INVESTMENT STRATEGY

Global Investment Committee | March 08, 2021

The GIC Weekly

Change in Rates or Rates of Change? Lisa Shalett
Chief Investment Officer
Head of the Global Investment Office
Better-than-expected news on the pandemic and vaccinations Morgan Stanley Wealth Management
triggered a rise in real interest rates, causing equity risk premiums to [email protected]
+1 212 296-0335
shrink and stocks to sell off—as did bonds. Based on the MS & Co.
year-end forecast of 1.70% for the 10-year US Treasury yield, much of
the repricing disruption may be behind us. However, markets will Upcoming Catalysts
soon recalibrate to a 12-month forward outlook that includes a March 08
sequential downshift in the drivers of the equity run-up. Specifically, US Wholesale Trade report
earnings revision breadth is peaking; economic news will soon lap the March 09
easiest comparisons of the recession; and policy accommodation is NFIB Small Business Optimism Index
China Consumer Price Index
also at its most extreme, with another $1 trillion package due by mid- China Producer Price Index
month. In 2022, the rate of change for many metrics will be negative.
The comparisons may prove especially daunting because of the March 10
US Consumer Price Index
severity of the crisis and the unprecedented level of stimulus. US Treasury budget report
Postrecession booms can sometimes lead to busts which are not Japan Producer Price Index
necessarily bear markets but rather a sideways grind. Consider March 11
reviewing portfolios to make sure they are well diversified and US JOLTS Survey
European Central Bank rate decision
balanced, neutralizing outsized positions on any one style, sector or US initial jobless claims
region. US continuing claims

After racing to all-time highs in January, equities have pulled back. The tech-heavy March 12
US Producer Price Index
Nasdaq Composite Index is barely positive for the year to date and the S&P 500 U. of M. Consumer Sentiment Index
Index is up only a little more than 2%.  The consensus explanation for the
retracement is the swift upward move in US Treasury yields. The benchmark 10-year
bond recently hit 1.60% intraday, up nearly 65 basis points on the year. The two-
year/10-year yield curve steepened to 141 basis points, the highest since December
2016. Not only did the nominal rate reach its highest point in a year, but the
adjustment came almost entirely from the real rate component. The real 10-year
yield had been stuck around -1% since August, a historical extreme; it’s still negative,
but has climbed 35 basis points to -0.65% (see The GIC Weekly, March 1). Rather
than reacting to inflation expectations, real rates tend to reflect shifting
expectations about growth and, in turn, monetary policy responses to that growth.
On one hand, a steepening yield curve and rising GDP forecasts are excellent news
for both jobs and corporate profits. However, the repricing in rates can also be seen
as a double-edged sword, turning good news into bad news as only Wall Street can

