GIC Markets Library - scl.bz · GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK WEEKLY DIGEST . Chart of...

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GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK

GIC ChartBook – Markets Library

The GIC ChartBook Weekly Digest

Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.

GLOBAL INVESTMENT COMMITTEE GIC CHARTBOOK WEEKLY DIGEST

Weekly Summary (as of 2/5/2016)

Source: Bloomberg, Morgan Stanley Wealth Management GIC

Weekly Discussion Points Daily Positioning • The GIC has advocated moving a portion of one’s asset

allocation toward large-cap value • Utilities represent ~7% of the Russell 1000 Value Index

and have lower volatility, defensive characteristics and a 3.5% yield

• Within the Value cohort, we prefer Utilities given their defensive nature (particularly when paired with Energy and Financials, which are the two largest overweights within the value sector relative to the S&P – Utilities is third)

• We view Utilities’ defensive-oriented business models (MS & Co. Research estimates that 80% of utilities’ earnings come from regulated activities in the US with a relatively low level of political scrutiny) as favorable in the current volatile market environment

The GIC Weekly • It is human nature to want to avoid making the same

mistake twice and investors’ memories of 2008’s trauma loom large

• While global risks have risen around slowing global growth, China currency volatility, central bank policy efficacy and the economic, market and geopolitical ripple effects from low oil, we strongly doubt that Banks and US Financials in particular will again be the epicenter of the storm

• Recent sell-offs are extreme in relation to the credit market, earnings fundamentals, balance sheet exposure and capital adequacy, leaving valuations at highly attractive levels for the long-term investor

• Watch bank dividend and repurchase announcements and clarity around regulatory capital requirements

• Consider adding to US capital market and regional banks where valuations are well below historic and book value

Market Summary

Market/Asset Class Performance • The S&P 500 fell by 3.1% on the week as market volatility continued; US equity markets continue to digest less-than-stellar

economic data and earnings, a “new tech” sell-off, bank sector underperformance and uncertainty around Fed policy expectations

• The Morgan Stanley New Technology basket has sold off by 25.2% YTD as earnings have been mixed and the Fed’s rate hike in December has put pressure on high multiple stocks; meanwhile, bank shares have declined by 15.5% this year as the yield curve has compressed and contagion fears have started to emerge related to struggling European banks; that said, stocks are pricing in a far worse outcome than CDS spreads are, underscoring the idea that the sell-off may be nearing oversold conditions

• European shares (STOXX 600) continued to struggle, pulling back by 4.8% on the week as concerns over nonperforming loan exposure are hurting banks and a stronger euro and mixed Chinese macro data are weighing on exporters; earnings trends in Europe have continued to be lackluster (35% of companies have beaten estimates in 4Q so far; 31% have missed) and earnings revisions continue to be negative

• Japanese equities sold off by 4.4% last week led by banks in the wake of the BOJ’s recent decision to implement a negative interest rate policy; though earnings revisions for the region continue to look relatively stable

Macro Growth Indicators • Nonfarm payrolls for January came in at 151K (vs. 190K expected and 262K prior); December’s number was revised down

from 292K to 262K; encouragingly, manufacturing payrolls came in at 29K vs. -2K expected; average hourly earnings of 2.5% y/y exceeded expectations for 2.2%; the labor force participation rate ticked up to 62.7% from 62.6%, in-line with expectations

• ISM manufacturing PMI for January came in at 48.2 vs. estimated 48.4; this compares to December’s revised reading of 48.0; ISM new orders ticked up to 51.5 from 48.8 last month

• US durable goods orders for December were -5.0% m/m, up slightly from November’s -5.1%, but below estimates for -4.5% • Eurozone Markit manufacturing PMI of 52.3 was in line with expectations and last month’s reading; retail sales of 1.4% y/y

came in slightly below expectations of 1.5% Rates/Yield Curve/Central Bank Policy • 10-year rates in the US continued to rally, sending yields down to 1.84% as inflation expectations continued to decline;

investors are speculating that Japan’s decision to implement negative interest rate policy likely has dovish implications for the Fed’s pace of tightening

Sentiment, Risk Appetite, Technicals • The VIX Index rose to 23.4 on the week as equities sold off; financial conditions remain relatively tight Earnings • US earnings season is well underway with 63% of the S&P 500 having reported thus far; aggregate earnings surprise is 4.4%

(slightly worse than last quarter) and average sales surprise is -0.2% (also slightly worse than last quarter); in terms of breadth, 46% of companies have beaten on top line and 77% of companies have beaten on bottom line

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{title}:WeeklyDigest001:



Chart of the Week: Bank Stocks and Credit Disconnect Spell Opportunity

Source: Bloomberg, Morgan Stanley Wealth Management GIC . US Large-Cap Bank Stocks indexed to 100 on Jan 1, 2009.

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US Large-Cap Bank Stocks and Five-Year Senior CDS Spreads As of February 5, 2016

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2009 2010 2011 2012 2013 2014 2015 2016

US Large-Cap Bank Stocks (left axis) US Large-Cap Bank Five-Year Senior CDS Spreads (right axis, inverted, Bps)

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Asset Class Performance

Source: Bloomberg, FactSet, Morgan Stanley Wealth Management GIC

Americas As of 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year Market Cap & Style 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year Market Breadth Advances Declines UnchangedDJ Industrial Average 16,204.97 -211.61 -1.3% -1.5% -1.5% -6.8% -6.8% -7.1% Russell 1000 1,036.00 -20.87 -2.0% -3.1% -3.1% -8.3% -8.3% -8.0% AMEX 98 172 56S&P 500 1,880.05 -35.40 -1.8% -3.0% -3.0% -7.9% -7.9% -6.9% Russell 1000 Growth 907.07 -24.23 -2.6% -3.8% -3.8% -9.2% -9.2% -5.5% NASDAQ 399 2,039 163NASDAQ Composite 4,363.14 -146.42 -3.2% -5.4% -5.4% -12.8% -12.8% -7.3% Russell 1000 Value 891.52 -11.77 -1.3% -2.3% -2.3% -7.4% -7.4% -10.6% NYSE 372 1,547 41CBOE Market Volatility (VIX) 23.38 1.54 7.1% 15.7% 15.7% 28.4% 28.4% 38.8% S&P 500 1,880.05 -35.40 -1.8% -3.0% -3.0% -7.9% -7.9% -6.9%NYSE Composite 9,390.33 -143.97 -1.5% -2.5% -2.5% -7.3% -7.3% -11.5% S&P 500 Growth 1,055.57 -28.86 -2.7% -4.4% -4.4% -9.2% -9.2% -5.3% US LIBOR Rates 2/5/2016 1-Day (Net) 1-Day (% Chg)AMEX Composite 2,046.29 -29.25 -1.4% -1.9% -1.9% -4.7% -4.7% -15.3% S&P 500 Value 817.52 -8.32 -1.0% -1.7% -1.7% -6.5% -6.5% -8.8% 1-Month 0.429 0.00 0.3%S&P/TSX Composite 9,194.63 -112.16 -1.2% 0.6% 0.6% -2.0% -2.0% -22.1% Russell Mid Cap 1,446.45 -33.50 -2.3% -2.9% -2.9% -9.3% -9.3% -13.0% 3-Month 0.620 0.00 -0.1%Mexico IPC 2,351.88 -45.09 -1.9% -2.1% -2.1% -5.7% -5.7% -16.7% Russell Mid Cap Growth 655.26 -20.25 -3.0% -3.9% -3.9% -11.2% -11.2% -12.6% 6-Month 0.867 0.00 0.3%Brazil Bovespa 10,406.63 -86.31 -0.8% 3.0% 3.0% -5.1% -5.1% -42.1% Russell Mid Cap Value 1,462.57 -22.92 -1.5% -1.9% -1.9% -7.4% -7.4% -13.5% 9-Month - - -

