↑
1 ↑
0
Improving Profits and
1 Yen
Weaker
LIBOR-OIS Positive Earning
Narrowing Surprise

Political Stability
↓ ↓ ↑ ↑ ↑
↑ ↑
Brazil -1 1 1 0 0 -1 -1 Supports
1
Yield Curve Recovery
Steepening

Cyclical Headwinds
↓
↓
↑ ↓ ↓ ↓
↓ from China Trade
Europe 0 -1 0 0 1 0 0
Positive Earning Surprise Links Abating
& Revision

Risk Asset Risk Asset

Neutral
Positive Negative
Note: Text in a factor box denotes a color change; In Brazil, rates moved from risk asset neutral to risk asset positive as the yield curve steepened;
In Japan, liquidity moved from risk asset negative to risk asset neutral as LIBOR-OIS narrowed; In China, earnings moved from risk asset neutral to
risk asset negative on negative earnings revisions; In Japan, earnings moved from risk asset negative to risk asset neutral on positive earnings
surprise; In Europe, earnings moved from risk asset negative to risk asset neutral on positive earnings surprise & revision; for further explanation of
the chart, see page 8.
Source: Morgan Stanley Wealth Management GIC
Market Factor Data Points (for the week ending Aug. 2, 2019)
Positives Negatives
• US pending home sales rose 2.8% month over month in • July US nonfarm payrolls showed 164,000 new jobs
June, beating estimate of 0.5% vs. 165,000 projected; unemployment rate came in at
• June Euro Zone retail sales increased 2.6% year over 3.7% vs. 3.6% expected
year vs. 1.3% forecast • ISM Manufacturing Survey fell to 51.2 in July, missing
forecast of 52.0
Global Growth • US factory orders missed expectations in June at
0.6% month over month vs. 0.7% projected
• June US construction spending fell 1.3% month over
month vs. an expected 0.3% increase
• Euro Zone unemployment rate came in at 4.6% for
July, higher than June's 4.5%
• FOMC cut rates 25 basis points with upper bound at
2.25% and lower bound at 2.00%
Rates
• Central Bank of Brazil cut rates by 50 basis points to
6.00% as an injection of stimulus
• Euro Zone CPI disappointed in July at 0.9% year over
Inflation vs. 1.0% expected; June PPI at 0.7% year over year,
vs. forecast of 0.8%
•
July Conf. Board Consumer Confidence Index at 135.7,
Sentiments and Flows
beating forecast of 125.0
Source: Morgan Stanley Wealth Management GIC

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 6
THE GIC WEEKLY

Tactical Asset Allocation Reasoning

Relative Weight
Global Equities Within Equities

While the benchmark S&P 500 has recently made an all-time high, higher risk indexes like the small-cap Russell 2000
Index are well below the high made last year. Meanwhile, sector leadership has come from defensive and high-quality
US Underweight sectors, which is indicative of a market that is not as bullish as it may appear. We think this is due to both economic
and earnings growth, have slowed materially this year and are apt to weigh on US stocks in the third quarter. Our
year-end base case price S&P 500 target remains 2,750.

We maintain a positive bias for Japanese and European equity markets. The populist movements around the world
International Equities
Overweight are likely to drive more fiscal policy action in both regions, especially in Europe, which will allow the central banks to
(Developed Markets)
exit their extraordinary monetary policies and help valuations to rise.

After a difficult first 10 months of 2018, emerging market (EM) equities have performed relatively well, a positive sign
for future leadership. With our view for the US dollar to make a secular top this year, global nominal GDP growth
Emerging Markets Overweight
should accelerate faster than the US GDP, particularly as China’s fiscal stimulus takes hold. This should
disproportionately benefit international equities, led by EM equities.

Relative Weight
Global Fixed
Within Fixed
Income Income

We have recommended shorter-duration* (maturities) since March 2013 given the extremely low yields and potential
capital losses associated with rising interest rates from such low levels. We are also increasingly concerned that credit
US Investment Grade Underweight
spreads do not reflect the current earnings recession in the US nor the significant leverage now present on corporate
balance sheet. Therefore, we are underweight US investment grade credit.

Yields are even lower outside the US, leaving very little value in international fixed income, particularly as the global
International
Underweight economy begins to recover more broadly. While interest rates are likely to stay low, the offsetting diversification
Investment Grade
benefits do not warrant much, if any, position, in our view.

With the recent collapse in real yields from the Fed’s pivot, these securities offer little relative value in the context of
Inflation-Protected
Overweight our expectations for global growth to eventually accelerate, oil prices to trough and the US dollar to top. In short,
Securities
inflation risk is underpriced.