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 GIC WEEKLY

do. First, the increase in rates caused equity risk premiums to Macro indicators may not be the only variables with
collapse, challenging valuations for the longest-duration decelerating rates of improvements. According to Mike
secular growth stocks. Second, the volatility in bonds Wilson, MS & Co.’s chief investment officer and US equity
surpassed that of equities, which can be a sign of regime strategist, 2021 earnings revision breadth appears to have
change. As interest rates jumped, both stocks and bonds fell already peaked (see Chart of the Week). The consensus now
in price, rendering portfolio diversification ineffective. Third, discounts 27% year-over-year profit gains, a forecast in line
the shifting dynamics in the Treasury market began to press with ours and one that would put 2021 profits 7% above prior
up against Fed rhetoric and guidance that has continued to peaks. While economic growth should remain robust next
pin the first fed funds rate hike in late 2023/early 2024. The year, profits are apt to decline materially because of higher
market is now at odds with the Fed, placing the first rate hike input costs, wages and cost of capital. They could fall even
in early 2023 and the start of tapering of bond purchases more if possible corporate tax hikes kick in. 
next year. The benchmark 10-year yield is within 15 basis
points of  Morgan Stanley & Co’s. target of 1.70% in 2021’s The last hurdle will be the roll-off from peak policy
second half, and the 10-year inflation breakeven rate is near accommodation. Fed tapering, if it starts next year, could be a
2.2%, 30 basis points higher than the average of the last 25 market-roiling event. When it happened in 2013, the markets
years. Thus, in our view, the near-term risks associated with staged a “taper tantrum,” leading to a swift jump of 130 basis
changing rates may be close to resolution. points in the real interest rate and a 6% fall for the S&P 500.
Importantly, in 2013 the equity risk premium was an above-
Even if rates are close to a near-term peak and volatility average 550 basis points and now it’s just 320 basis points.
recedes, market worries may not be over. Despite an Also next year, the economy will face a fiscal cliff as it
outstanding outlook for economic improvement, we believe transitions from receiving what is likely to be nearly $6
that investors may soon need to contend with another trillion in direct payments for unemployment benefits, small
market nemesis—negative rates of change as the easy year- businesses, state aid and lower income households to
over-year comparisons roll off. Like the risks around rising receiving nothing.         
rates coming out of a recession, this is right out of the
playbook. However, given the extremes of this cycle, Bottom Line: Business-cycle transitions are especially tricky
comparisons may deteriorate swiftly and starkly. Of course, for investors as the economic outlook evolves and the policy
some of that is obvious and to be expected. Still, the markets responses to it are unclear. That drama has played out in the
may soon start to discount 2022 results, especially if they
US Treasury market through an upward repricing of real
follow the grinding sideways postrecession pattern as in the
yields, reflecting an improved growth outlook, combined
1982-1984 and 2001-2004 periods (see Charts in Focus).
with higher inflation expectations. This forced investors to
First, consider how we are modeling the evolution of rethink the cost of capital in the new business cycle. While
economic growth metrics. First and second quarter 2021 GDP that dynamic around changing rates is in the recession
forecasts have had upward revisions. MS & Co. has a first playbook, a complicating factor is the shape and pace of the
quarter tracking estimate at a seasonally adjusted annualized recovery. Fast and forceful recoveries, often fueled by strong
rate of 8.1%. Two other tracking estimates are even higher— stimulus, set up the potential for booms, and immediately
the New York Fed Nowcast is 8.7% and the Atlanta Fed beg the question of negative year-over-year comparisons. In
Nowcast is 10%. The second quarter should be even better as a world in which rate of change and direction of travel often
we lap last year’s March-May trough and inflation peaking at
matter as much as level, the issue of negative comparisons
close to 2.6% on the core Personal Consumption
bears watching as earnings revisions peak, economic
Expenditures Index. The latest round of fiscal stimulus seems
indicator comparisons become tougher and policy retracts
likely to pass by March 15, and should further sustain
household purchasing power against a backdrop of pent-up from crisis-level accommodation. Such activity doesn’t
demand and a more complete economic reopening in the typically mark the end of the cycle, but the stock market
second half enabled by herd immunity. In all, the 2021 response is usually a sideways grind until the outlook
economy should grow at an inflation-adjusted 6.5% as nearly becomes clearer. Watch for inflection points in leading
$1 trillion in excess household savings is released. But then economic indicators in the next nine to 12 months. Consider
we hit the proverbial wall as comparisons get tougher, with reviewing portfolios to make sure they are well diversified
2022 GDP growth rates falling to 2.5% by the year's fourth and balanced, neutralizing outsized positions on any one
quarter. Again this is not about levels, but the constant style, sector or region.
drumbeat of negative comparisons.

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THE GIC WEEKLY

Chart of the Week: Earnings Revision Breadth Appears to Be Peaking

With price/earnings multiples threatened by higher interest
rates, stock-price appreciation must come from
unanticipated—and not discounted—earnings growth. The
current consensus forecast for 2021 S&P 500 profits already
embeds our estimates of 27% year-over-year growth.
Further gains should be evident in rising earnings revisions.
Unfortunately, earnings revisions breadth looks like it’s
rolling over (see chart). This complicates the path for
further gains at the index level. Active stock-picking is
preferred. 