Russell 2000 985.62 -29.17 -2.9% -4.8% -4.8% -13.2% -13.2% -17.3% 1-Year 1.136 0.01 0.6%Europe As of 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year Russell 2000 Growth 593.45 -23.42 -3.8% -5.9% -5.9% -16.1% -16.1% -18.0%FTSE 100 8,462.73 -141.79 -1.6% -2.1% -2.1% -7.9% -7.9% -16.1% Russell 2000 Value 1,238.33 -24.99 -2.0% -3.7% -3.7% -10.2% -10.2% -16.8% US Bank Rates 2/5/2016 1-Day (Net) 1-Day (% Chg)STOXX 50 3,207.35 -45.71 -1.4% -2.7% -2.7% -9.4% -9.4% -15.0% Russell 3000 1,099.56 -22.90 -2.0% -3.2% -3.2% -8.7% -8.7% -8.8% Discount Rate 1 - -France CAC 40 4,679.13 -55.56 -1.2% -2.2% -2.2% -7.0% -7.0% -10.3% Russell 3000 Growth 733.89 -20.25 -2.7% -4.0% -4.0% -9.7% -9.7% -6.5% Prime Rate 3.5 - -Germany DAX 10,343.93 -173.81 -1.7% -2.6% -2.6% -11.8% -11.8% -17.2% Russell 3000 Value 1,167.62 -16.04 -1.4% -2.4% -2.4% -7.6% -7.6% -11.1% Federal Funds 0.38 - -Spain IBEX 35 9,467.59 -14.14 -0.1% -0.8% -0.8% -8.1% -8.1% -18.6%Netherlands AEX 461.09 -6.88 -1.5% -1.3% -1.3% -3.8% -3.8% -8.8% S&P 500 Sectors 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year FX Rates As o 2/5/2016 1-Day (Net) 1-Day (% Chg)OMX Stockholm 30 156.91 -1.70 -1.1% -0.9% -0.9% -8.6% -8.6% -15.6% S&P 500 1,880.05 -35.40 -1.8% -3.0% -3.0% -7.9% -7.9% -6.9% US Dollar Spot Rate (DXY 97.03 0.56 0.6%Switzerland SMI 8,020.28 -20.91 -0.3% -1.5% -1.5% -10.0% -10.0% -10.7% Discretionary 556.82 -18.33 -3.2% -5.4% -5.4% -10.2% -10.2% -2.3% Euro/$ 1.12 -0.01 -0.5%

Energy 420.11 -8.72 -2.0% -3.3% -3.3% -6.2% -6.2% -26.5% British Pound/$ 1.45 -0.01 -0.6%Asia As of 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year Financials 282.15 -3.91 -1.4% -3.5% -3.5% -12.1% -12.1% -10.8% Swiss Franc/$ 1.01 0.00 0.2%Japan Nikkei 225 143.87 -2.04 -1.4% -0.7% -0.7% -8.8% -8.8% -1.9% Health Care 744.01 -14.86 -2.0% -3.2% -3.2% -10.6% -10.6% -7.1% Japanese Yen/$ 0.01 0.00 0.0%Hang Seng Hong Kong 2,475.95 12.98 0.5% -2.0% -2.0% -12.4% -12.4% -19.8% Industrials 435.80 -4.62 -1.0% -0.2% -0.2% -5.9% -5.9% -7.9% Australian Dollar/$ 0.71 -0.01 -1.9%China Shenzhen Composite 266.39 -3.38 -1.3% 3.7% 3.7% -25.1% -25.1% 9.7% Info Tech 649.34 -22.50 -3.3% -5.2% -5.2% -9.8% -9.8% -3.8% Canadian Dollar/$ 0.72 -0.01 -1.2%ASX All Ordinaries 3,556.63 -74.99 -2.1% -0.7% -0.7% -8.7% -8.7% -15.9% Materials 256.24 -2.71 -1.0% 4.8% 4.8% -6.3% -6.3% -16.7% Hong Kong Dollar/$ 0.13 0.00 0.0%India S&P BSE SENSEX 362.98 2.44 0.7% -0.9% -0.9% -7.9% -7.9% -21.3% Staples 508.98 -0.66 -0.1% -2.3% -2.3% -1.6% -1.6% 3.2% Singapore Dollar/$ 0.71 -0.01 -0.7%Korea KOSPI 1.59 -0.02 -1.4% 0.9% 0.9% -4.5% -4.5% -10.5% Telecom 161.38 1.22 0.8% 2.1% 2.1% 9.0% 9.0% 8.5% Chinese Renminbi/$ 0.15 0.00 -0.1%FTSE Bursa Malaysia KLCI 399.78 -4.32 -1.1% -0.6% -0.6% 1.7% 1.7% -18.6% Utilities 236.59 0.72 0.3% 2.6% 2.6% 7.6% 7.6% -0.4% Indian Rupee/$ 0.01 0.00 -0.5%

Mexican Peso/$ 0.05 0.00 -0.9%Other As of 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year MSCI Indices 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year Russian Ruble/$ 0.01 0.00 -0.2%DJ Equity All REIT 305.21 -6.84 -2.2% -2.4% -2.4% -5.9% -5.9% -13.3% MSCI EAFE 1,566.75 -17.51 -1.1% -1.5% -1.5% -8.6% -8.6% -11.2% Brazilian Real/$ 0.26 0.00 -0.4%CRB Index 385.94 -0.77 -0.2% 0.7% 0.7% 3.0% 3.0% -9.4% MSCI EM 739.61 0.06 0.0% -0.4% -0.4% -6.8% -6.8% -22.6%DJ UBS Commodity 75.60 -0.55 -0.7% -2.1% -2.1% -3.8% -3.8% -26.2% MSCI WORLD 1,523.87 -24.99 -1.6% -2.4% -2.4% -8.2% -8.2% -9.5%DJ UBS Precious Metals 317.74 -0.37 -0.1% 3.7% 3.7% 8.7% 8.7% -10.4% MSCI ACWI 366.57 -5.42 -1.5% -2.2% -2.2% -8.1% -8.1% -10.9%DJ UBS Ex Precious Metals 84.50 -0.71 -0.8% -3.2% -3.2% -6.1% -6.1% -29.0% MSCI ACWI xUSA 223.13 -1.99 -0.9% -1.1% -1.1% -7.8% -7.8% -14.5%HFRI Fund of Funds 5,501.33 - - -2.9% - -2.9% -2.9% -3.2% MSCI USA 1,784.73 -35.72 -2.0% -3.1% -3.1% -8.3% -8.3% -7.6%BarclayHedge BTop50 9,529.84 - - - - 0.0% 0.0% -4.8% MSCI BRIC 195.75 -0.30 -0.2% -1.5% -1.5% -11.3% -11.3% -25.5%Alerian MLP Index 240.20 -7.54 -3.0% -4.7% -4.7% -15.2% -15.2% -43.4% MSCI EUROPE 122.41 -1.66 -1.3% -2.1% -2.1% -8.4% -8.4% -13.1%