High yield bonds have rebounded with equity markets this year as the Fed pivoted to a more dovish policy. Since
February, high yield has underperformed investment grade as it starts to reflect earnings recession risk in the US.
High Yield Underweight
With a zero weighting in high yield since January 2018, we will revisit our allocation to high yield bonds during 2019 if
spreads widen appropriately.

Relative Weight
Alternative Within
Investments Alternative
Investments

Real estate investment trusts (REITs) have performed very well as global growth slowed and interest rates fell.
REITs Underweight However, REITs remain expensive and are vulnerable to credit risks. We will revisit our position as nominal GDP
troughs and/or valuations become more attractive.

Master limited partnerships (MLPs) rebounded this year. With oil prices recovering and a more favorable regulatory
Master Limited
environment, MLPs should provide a reliable and attractive yield relative to high yield. Global supply shortages from
Partnerships/Energy Overweight
Iranian sanctions should also be supportive for fracking activity and pipeline construction, both of which should lead to
Infrastructure*
an acceleration in dividend growth.

Hedged Strategies This asset category can provide uncorrelated exposure to traditional risk-asset markets. It tends to outperform when
(Hedge Funds and Equal Weight traditional asset categories are challenged by growth scares and/or interest rate volatility spikes. With the recent surge
Managed Futures) in volatility, these strategies could perform better on a relative basis.

*For more about the risks to Master Limited Partnerships (MLPs) and Duration, please see the Risk Considerations section beginning on
page 9 of this report.
Source: Morgan Stanley Wealth Management GlC as of Aug. 2, 2019

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 7
THE GIC WEEKLY

Macro Factor Heat Map Key (see page 6)

Economic Inflation /
Rates Liquidity Sentiment and Risk Valuation Earnings Conclusion
Growth Deflation

Dark Blue Economic growth Steep yield curve Low-moderate and Liquidity robust Shorter-term sentiment and Risk assets Earnings Confluence of factors
robust rising inflation in economy / technicals bearish attractively outlook supports a risk-on
banking valued robust investment approach
system

Light Blue Economic growth Normal yield curve Low-moderate and Liquidity Shorter-term sentiment and Risk assets Earnings Confluence of factors
neutral declining inflation; neutral in the technicals neutral neutral outlook supports a neutral
moderate inflation; economy / neutral investment approach
higher and falling banking
inflation system

Gray Economic growth Flat/inverted yield Very high/low Liquidity low in Shorter-term sentiment and Risk assets are Earnings Confluence of factors
anemic curve inflation/deflation; economy / technicals bullish richly valued outlook supports a risk-off
high and rising banking anemic investment approach
inflation system

Up Growth accelerating Yield curve Inflation rising Liquidity Sentiment becoming more Valuations rising Earnings
steepening increasing bullish outlook
improving

Down Growth declining Yield curve flattening Inflation falling Liquidity Sentiment becoming more Valuations falling Earnings
decreasing bearish outlook
worsening

Signal One to three years One to three years One to three years One to three One to three months Six months to Six months
Horizon years two years to two
years
Inputs • Industrial • 10-year vs. 2-year • Consumer Price • M1 growth • MS US Equity Risk Indicator • Forward • Earnings • Weighted average
production government bond Index • Private credit (US) price/earnings revisions z-score of all factors
• Unemployment yield spread growth • MS Combined Market ratio breadth
• Total return • Libor-OIS Timing Indicator (Europe) • Price/book • Earnings
• Earnings revisions spread • MS Global Risk Demand ratio surprise
• Home prices Index • Equity risk • Return
• OECD LEI (China • Relative strength index premium on equity
and Brazil) • Members above / below • High yield
• MS & Co. ARIA moving average. option-adjusted
(US) • Index above / below moving spread
average
• Consumer confidence

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 8
THE GIC WEEKLY

Index Definitions
For other index, indicator and survey definitions referenced in this report please visit the following:
https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations
MLPs
Master Limited Partnerships (MLPs) are limited partnerships or limited liability companies that are taxed as partnerships and whose interests (limited
partnership units or limited liability company units) are traded on securities exchanges like shares of common stock. Currently, most MLPs operate in
the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally applicable to companies in the
energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk.