Source: FactSet, Morgan Stanley Research as of Feb. 26, 2021

Fixed Income Insight: Near-Term Inflation Expectations Rising the Fastest

Most of the market’s attention for the last few weeks has
been on real interest rates, which have finally become
unmoored. However, inflation expectations are shifting as
well. In a rare occurrence, inflation breakeven curves have
inverted, which means inflation estimates on a five-year
horizon are rising much faster than they are on the 30-year
horizon (see chart). For now, that supports the Fed’s
guidance that higher inflation will prove temporary. We
expect this debate to figure prominently in interest rate
volatility for the remainder of the year.
Source: Bloomberg as of March 3, 2021

Market Factor Data Points (for the week ending March 5, 2021)

Color coding shows how actual data compares with consensus estimates. Green implies better than expected, red implies worse than expected. Trend shows the
one period change between actual and prior reports.
Source: Morgan Stanley Wealth Management GIC

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Macro Factor Heat Map (as of March 5, 2021)

Note: Text in a factor box denotes a color; In Europe, Economic Growth went from neutral to risk off due to declining GDP numbers; Earnings went from neutral
to risk off due to declining earnings surprises; In China, Earnings went from risk off to neutral due to improved earnings surprises; In Japan, Economic Growth
went from neutral to risk on due to improving GDP numbers; In Brazil, Earnings went from neutral to risk off due to declining earnings estimate revisions; for
further explanation of the chart, see page 10.
Source: Morgan Stanley Wealth Management GIC

Charts in Focus: The Market Cycle May Have Peaked, So Look Beyond the S&P 500
Markets May Now Trade Sideways Value Stocks Are Inexpensive Relative to Growth

Note: All time series are indexed to 100. Source: Bloomberg as of March 3, 2021
Source: Strategas as of Feb. 25, 2021

Emerging Markets Look Cheap Versus Rest of World Commodities Are Undervalued to Equities

Source: Bloomberg as of March 3, 2021 Source: Absolute Strategy Research, Refinitiv Datastream as of March 2, 2021

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THE GIC WEEKLY

Short-Term Stock and Bond Indicator

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. Earnings revisions breadth is defined as the number of positive analyst revisions minus the number of negative analyst revisions divided by the total
number of revisions.
Source: Morgan Stanley Wealth Management GIC, Morgan Stanley & Co., Haver Analytics, Bloomberg, FactSet as of March 5, 2021

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THE GIC WEEKLY

Asset Class Performance (as of March 5, 2021)

Note: Performance values calculated using USD. 1. As of Jan. 29, 2021. 2. Forward P/E using Next 12-month earnings 3. 20-year average as of Jan. 29, 2021. 4.
Volatility and Correlation: June 30, 2006 – Present. 5. Volatility and Correlation: Jan 31, 1998 – Present Hedged strategies consist of hedge funds and managed
futures 6. Volatility and Correlation: February 28, 1998 – Present. Standard deviation (volatility) is a measure of the dispersion of a set of data from its mean.
Source: Factset, Bloomberg, Morgan Stanley Wealth Management GIC

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S&P 500 Earnings Estimates MS & Co. S&P 500 Price Target: Year-End 2021

Note: Price targets are based on estimated 2022 earnings.

Source: Refinitiv, S&P, MS & Co. Research as of March 5, 2021 Source: MS & Co. Research as of March 5, 2021

S&P 500 Sector Performance and Valuation (as of March 5, 2021)

Source: Morgan Stanley & Co. Research

Equity Market Relative Valuation (as of March 5, 2021)

Note: Dark blue, light blue and gray fill denotes whether the group is relatively attractive, neutral or unattractive to other groups under the same metric.
Source: Bloomberg

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Government Debt Monitor & Fixed Income Spread Dashboard

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. © 2021 FTSE Index LLC. All rights reserved. Data as of March 5, 2021

Government Debt Monitor & Benchmark Returns

*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 March 5, 2021

Morgan Stanley & Co. Forecasts (as of March 5, 2021)

Source: Morgan Stanley & Co. Research

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Tactical Asset Allocation Reasoning

Relative Weight
 Global Equities Within Equities
 

A V-shaped recovery is central to our thesis that a new business cycle and bull market have begun.
Risks remain around policy changes, fiscal stimulus and the COVID-19 vaccine, but we expect 2021
GDP growth in the 5%-to-6% range, which should improve profits among cyclical and small-/mid-cap
US Overweight companies. We prefer active stock-picking rather than holding the S&P 500 Index, which is overly
concentrated in large tech stocks. Those leaders are likely fully priced, facing tough year-over-year
comparisons and decelerating sequential momentum.