MSCI PACIFIC 2,100.16 -26.42 -1.2% -0.9% -0.9% -9.2% -9.2% -8.1%Commodities As of 2/5/2016 1-Day 1-Day WTD MTD QTD YTD 1-Year MSCI PACIFIC x JAPAN 1,025.38 -10.88 -1.0% -0.6% -0.6% -9.4% -9.4% -18.2%Gold - London AM Fixing $1,158.50 12.25 1.1% 4.1% 4.1% 9.1% 9.1% -8.3% MSCI JAPAN 7.09 -0.11 -1.5% -1.1% -1.1% -8.9% -8.9% -2.3%Gold - London PM Fixing $1,150.35 -6.00 -0.5% 3.5% 3.5% 8.5% 8.5% -8.7% MSCI BRAZIL 982.59 -17.99 -1.8% 2.6% 2.6% -4.9% -4.9% -41.9%Gold Spot $1,173.82 18.22 1.6% 5.0% 5.0% 10.6% 10.6% -7.2% MSCI RUSSIA 388.00 -6.24 -1.6% -3.2% -3.2% -4.0% -4.0% -7.4%Gold Futures $1,157.80 0.20 0.0% 3.7% 3.7% 9.2% 9.2% -8.3% MSCI INDIA 13.76 0.10 0.7% -0.8% -0.8% -7.5% -7.5% -19.7%Silver Futures $14.78 -0.07 -0.5% 3.8% 3.8% 7.1% 7.1% -14.1% MSCI CHINA 6.53 0.00 0.0% -2.5% -2.5% -14.9% -14.9% -24.2%Crude Oil Futures (WTI) $30.89 -0.83 -2.6% -8.1% -8.1% -16.6% -16.6% -38.8% MSCI MEXICO 4,994.36 -117.20 -2.3% -1.8% -1.8% -5.1% -5.1% -17.8%Brent Crude Oil Futures $34.06 -0.40 -1.2% -2.0% -2.0% -8.6% -8.6% -39.8% MSCI FRONTIER MARKET 483.71 0.28 0.1% 2.7% 2.7% -4.4% -4.4% -16.0%Copper Futures $2.10 -0.03 -1.3% 1.7% 1.7% -1.5% -1.5% -19.0%Natural Gas Futures $2.06 0.09 4.6% -10.2% -10.2% -11.7% -11.7% -20.7%Palladium Futures $498.70 -16.90 -3.3% 0.0% 0.0% -11.3% -11.3% -37.3%Platinum Futures $903.70 -2.60 -0.3% 3.4% 3.4% 1.3% 1.3% -27.7%

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Asset Class Performance

Source: Bloomberg, FactSet, Morgan Stanley Wealth Management GIC

US Treasuries & MunicipalsYields

2/5/2016 1-Day 1-Day 3/9/2009 12/31/2015 2/5/2015

2/5/2016 vs

3/9/20092/5/2016 vs 12/31/2015

2/5/2016 vs 2/5/2015

Spread 2/5/2016 vs

3/9/2009

Spread 2/5/2016 vs 12/31/2015

Spread 2/5/2016 vs

2/5/20153-Month 0.29 0.00 -0.00% 0.20 0.16 0.01 0.44% 0.78% 55.84% 0.09 0.13 0.286-Month 0.43 0.01 0.02% 0.43 0.47 0.06 0.01% -0.09% 6.76% 0.01 -0.04 0.382-Year 0.72 0.02 0.03% 0.96 1.05 0.52 -0.24% -0.31% 0.39% -0.23 -0.33 0.205-Year 1.24 0.01 0.01% 1.88 1.76 1.30 -0.34% -0.30% -0.05% -0.63 -0.52 -0.0610-Year 1.84 0.00 -0.00% 2.86 2.27 1.82 -0.36% -0.19% 0.01% -1.02 -0.43 0.0230-Year 2.67 -0.01 -0.00% 3.57 3.02 2.43 -0.25% -0.12% 0.10% -0.90 -0.35 0.24Municipal Market Advisor ÁAA' GO 10Yr. 2.10 -0.01 -0.00% 3.52 2.30 2.17 -0.40% -0.09% -0.03% -1.42 -0.20 -0.07Municipal Market Advisor ÁAA' GO 30Yr. 4.31 0.00 0.00% 5.24 4.42 4.12 -0.18% -0.02% 0.05% -0.93 -0.11 0.19

Historical Yield Spreads (%) Yield Spreads

Fixed Income Index Performance (Total Return) Fixed Income Index Spreads

1 Day 1 Month QTD YTD YOY 2015 2/5/2016 3 Months Ago 6 Months Ago 12 Months AgoBarclays Capital Multiverse (USD) -0.1 2.5 2.4 2.4 -1.0 -3.3 89 74 73 66Barclays Capital Global Aggregate x US (USD) -0.2 3.3 3.1 3.1 -1.4 -5.3 58 49 49 43Barclays Capital Global Investment Grade (USD) 0.1 1.3 1.4 1.4 -0.3 0.7 137 113 119 102 Government/Gov't Related (USD) -0.1 5.4 5.8 5.8 0.2 -3.3 21 18 19 20 Securitized (USD) -0.1 1.8 1.6 1.6 1.2 -0.5 37 31 36 30 Corporate (USD) 0.1 0.3 0.4 0.4 -2.5 -0.7 201 154 154 133Barclays Capital US Gov/Credit Float Adjusted 1-5Y (US 0.0 0.9 1.0 1.0 1.2 1.0 46 32 32 27Barclays Capital Global High Yield (USD) -0.2 -1.4 -1.6 -1.6 -4.3 -2.7 731 554 514 526Barclays Capital Global Emerging Market (USD) 0.0 0.4 0.5 0.5 0.1 -0.2 435 353 342 381Barclays Capital Global Inflation Linked (USD) -0.2 2.5 2.3 2.3 -3.1 -5.0 - - - -Barclays Capital US Aggregate (USD) 0.0 1.5 1.6 1.6 0.6 0.5 66 53 56 48Barclays Capital US Government/Corporate (USD) 0.3 4.3 4.4 4.4 -0.1 -0.3 44 40 40 33Barclays Capital US High Yield (USD) -0.3 -2.7 -2.7 -2.7 -8.3 -4.5 768 551 494 484Barclays Capital Global Inflation-Linked - US TIPS (USD -0.2 1.3 1.5 1.5 -2.4 -1.4 - - - -Barclays Capital Global Aggregate - Germany (Local) -0.2 4.9 4.0 4.0 -1.9 -8.9 33 29 27 14Barclays Capital Global Aggregate - United Kingdom (Lo -0.6 1.4 1.4 1.4 -4.1 -5.0 57 46 41 35Barclays Capital Global Aggregate - Japan (Local) 0.2 3.5 4.6 4.6 3.8 0.7 4 4 4 3Barclays Capital Global Aggregate - Brazil (Local) 0.0 -3.0 -2.3 -2.3 -18.3 -17.5 780 431 407 393Barclays Capital Global Aggregate - Russia (Local) -1.0 -4.4 -4.5 -4.5 7.8 10.3 87 67 72 504Barclays Capital Global Aggregate - India (Local) -0.1 0.8 0.9 0.9 2.3 2.7 222 192 189 195Barclays Capital Global Aggregate - China (Local) 0.0 1.3 1.5 1.5 3.0 2.9 201 188 186 199Barclays Capital Universal Government Inflation Linked (USD)

-0.3 2.4 2.2 2.2 -5.6 -7.2 - - - -

0.00

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United States Treasury Yields

2/5/2016

3/9/2009

12/31/2015

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-0.63

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0.603-Month 6-Month 2-Year 5-Year 10-Year 30-Year

Spread 2/5/2016 vs 3/9/2009 Spread 2/5/2016 vs 12/31/2015

Spread 2/5/2016 vs 2/5/2015

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GIC Balanced Growth Model Hypothetical Performance Comparison

Source: FactSet, Bloomberg, Morgan Stanley Wealth Management GIC. Model 3 = GIC Balanced Growth Model and is shown for illustrative purposes only, representing the GIC’s moderate asset allocation profile aimed at balancing risk and return. Model 3 Benchmark as shown represents the average of the blended benchmark indices as selected by the GIC: 50% MSCI ACWI, 45% Barclays US Aggregate Bond Index, and 5% Citi 3 Month T Bill Index. S&P 500 and HFRX Global HF indices are shown for illustrative purposes only and are meant to be representative of the US large-cap equity market and the overall hedge fund universe, respectively, to complement the benchmark indices and serve as further comparison for the asset classes included in Model 3 . Model 3 Strategic return and volatility represent the GIC’s proposed 7-year investment horizon. Model 3 Tactical return and volatility represent the GIC’s proposed 20-year investment horizon. The Global Investment Committee Asset Allocation Models are not provided as part of an investment advisory service offered by Morgan Stanley Wealth Management, are not available to be directly implemented as part of an investment advisory service and should not be regarded as a recommendation of any Morgan Stanley Wealth Management investment advisory service. Returns expressed in US dollars. The hypothetical Model 3 performance does not reflect the investment or performance of actual portfolios. Hypothetical performance results do not reflect advisory fees or brokerage commissions. Had the results reflected these costs, the hypothetical performance would have been lower. For more information about the risks to hypothetical performance please refer to the Risk Considerations section at the end of this material. Please refer to the GIC’s Tactical Asset Allocation Changes report dated January 21, 2016 and the GIC Profiles for more information regarding current model positioning. Standard deviation (volatility) is a measure of the dispersion of a set of data from its mean. Volatility as shown is measured over the most recent rolling six months.