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. MLP funds accrue deferred income taxes for future tax
liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as
capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund’s after-tax performance
could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Duration
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. Generally, if interest rates rise, bond prices
fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing
interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as
compared to the price of a short-term bond.
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.
Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment.
Alternative investments are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period
of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of loss.
Alternative Investments typically have higher fees than traditional investments. Investors should carefully review and consider potential risks before
investing. Certain of these risks may include but are not limited to: Loss of all or a substantial portion of the investment due to leveraging, short-
selling, or other speculative practices; Lack of liquidity in that there may be no secondary market for a fund; 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 mutual funds; and Risks associated with the operations, personnel, and processes of the manager. Further, opinions regarding Alternative
Investments expressed herein may differ from the opinions expressed by Morgan Stanley Wealth Management and/or other businesses/affiliates of
Morgan Stanley Wealth Management.
Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the
performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements. Clients should carefully
consider the investment objectives, risks, charges, and expenses of a fund before investing.
Alternative investments involve complex tax structures, tax inefficient investing, and delays in distributing important tax information. Individual funds
have specific risks related to their investment programs that will vary from fund to fund. Clients should consult their own tax and legal advisors as
Morgan Stanley Wealth Management does not provide tax or legal advice.
Interests in alternative investment products are offered pursuant to the terms of the applicable offering memorandum, are distributed by Morgan
Stanley Smith Barney LLC and certain of its affiliates, and (1) are not FDIC-insured, (2) are not deposits or other obligations of Morgan Stanley or any
of its affiliates, (3) are not guaranteed by Morgan Stanley and its affiliates, and (4) involve investment risks, including possible loss of principal.
Morgan Stanley Smith Barney LLC is a registered broker-dealer, not a bank.

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 9
THE GIC WEEKLY

Managed futures investments are speculative, involve a high degree of risk, use significant leverage, have limited liquidity and/or may be generally
illiquid, may incur substantial charges, may subject investors to conflicts of interest, and are usually suitable only for the risk capital portion of an
investor’s portfolio. Before investing in any partnership and in order to make an informed decision, investors should read the applicable prospectus
and/or offering documents carefully for additional information, including charges, expenses, and risks. Managed futures investments are not intended
to replace equities or fixed income securities but rather may act as a complement to these asset categories in a diversified portfolio.

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.
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.
Ultrashort bond funds Ultra-short bond funds are mutual funds and exchange-traded funds that generally invest in fixed income securities with very
short maturities, typically less than one year. They are not money market funds. While money market funds attempt to maintain a stable net asset
value, an ultra-short bond fund’s net asset value will fluctuate, which may result in the loss of the principal amount invested. They are therefore
subject to the risks associated with debt securities such as credit and interest rate risk.
Ultrashort-term fixed income asset class is comprised of fixed income securities with high quality, very short maturities. They are therefore subject
to the risks associated with debt securities such as credit and interest rate risk
The majority of $25 and $1000 par preferred securities are “callable” meaning that the issuer may retire the securities at specific prices and dates
prior to maturity. Interest/dividend payments on certain preferred issues may be deferred by the issuer for periods of up to 5 to 10 years, depending
on the particular issue. The investor would still have income tax liability even though payments would not have been received. Price quoted is per
$25 or $1,000 share, unless otherwise specified. Current yield is calculated by multiplying the coupon by par value divided by the market price.
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.

The market value of convertible bonds and the underlying common stock(s) will fluctuate and after purchase may be worth more or less than
original cost. If sold prior to maturity, investors may receive more or less than their original purchase price or maturity value, depending on market
conditions. Callable bonds may be redeemed by the issuer prior to maturity. Additional call features may exist that could affect yield.

Some $25 or $1000 par preferred securities are QDI (Qualified Dividend Income) eligible. Information on QDI eligibility is obtained from third party
sources. The dividend income on QDI eligible preferreds qualifies for a reduced tax rate. Many traditional ‘dividend paying’ perpetual preferred
securities (traditional preferreds with no maturity date) are QDI eligible. In order to qualify for the preferential tax treatment all qualifying preferred
securities must be held by investors for a minimum period – 91 days during a 180 day window period, beginning 90 days before the ex-dividend date.
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. Yields and average lives are estimated
based on prepayment assumptions and are subject to change based on actual prepayment of the mortgages in the underlying pools. The level of
predictability of an MBS/CMO’s average life, and its market price, depends on the type of MBS/CMO class purchased and interest rate movements.
In general, as interest rates fall, prepayment speeds are likely to increase, thus shortening the MBS/CMO’s average life and likely causing its market
price to rise. Conversely, as interest rates rise, prepayment speeds are likely to decrease, thus lengthening average life and likely causing the
MBS/CMO’s market price to fall. Some MBS/CMOs may have “original issue discount” (OID). OID occurs if the MBS/CMO’s original issue price is

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THE GIC WEEKLY

below its stated redemption price at maturity, and results in “imputed interest” that must be reported annually for tax purposes, resulting in a tax
liability even though interest was not received. Investors are urged to consult their tax advisors for more information.
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.
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.
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.
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.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Credit ratings are subject to change.
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.
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.
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.
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.

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

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 11
THE GIC WEEKLY

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
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.
© 2019 Morgan Stanley Smith Barney LLC. Member SIPC.

Please refer to important information, disclosures and qualifications at the end of this material. Aug. 5, 2019 12