In Europe, prospects for fiscal stimulus and concrete moves toward pan-Europe fiscal integration are
International Equities game-changers. In Japan, economic recovery is gaining momentum, and we expect shareholder-
Market Weight
(Developed Markets) friendly and positive return-on-equity policies to persist. The weakening of the US dollar is a tailwind.

China was the first country to enter the COVID-19 crisis and appears poised to be the first out.
Resumption of economic activity during the second quarter should jump-start global growth,
especially given huge government stimulus programs. Ample liquidity from the Fed and a weakening
Emerging Markets Overweight 
dollar should catalyze investor interest. China stands to gain the most from US tariff rollbacks and
global trade dynamics should improve. Valuations are attractive and local central banks should be
able to maintain accommodation and stimulus. 
Relative Weight
Global Fixed Income  
Within Fixed Income
We have recommended shorter-duration* (maturities) since March 2018, given the extremely low
yields and potential capital losses associated with rising interest rates from such low levels, and had
been pairing that position with a large exposure to long-term US Treasuries to hedge what we
US Investment Grade Market Weight expected would be a modest correction in stocks. With long-term Treasury yields troughing for the
cycle, we recently removed that position and resumed a benchmark exposure to duration. Recent
dislocation of investment grade credit spreads and market illiquidity have created opportunities. Fed
programs aimed at backstopping this market give reason to be an active bond selector.

International Negative interest rates suggest that this is not a preferred asset class for US-dollar clients at this
Underweight time. Actively managed funds may provide very patient, risk-tolerant clients with income
Investment Grade opportunities in select corporate credits.

Inflation-Protection   The “sudden stop” recession has caused a severe pricing of real interest rates, pushing them negative
Underweight
Securities and near all-time lows. In the near term, upside appears limited.

High yield bonds remain at the epicenter of the dual risks from COVID-19 and the collapse in oil
prices from the failure of OPEC negotiations. In our view, some of the most extreme risks have been
High Yield  Overweight discounted, especially in light of unprecedented monetary and fiscal policy intervention aimed not
only at market liquidity but in bridging cash flow requirements. It’s time to ease in opportunistically,
using active managers.
Relative Weight Within
Alternative Investments  
Alternative Investments

Real estate investment trusts (REITs) were laggards in 2020 as the pandemic's impact on retail and
REITs Market Weight urban office space weighed heavily on the sector. With real interest rates still negative and inflation
expectations rising, we expect to be selective opportunistic investors in the sector this year.

The “sudden stop” global recession has driven commodities such as oil to multidecade lows. The rush
to the "safe haven” US dollar, which is near its multiyear high, has exacerbated these dynamics. While
we recognize the complexity of the geopolitical issues that surround oil, we believe that on a six-to-
Commodities Overweight
12-month basis the outlook for the global economy and overall demand will improve materially. Thus,
we suggest risk-oriented clients establish exposure to the broad diversified asset class through the
use of active managers. Pure passive exposure is not advised at this time.
The bear market associated with COVID-19 has driven volatility to historic extremes and led to wide
dispersion in price performance and stock-level idiosyncratic risk. These factors tend to create a
Hedged Strategies (Hedge
Overweight constructive environment for hedge fund managers who are good stock-pickers and can use leverage
Funds and Managed Futures)
and risk management techniques to amplify returns. We prefer very active and fundamental
strategies, especially equity long/short.

*For more about the risks to Duration, please see the Risk Considerations section beginning on page 11 of this report.
Source: Morgan Stanley Wealth Management GlC as of March 5, 2021

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THE GIC WEEKLY

Macro Factor Heat Map Key

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

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

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

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

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

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

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

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THE GIC WEEKLY

Disclosure Section
The Global Investment Committee (GIC) is a group of seasoned investment professionals from Morgan Stanley & Co. and Morgan Stanley
Wealth Management who meet regularly to discuss the global economy and markets. The committee determines the investment outlook that
guides our advice to clients. They continually monitor developing economic and market conditions, review tactical outlooks and recommend
asset allocation model weightings, as well as produce a suite of strategy, analysis, commentary, portfolio positioning suggestions and other
reports and broadcasts.
Index Definitions

For 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 appropriate 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 Wealth Management 11

THE GIC WEEKLY

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.

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 appropriate 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.

Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk
of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex
tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often
charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to
the investment manager.
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 appropriate 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

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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 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

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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 appropriate 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 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.
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