Model 3 Strategic

Model 3 Tactical

Model 3 Benchmark

S&P 500

Citi 3M T Bill

Barclays US Agg

HFRX Global HF

MSCI ACWI

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

0% 5% 10% 15% 20% 25%

Ret

urns

Volatility

v

YTD Hypothetical Model 3 Performance and Volatility As of February 5, 2016

For Illustrative Purposes Only

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GIC Recommendations As of January 5, 2016

• We continue to recommend equities over fixed income. Furthermore, active managers should outperform this year in the US.

• In the US, we recommend a barbell approach with exposure in secular growth sectors like healthcare and tech offset by laggards and defensive areas with decent yields.

• Japan still in the early stages of a secular bull market—skepticism is still high / valuations low. The recent broadening out to domestically oriented sectors is a big positive for Abenomics. Near-term risk is political with July election potentially stalling new initiatives.

• Europe is finally getting the support from the ECB with QE, which could pave the way for the end of fiscal austerity—we expect European earnings to finally rebound and equities to outperform again in 2016.

• Emerging markets have been very idiosyncratic with most underperforming developed markets. We think EM is due for a rebound in 2016 and it will likely be more homogenous—i.e., beta driven.

• In fixed income, we still recommend below-benchmark duration*. US high yield attractive and municipal bonds cheap to Treasuries. Consider TIPS and WIPS as inflation expectations recover.

• Given our reflationary view and expectation for higher interest rates, we are less sanguine about interest rate-sensitive assets in the near term. We are likely to change that view if 10-year Treasury yields rise above 2.5%. US high yield offers value, but we believe we are at the tail end of the credit cycle.

Source: Morgan Stanley Wealth Management GIC. *For more information about the risks to Duration, please refer to the Risk Considerations section at the end of this material.

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Strategic and Tactical Portfolio Positioning MS & Co. 1-Year Return/Risk Forecasts As of February 1, 2016

Source: Bloomberg, FactSet, Morgan Stanley & Co. Research, Morgan Stanley Wealth Management GIC, The Yield Book® Software and Services. © 2016 Citigroup Index LLC. All rights reserved. Note: * 1 year realized volatility. Forecast implied is the volatility of the bull/base/bear case forecast. JGB10y represents Japanese 10-year government bonds,DBR10y represents German 10-year government bonds, UKT10y represents United Kingdom 10-year government bonds, UST10y represents US 10-year government bonds, INR represents Indian rupee, EUR represents euro, AUD represents Australian dollar, GBP represents British pound, JPY represents Japanese yen, ZAR represents South African rand.

Tactical GIC Portfolio Advice: 2016 As of February 5, 2016

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UST10y

JPY

Agency MBS

DBR10y

EUR

JGB10y

GBP

USIG

AUD

CMBS AAA

BTP10yr

INR

EUR IG

US HY

JP Stocks

EM Credit

EM StocksEU Stocks

US Stocks

EURHY

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Skew

(Bul

l+B

ear)

/Avg

Vol

Base Return/Avg Volatility

Lowest Correlation

Medium Correlation

Highest Correlation

Least attractive

Most attractive

MS & Co. 1 Year Expected Return vs. Return Skew MS & Co. 1 Year Expected Return vs. Return Skew (Volatility Adjusted) As of February 1, 2016

Note: JGB10y represents Japanese 10-year government bonds,DBR10y represents German 10-year government bonds, BTP10y represents Italy 10-year government bonds, UST10y represents US 10-year government bonds, INR represents Indian rupee, EUR represents euro, AUD represents Australian dollar, GBP represents British pound, JPY represents Japanese yen. US IG (investment grade) represented by the Citi US Broad Investment Grade Bond Index, US HY (high yield) represented by the Citi High Yield Market Index, emerging market stocks represented by the MSCI Emerging Market Index, US stocks represented by the S&P 500 Index, Japanese stocks represented by the TOPIX, EU stocks represented by the MSCI Europe Index, EM credit represented by the JP Morgan Emerging Market Bond Index, EUR IG represented by the iBoxx Markit Euro Corporate Index, EUR HY represented by the iBoxx Markit European Liquid High Yield Index. Source: Morgan Stanley Research, Bloomberg, The Yield Book® Software and Services. © 2016 Citigroup Index LLC. All rights reserved. Correlation is one-year, relative to a portfolio of 50%/50% US stocks and US Treasuries. Credit returns used are excess returns.

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Market Spotlight: ISM Manufacturing PMI Leads Nonfarm Manufacturing Payrolls


-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

30

35

40

45

50

55

60

65

70

1995 1999 2003 2007 2011 2015

ISM Manufacturing PMI (left axis) Nonfarm Payrolls Manufacturing Industry Y/Y (right axis, lagged 7 months)

v

ISM Manufacturing PMI vs Nonfarm Payrolls Manufacturing Industry As of January 31, 2016

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-10

-8

-6

-4

-2

0

2

4

6

98

99

100

101

102

103

104

1051994 1997 2000 2003 2006 2009 2012 2015

Goldman Sachs Financial Conditions Index (LS, inverted) Goldman Sachs Current Activity Indicator - US (RS)

Market Spotlight: Tighter Financial Conditions Decoupled from Fundamentals

Source: Bloomberg, Morgan Stanley Wealth Management GIC.

v

Financial Conditions Index vs. Current Activity Indicator As of February 4, 2016

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Source: Morgan Stanley Wealth Management GIC. Note: Text in a factor box denotes a color change; Japan liquidity went from risk asset positive to neutral as the Japan Libor–OIS 3 month spread widened, China valuation went from neutral to risk asset positive as multiples contracted

Macro Factor Heat Map As of February 5, 2016

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

Dark Blue Economic growth robust

Steep yield curve Low-moderate and rising inflation Liquidity is robust in economy / banking system

Shorter-term sentiment and technicals bearish

Risk assets are attractively valued

Earnings robust Confluence of factors is Risk Asset Positive

Light BlueEconomic growth neutral Normal yield curve

Low-moderate and decl. inflation; moderate inflation; higher and falling inflation

Liquidity is neutral in economy / banking system

Shorter-term sentiment and technicals neutral Risk assets are neutral Earnings neutral

Confluence of factors supports a neutral investment approach

Grey Economic growth anemic

Flat / inverted yield curve Very high / low inflation / deflation; high and rising inflation

Liquidity is low in economy / banking system

Shorter-term sentiment and technicals bullish

Risk assets are richly valued

Earnings anemic Confluence of factors is Risk Asset Negative

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

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

Signal Horizon One-three years One-three years One-three years One-three years One-three months Six months-tw o yrs. Six months-tw o yrs.

Economic Growth Rates

Inflation / Deflation Liquidity

Sentiment and Risk Valuation Earnings GIC Conclusion

US 0 0 0 -1 1 1 0 0

Japan 0 -1 0 0 1 1 0 1

Europe 0 -1 0 0 1 0 -1 1

China 1 -1 0 1 1 1 -1 0

Brazil -1 1 -1 -1 0 1 -1 -1

Risk Asset Positive Neutral Risk Asset

Negative

Grinding Expansion

Encouraging Momentum

Earnings Growth

Dependent

Growth Trends

Stabilizing

Stagflation; Avoid

Liquidity Tighter

Attractive Valuation

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-150

-130

-110

-90

-70

-50

-30

-10

10

30

50

70

90

110

Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15 Jan '16

US Europe Japan China

Global Citi Economic Surprise Indices


Citi Economic Surprise Indices As of February 5, 2016

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-3

-2

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Morgan Stanley Financial Conditions Index¹

QE1

QE1.5

QE2

Twist

LTRO

LTRO II

Draghi

QE3 BOJQQE²

Fed Ends QE

BOJQQE+

ECBQE

China/OPEC FX Reserves Repatriated

Morgan Stanley Financial Conditions Index

Source: Bloomberg, Morgan Stanley Wealth Management GIC. (1) The y-axis measures the Morgan Stanley Financial Conditions Index, a weighted index comprised of changes in equities (S&P 500), short-term interest rates (3-month Treasury), long-term interest rates (10-year Treasury) and USD currency (Morgan Stanley Dollar Index). (2) Bank of Japan Quantitative and Qualitative Easing (QQE).

Financial Conditions

Tighter ↑

Looser ↓

As of February 4, 2016

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Source: Morgan Stanley Wealth Management GIC. Note: Performance is ex-crisis. Equity Risk Indicator is a standardized measure of investor sentiment and positioning and earnings revision factors, compiled using a statistical Z-score methodology. A Z-Score is a statistical measurement of a score's relationship to the mean in a group of scores. A Z-score of 0 means the score is the same as the mean. A Z-score can also be positive or negative, indicating whether it is above or below the mean and by how many standard deviations.

US Equity Market Sentiment Morgan Stanley Equity Risk Indicator As of February 5, 2016

1W 1M 3M 6M 1Y

Avg. Total Return 1.3% 4.0% 6.4% 10.6% 10.8%

Percent Positive 73% 91% 82% 80% 78%

S&P 500 Performance Following -1 Readings on the ERI

Sell

Buy

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-4

-3

-2

-1

0

1

2

3

4

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Morgan Stanley Standardized GRDI

Morgan Stanley Global Risk Demand Index

Global Risk Appetite

Source: Morgan Stanley & Co. Research. (1) There is one composite market timing indicator (CMTI) and four components: the valuation, risk, fundamentals and capitulation indicators. They help decide the tactical outlook for equity markets for the next three-six months.

Morgan Stanley Europe Combined Market Timing Indicator1 As of February 4, 2016

Sell

Buy -1.5

-1.0

-0.5

0.0

0.5

2010 2011 2012 2013 2014 2015 2016

Combined Market Timing Indicator (CMTI)

Sell

Buy


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-50

-40

-30

-20

-10

0

10

20

30

40

50

60

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

AAII Bull-Bear Spread (four week avg.) Long-Term Average

AAII Bull-Bear Spread


Individual Investor Sentiment


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468

10121416182022

2005 2007 2009 2011 2013 2015

CVIX Index

40

90

140

190

240

2005 2007 2009 2011 2013 2015

MOVE Index

10

20

30

40

50

60

2005 2007 2009 2011 2013 2015

VIX Index

VIX Index (Equities)

MOVE Index (Fixed Income)

CVIX Index (Currency)

US Equity, Fixed Income and Currency Volatility





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-150

-50

50

150

250

1991 1994 1997 2000 2003 2006 2009 2012 2015Germany 10-Yr. - 2-Yr. Spread

-50

0

50

100

150

200

250

300

1991 1994 1997 2000 2003 2006 2009 2012 2015Japan 10-Yr. - 2-Yr. Spread

-50

0

50

100

150

200

250

300

1991 1994 1997 2000 2003 2006 2009 2012 2015

US 10-Yr. - 2 Yr. Spread

US 10-Year Minus 2-Year Govt. Bond Yield Spread

Germany 10-Year Minus 2-Year Govt. Bond Yield Spread

Japan 10-Year Minus 2-Year Govt. Bond Yield Spread

Global Yield Curve Slopes


Bps Bps

Bps




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-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

US 10-Year Treasury Term Premium

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2000 2002 2004 2006 2008 2010 2012 2014 2016

US 10-Year Treasury Term Premium

Long Term Chart: US 10-Year Treasury Term Premium1

Trailing One-Year Chart: US 10-Year Treasury Term Premium

US Treasury Term Premium

Source: Haver Analytics, Morgan Stanley Wealth Management GIC. (1) The term premium is the excess yield that investors require to commit to holding a long-term bond instead of a series of shorter-term bonds.

As of January 28, 2016 As of January 28, 2016

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Global Inflation Expectations


Five-Year, Five-Year Inflation Swap Forward Rates

-0.3%

-0.1%

0.1%

0.3%

0.5%

0.7%

0.9%

1.1%

1.3%

1.5%

1.3%

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

2012 2013 2014 2015 2016

Europe (left axis) US (left axis) Japan (right axis)


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70

80

90

100

110

120

130

140

150

160

170

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

USD Index

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

70

80

90

100

110

120

130

140

150

160

1990 1995 2000 2005 2010 2015

USD/JPY (left axis) EUR/USD (right axis)

Global Currencies


Only three times in the last 50 years has the USD strengthened this much, this quickly

Rally lasted ~7 years; USD up 100%

Rally lasted ~9 years; USD up 54%

Rally lasted ~7 years to date; USD up 36%

USD Index Yen and Euro As of February 5, 2016 As of February 5, 2016

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$20

$200

$2,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Log

Scal

e

Gold Spot

0.1

1

10

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Log

Scal

e

Real Price of Crude (WTI Crude/Gold, left axis) S&P 500 in Gold Price Terms (right axis)

1M 3M 6M 1Y YTD 10Y Ann.

Bloomberg Commod. Index -2.7 -11.9 -16.8 -26.2 -3.8 -7.4

Bloomberg Gold Index 7.3 4.7 6.5 -8.8 9.2 5.5

Bloomberg Silver Index 5.8 -1.7 0.9 -15.3 7.1 2.0

Bloomberg Grains Index 2.0 -5.0 -8.6 -14.3 0.6 -1.1

Bloomberg Indust. Metals Index 1.1 -5.6 -12.3 -25.4 -1.4 -4.8

Brent Crude Oil -6.5 -29.0 -31.3 -39.8 -8.6 -5.8

Price Returns (%)

Commodity Performance

Source: FactSet, Morgan Stanley Wealth Management GIC. Note: Spot = current price level. S&P 500 in gold price terms calculated by dividing the S&P 500 Index level by the spot price of gold.

Real Price of Crude (WTI Crude/Gold) Vs. Real Price of S&P 500 in Gold Price Terms

Commodity Performance Table As of February 5, 2016 As of February 5, 2016

Gold Spot Price As of February 5, 2016

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Asset Class Performance Heat Map As of February 5, 2016

Source: Bloomberg, Morgan Stanley Wealth Management GIC. *January 31, 2016. **20-year average as of January 31, 2016. ***Volatility and Correlation: June 30, 2006 - Present. ****Volatility and Correlation: February 28, 1998 - Present. Hedged strategies consist of hedge funds and managed futures. *****Values calculated using USD. ******Volatility and Correlation: Jan 31, 1998 - Present. Cheap = Below -0.5 standard deviation; Moderate = 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.

Moderate

High Volatility

High Correlation

Expensive

Cheap

Low Volatility

Low Correlation

Asset Class Yield

Cash YTD 1-Yr 2015 3-Yr* 5-Yr* 10-Yr* 20-Yr* Current YTM

Current YTM

Avg YTM

30 Days 20 Yrs.* 30 Days 20 Yrs.*

90-Day US Treasury Bills 0.0 0.0 0.0 0.0 0.1 1.1 2.4 0.32 0.32 2.39 0.0 0.63 0.16 -0.01

Global Equities Current Dividend Yield

Current P/E

Avg. P/E**

US Large-Cap Growth -9.7 -6.0 5.8 13.5 12.5 7.9 7.2 1.41 17.2 21.4 24.6 18.1 0.84 0.89 US Large-Cap Value -6.3 -7.2 -1.7 9.5 9.6 5.4 7.4 3.20 14.6 13.7 23.5 14.6 0.90 0.89 US Mid-Cap Growth -12.1 -12.9 -0.1 9.0 9.3 6.1 7.3 1.01 18.5 26.5 26.9 23.7 0.86 0.81 US Mid-Cap Value -6.9 -12.4 -4.1 8.8 9.5 6.1 9.6 2.99 14.9 14.1 23.9 16.5 0.87 0.88 US Small-Cap Growth -13.4 -16.4 -2.2 7.9 8.4 7.1 8.9 0.81 21.9 23.7 28.6 22.8 0.82 0.82 US Small-Cap Value -9.1 -14.6 -5.1 6.8 8.3 6.4 9.8 3.03 16.7 16.6 26.0 17.3 0.86 0.84 Europe Equity -8.3 -13.0 -2.3 0.8 2.3 2.6 6.4 3.61 14.2 14.8 22.4 18.3 0.84 0.94 Japan Equity -9.2 -2.2 9.9 6.1 2.8 -0.3 0.2 2.07 12.6 22.5 33.3 18.0 0.27 0.67 Asia Pacific ex Japan Equity -9.4 -19.0 -8.4 -5.7 -0.6 4.8 5.4 4.72 13.6 14.6 24.7 21.6 0.70 0.85 Emerging Markets***** -6.8 -22.6 -14.6 -8.9 -5.2 2.2 4.7 2.96 10.8 11.6 27.1 23.7 0.75 0.85

Global Fixed Income Current YTM

Current Spread

Avg. Spread**

Short-Term Fixed Income 1.0 1.2 1.0 1.2 1.7 3.4 4.3 1.40 46.0 31.0 1.2 2.1 -0.36 -0.08 US Fixed Income 1.6 0.6 0.5 2.1 3.5 4.7 5.4 2.32 66.0 54.0 2.8 3.5 -0.33 -0.01 International Fixed Income 3.1 -1.4 -5.3 -3.0 -0.3 3.2 4.0 1.10 58.0 52.0 7.5 8.0 -0.26 0.28 Inflation-Linked Securities 2.2 -5.6 -7.2 -3.4 1.1 3.8 6.4 - - - 6.0 7.5 0.19 0.43 High Yield -1.6 -4.3 -2.7 0.5 4.4 6.9 7.8 8.81 731.0 496.5 6.6 10.2 0.70 0.76 Emerging Markets Fixed Income 1.5 -14.7 -14.9 -10.1 -3.1 3.9 7.7 6.83 435.0 369.0 12.3 13.0 0.77 0.69

Alternative InvestmentsCurrent

Dividend Yield

REITs -5.7 -11.8 -0.4 2.4 5.7 3.9 7.8 3.85 - - 19.7 18.4 0.89 0.79 Master Limited Partnerships*** -15.2 -43.4 -32.6 -10.7 -1.5 7.0 - 10.21 - - 67.7 19.0 0.74 0.57 Commodities ex Prec. Metals -6.1 -29.0 -27.1 -19.2 -15.4 -8.5 0.0 - - - 22.9 16.9 0.65 0.43 Precious Metals 8.7 -10.4 -11.5 -15.8 -6.5 5.5 5.1 - - - 16.3 19.0 -0.25 0.20 Hedged Strategies****** -3.3 -7.2 -3.6 -1.0 -1.5 -0.5 - - - - 4.2 6.3 0.86 0.64 Managed Futures**** 0.5 -3.4 -2.0 0.6 -0.9 -0.5 - - - - 6.0 8.2 -0.49 0.17S&P 500 -7.9 -6.9 1.4 11.3 10.9 6.5 7.7 2.29 15.2 16.3 23.4 15.4 0.89 0.95Russell 2000 -13.2 -17.3 -4.4 6.1 7.3 4.9 7.5 1.51 18.6 20.8 28.1 20.1 0.79 0.82MSCI EAFE -8.6 -11.3 -0.4 1.1 2.0 2.1 4.4 3.37 13.7 15.9 21.0 16.8 0.77 0.96MSCI AC World -8.1 -11.0 -1.8 4.5 5.0 4.2 5.9 2.73 14.2 15.7 19.6 15.8 1.00 1.00

Annualized Returns (%) Valuation Volatility (%) Correlation to Global Equities

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v


Global Fixed Income Snapshot

Source: Bloomberg, The Yield Book® Software and Services. © 2016 Citigroup Index LLC. All rights reserved. Morgan Stanley Wealth Management GIC. Unless stated, indexes utilized are Citi Broad Investment Grade, Citi High Yield, and Citi Global Indexes. *Global total returns reflect Citigroup 7- to 10-year bond indexes and Muni total returns reflect Barclays Municipal Bond Index Total Return

Government Debt Monitor Fixed Income Spread Dashboard

Unless stated, indexes utilized are Citi Broad Investment Grade, Citi High Yield, and Citi 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. © 2015 Citigroup Index LLC. All rights reserved. Data as of February 5, 2016

Government Debt Monitor Benchmark Returns

Total Return (%) Rich Cheap Treasury Benchmark Current ΔWTD ΔYTD YTD MBS* 3.44 2.22 21 -3 30

3-Month 0.29 -0.02 0.13 0.01 AAA 4.16 1.46 34 9 40

2-Year 0.72 -0.05 -0.33 0.71 AA 4.97 1.73 14 3 16

5-Year 1.24 -0.09 -0.52 2.60 A 7.09 3.02 147 79 148

10-Year 1.84 -0.09 -0.43 4.00 BBB 6.91 4.34 276 134 276

30-Year 2.67 -0.08 -0.35 6.96 BB 4.54 7.16 588 253 644

2-Yr./10-Yr. Spread (bp) 111 -3.36 -10.81 - B 4.16 10.03 930 367 947

10-Yr. TIPS Breakeven (bp) 133 -7.61 -24.73 - CCC 3.58 15.77 1,834 664 1,834

Interest Rate Volatility† (bp) 82 7.67 13.82 -

Yield (%)US OAS Range**

Hig

h Yi

eld

Inve

stm

ent G

rade

OAS (bp)

Yield-to-Worst (%)

Duration(Yrs.)

Total Return (%)* 10-Year Govt. Bond Current ΔWTD ΔYTD YTD Index YTD MTD 2015 France 0.63 0.00 -0.35 2.60 Barclays US Aggregate 1.62 0.24 0.55 Germany 0.30 -0.03 -0.33 2.89 Barclays US MBS 1.33 0.03 1.51 Japan 0.02 -0.07 -0.24 2.04 Barclays US IG Corporates 0.47 0.12 -0.68 Spain 1.64 0.13 -0.13 1.06 Barclays Municipal 1.52 0.32 3.30 UK 1.56 0.00 -0.40 3.09 Barclays US High Yield -2.71 -1.12 -4.47 3-Month LIBOR 0.62 0.01 0.01 - Barclays Global Aggregate 2.57 1.68 -3.15

JPMorgan Emerging Market -0.08 0.12 1.23 10-Year AAA Muni 1.66 -0.05 -0.26 1.52 10-Yr. Muni/UST Ratio 89.25 0.56 4.85 -

Global

US Tax Exempt

Total Returns (%)Yield (%)

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476bps

-400

-200

0

200

400

600

800

1984 1989 1994 1999 2004 2009 2014

Bas

is P

oint

s

+1 Std Dev

Average

-1 Std Dev

226 bps

-500

-250

0

250

500

1995 1998 2001 2004 2007 2010 2013

Bas

is P

oint

s

+1 Std Dev

-1 Std Dev

Average

S&P 500 Equity Risk Premium

Source: FactSet, Morgan Stanley Wealth Management GIC (1) Equity risk premium = S&P 500 forward earnings yield – 10-year Treasury yield. Equity risk premium is the excess return that an individual stock or the overall stock market provides over a risk-free rate. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. Standard deviation (volatility) is a measure of the dispersion of a set of data from its mean.

S&P 500 Equity Risk Premium¹

Spread: S&P 500 Earnings Yield Vs. Baa Bond Yield

Stocks Cheaper Relative to Treasuries

Stocks Richer

Stocks Cheaper Relative to Investment Grade

Stocks Richer

As of February 5, 2016 As of February 5, 2016

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US Equities Snapshot and Sector Breakdown

Source: Morgan Stanley & Co., FactSet, Thomson Reuters, Morgan Stanley Wealth Management GIC. (1) Green/red text denotes sector total return and dividend yield higher/lower than S&P 500. (2) Dark blue/light blue/grey fill denotes whether current relative NTM P/E is low/neutral/high relative to history.

$118

$123$121

$126

2015E 2016E

Consensus MS Estimates

Morgan Stanley & Co. and Consensus S&P 500 Earnings Estimates MS & Co. Estimates as of February 5, 2016

Morgan Stanley & Co. 12-Month S&P 500 Target Forecasts as of February 5, 2016

EPS Landscape

Probability of Scenario

EPS 2015E

EPS 2016E Multiple

Scenario Target

Upside / (Downside)

Bull Case 20% 122 129.3 17.7x 2425 25.3%

Growth 3% 6%

Base Case 60% 120.5 125.9 16.6x 2175 12.4%

Growth 1.3% 4%

Bear Case 20% 116.6 110.8 15.2x 1600 (17.3%)

Growth -2% -5%

Current S&P 500 Price 1880

Morgan Stanley 12-Month S&P Price Target Methodology

S&P 500 Sector Performance and Valuation1

Index Name WTD (%) YTD (%) 1-Year (%) Div. Yield (%) Beta NTM P/E2

S&P 500 -3.04 -7.85 -6.89 2.29 15.2

Energy -3.32 -6.24 -26.46 4.01 1.20 46.8

Materials 4.77 -6.30 -16.68 2.53 1.02 15.6

Industrials -0.17 -5.90 -7.85 2.44 0.96 14.5

Consumer Discretionary -5.41 -10.25 -2.34 1.64 0.97 16.2

Consumer Staples -2.26 -1.62 3.25 2.64 0.76 19.8

Health Care -3.24 -10.59 -7.08 1.73 1.00 14.2

Financials -3.54 -12.08 -10.73 2.22 1.06 11.3

Information Technology -5.25 -9.83 -3.80 1.70 1.14 14.6

Telecommunication Services 2.06 8.97 8.51 4.75 0.74 13.2

Utilities 2.57 7.63 -0.43 3.58 0.61 16.6

Total Return


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S&P 500 Current and Historical Valuation


Tech Bubble

Financial Crisis Feb 5, 2016

20-Year Average

Current Relative to Average

Trailing P/E 29.2 11.5 16.4 19.5 0.84

Forward P/E 26.6 11.2 15.2 17.2 0.88

Trailing Normalized P/E 48.7 11.9 21.5 27.4 0.78

Shiller P/E 43.2 14.1 24.2 26.8 0.90

P/B 5.0 1.6 2.5 3.0 0.85

EV/EBITDA 16.5 9.0 11.0 12.2 0.90

Trailing PEG NA 1.0 1.6 1.5 1.11

Forward PEG NA 1.0 1.6 1.3 1.17

P/OCF 19.4 6.5 11.1 12.4 0.89

P/FCF 41.6 11.9 16.6 23.1 0.72

EV/Sales 3.0 1.4 2.2 2.2 0.99

S&P 500 in WTI Terms 55.7 16.4 60.9 31.5 1.93

S&P 500 in Gold Terms 5.4 0.8 1.6 2.4 0.68

Equity Risk Premium (bps) -225 588 476 201 2.37

Source: Bloomberg, FactSet, Morgan Stanley Wealth Management GIC. Note: Tech Bubble data is 3/31/2000, Financial Crisis data is 2/28/2009. Trailing and Forward PEG use 10 year average.

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Small Cap. Vs. Large Cap As of February 5, 2016

Growth Vs. Value As of February 5, 2016

Cyclicals Vs. Defensives As of February 5, 2016

Performance of Style and Cap Pairs

Quality Vs. Junk As of February 4, 2016

Source: FactSet, Bloomberg. Small cap is represented by the Russell 2000 Index; Large cap is represented by the Russell 1000 Index; Growth is represented by the Russell 1000 Growth Index; Value is represented by the Russell 1000 Value Index; cyclicals, defensives, quality and junk are based on Morgan Stanley & Co. analysis.

0.820.850.880.910.940.971.001.03

Feb '14 Jun '14 Oct '14 Feb '15 Jun '15 Oct '15

Small Cap vs. Large Cap

0.94

0.97

1.00

1.03

1.06

1.09

1.12


Growth vs. Value

0.52

0.60

0.68

0.76

0.84

0.92

1.00

Feb '14 Jun '14 Oct '14 Feb '15 Jun '15 Oct '15Cyclicals vs. Defensives

0.94

1.00

1.06

1.12

1.18

1.24


Quality vs. Junk

Growth Outperforms

Small Cap Outperforms

Cyclicals Outperform

Quality Outperforms

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0x

5x

10x

15x

20x

25x

30x

35x

40x

45x

1926 1932 1938 1945 1951 1957 1964 1970 1976 1983 1989 1995 2002 2008 2014

Rate-Adjusted Shiller P/E Ratio Shiller P/E Ratio Average Shiller P/E Since 1931 Average Rate-Adjusted Shiller P/E Since 1931

Interest Rate-Adjusted Shiller P/E Ratio As of January 31, 2016

Source: Haver Analytics, Morgan Stanley Wealth Management GIC. The Shiller P/E ratio, also known as the cyclically adjusted P/E ratio, uses a 10-year average of inflation-adjusted earnings to value the stock market. This Shiller P/E Ratio was calculated using the after-tax earnings in the National Income and Product Accounts (NIPA) report published by the Bureau of Economic Analysis.

US Rate-Adjusted Shiller P/E

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DNK

TWN

AUS JPN

USA

CHN (H)

CAN

RUS

GBRDEU

IRLESP

ZAF

MEXSGP

BRA

SAUITA

FRASWEKOR

NLDCHEHKGIDN

CHN (A)

MYSIND

PHLBEL

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

Fore

cast

ed R

etur

n

Forecasted Volatility

GIC Tactical Equity Country Allocation Model

Source: FactSet, Morgan Stanley Wealth Management GIC. Note: DNK represents Denmark, AUS represents Australia, TWN represents Taiwan, ZAF represents South Africa, USA represents United States, JPN represents Japan, RUS represents Russia, CNH (H) represents China H-Shares, CNH (A) represents China A-Shares, CAN represents Canada, GBR represents United Kingdom, ESP represents Spain, DEU represents Germany, BRA represents Brazil, FRA represents France, MEX represents Mexico, SGP represents Singapore, SAU represents Saudi Arabia, IND represents India, SWE represents Sweden, KOR represents South Korea, THA represents Thailand, HKG represents Hong Kong, ITA represents Italy, IRL represents Ireland, NLD represents Netherlands, IDN represents Indonesia, MYS represents Malaysia, CHE represents Switzerland, BEL represents Belgium, PHL represents Philippines.

Next 12 Months’ Global Equity Forecasted Return vs. Forecasted Volatility As of February 4, 2016

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Source: FactSet, Morgan Stanley Wealth Management GIC. Note: Other Developed Markets includes Canada, Australia, New Zealand, Hong Kong, and Singapore. Other Emerging Markets includes all MSCI Emerging Market countries except China and India. Developed Europe includes all MSCI Europe countries. Frontier Markets includes all MSCI Frontier Emerging Market countries. JPN represents Japan, GBR represents United Kingdom, USA represents United States, CNH (A) represents China A-Shares, CNH (H) represents China H-Shares, IND represents India. Information ratio is a ratio of portfolio returns above the returns of a benchmark (usually an index) to the volatility of those returns.

Next 12 Months’ Regional Forecasted Returns and Information Ratio As of February 4, 2016

-3%

-2%

-1%

0%

1%

2%

3%

JPN USA CNH (H) GBR OtherDev Mkt

OtherEM

Dev EUR FrontierMarkets

CNH (A) IND

Fore

cast

ed R

etur

ns

0.07 0.06 0.06 0.05 0.05 0.04 0.01 -0.03 -0.05 -0.07Info

Ratio

Global Region/Sector Preferences As of February 4, 2016

Global Top 10 Regions/Sectors Global Bottom 10 Regions/Sectors

Other EM Tech Frontier StaplesUSA Industrials Dev EUR StaplesGBR Discretionary CNH (A) HealthcareOther Dev Mkt Staples CNH (A) StaplesUSA Discretionary IND FinancialsJPN Tech CNH (A) TechJPN Materials CNH (A) IndustrialsJPN Industrials CNH (A) MaterialsUSA Tech Dev EUR HealthcareDev EUR Utilities CNH (A) Financials

GIC Tactical Equity Region/Sector Allocation Model

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-16%

-12%

-8%

-4%

0%

4%

8%

12%

2010 2011 2012 2013 2014 2015 2016

S&P 500 3M Avg MSCI Europe 3M Avg

MSCI Japan 3M Avg MSCI EM 3M Avg

18

20

22

24

26

28

30

32

34

2030405060708090

100110120130140

2005 2007 2009 2011 2013 2015

S&P 500 (left axis) TOPIX Index (left axis)EURO STOXX (right axis)

Global Earnings Revisions Breadth

Next 12 Months’ Global Earnings Estimates

Source: FactSet, Bloomberg, Morgan Stanley Wealth Management GIC

Global Earnings Revisions Breadth and Forward Estimates

As of February 5, 2016 As of February 5, 2016

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-100%-75%-50%-25%

0%25%50%75%

100%

2000 2002 2004 2006 2008 2010 2012 2014

-60%

-40%

-20%

0%

20%

40%

2000 2002 2004 2006 2008 2010 2012 2014-100%

-75%

-50%

-25%

0%

25%

50%

75%

2000 2002 2004 2006 2008 2010 2012 2014

Consumer Discretionary Consumer Staples

Energy Financials

-80%

-60%

-40%

-20%

0%

20%

40%

2000 2002 2004 2006 2008 2010 2012 2014

Source: FactSet, Morgan Stanley Wealth Management GIC. (1) 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.

S&P 500 Sector Earnings Revisions Breadth1

As of February 3, 2016 (Weekly)

As of February 3, 2016 (Weekly) As of February 3, 2016 (Weekly)


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-100%

-75%

-50%

-25%

0%

25%

50%

75%

2000 2002 2004 2006 2008 2010 2012 2014-80%-60%-40%-20%

0%20%40%60%80%

2000 2002 2004 2006 2008 2010 2012 2014

-40%

-20%

0%

20%

40%

60%

2000 2002 2004 2006 2008 2010 2012 2014-100%

-75%

-50%

-25%

0%

25%

50%

75%

2000 2002 2004 2006 2008 2010 2012 2014

Health Care Industrials

Information Technology Materials






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-80%

-60%

-40%

-20%

0%

20%

40%

60%

2000 2002 2004 2006 2008 2010 2012 2014-70%

-50%

-30%

-10%

10%

30%

50%

2000 2002 2004 2006 2008 2010 2012 2014

Utilities Telecommunications




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S&P 500 As of February 4, 2016

S&P 500 Ex-Energy As of February 4, 2016

Source: Thomson Financial, S&P, Morgan Stanley & Co. Research

-5%

0%

5%

10%

15%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

S&P 500 Y/Y EPS Growth

0%

4%

8%

12%

16%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

S&P 500 Ex-Energy Y/Y EPS Growth

S&P 500 Ex-Energy and Financials As of February 4, 2016

-2%0%2%4%6%8%

10%12%14%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

ES&P 500 Ex-Energy and Financials Y/Y EPS Growth

Actual and Estimated S&P 500 Sector Earnings Per Share Growth

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Energy As of February 4, 2016

Consumer Discretionary As of February 4, 2016


-80%-60%-40%-20%

0%20%40%60%80%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Energy Y/Y EPS Growth

0%

5%

10%

15%

20%

25%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Consumer Discretionary Y/Y EPS Growth

Consumer Staples As of February 4, 2016

-10%

-5%

0%

5%

10%

15%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Consumer Staples Y/Y EPS Growth

Financials As of February 4, 2016

-10%

0%

10%

20%

30%

40%

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E

1Q16

E

2Q16

E

3Q16

E

4Q16

E

Financials Y/Y EPS Growth


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Health Care As of February 4, 2016

Industrials As of February 4, 2016


-5%

0%

5%

10%

15%

20%

25%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Health Care Y/Y EPS Growth

-10%

-5%

0%

5%

10%

15%

20%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Industrials Y/Y EPS Growth

Information Technology As of February 4, 2016

Materials As of February 4, 2016

-30%

-20%

-10%

0%

10%

20%

30%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Materials Y/Y EPS Growth

-5%

0%

5%

10%

15%

20%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Info Tech Y/Y EPS Growth


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Utilities As of February 4, 2016

Telecommunications Services As of February 4, 2016


-15%

5%

25%

45%

65%

85%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

E

Telecom Services Y/Y EPS Growth

-15%

-5%

5%

15%

25%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

E1Q

16E

2Q16

E3Q

16E

4Q16

EUtilities Y/Y EPS Growth


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S&P 500 Sector EPS Growth Estimates and Revisions As of February 4, 2016

Sector/Index Current Two Wks Ago End of 3Q Start of 2015Chg. Vs.

Two Wks AgoChg. Vs.

End of 3QChg. Vs.

Start of 2015Consumer Discretionary 6.4% 4.9% 10.6% 17.4% 1.5% -4.1% -11.0%

Consumer Staples -4.6% -5.3% -2.2% 5.6% 0.6% -2.5% -10.3%

Energy -76.0% -74.0% -63.8% -28.8% -2.0% -12.2% -47.2%

Financials 6.4% 10.5% 18.0% 15.4% -4.1% -11.6% -9.0%

Health Care 10.5% 6.3% 8.4% 9.5% 4.2% 2.1% 1.0%

Industrials 0.0% -0.8% 6.2% 8.9% 0.9% -6.2% -8.8%

Info Tech 0.6% -2.5% -0.6% 12.0% 3.2% 1.2% -11.3%

Materials -20.3% -27.5% -1.9% 5.5% 7.2% -18.4% -25.8%

Telecom 32.7% 33.0% 31.8% 7.2% -0.4% 0.9% 25.5%

Utilities -9.0% -6.7% -6.8% 4.8% -2.4% -2.3% -13.8%

S&P 500 -3.7% -4.6% 0.6% 6.7% 0.9% -4.3% -10.4%

Sector/Index Current Two Wks Ago End of 3Q 2015 Est.Chg. Vs.

Two Wks AgoChg. Vs.

End of 3QChg. Vs.2015 Est.

Consumer Discretionary 11.4% 12.4% 14.7% 9.0% -1.0% -3.3% 2.3%

Consumer Staples 4.0% 5.8% 8.2% -2.3% -1.8% -4.2% 6.3%

Energy -50.2% -33.8% 7.4% -60.1% -16.4% -57.6% 9.9%

Financials 9.5% 7.1% 9.5% 6.4% 2.4% 0.0% 3.0%

Health Care 8.2% 9.3% 9.8% 14.8% -1.1% -1.6% -6.6%

Industrials 1.6% 4.3% 8.6% 4.7% -2.6% -7.0% -3.0%

Info Tech 2.6% 5.6% 10.8% 5.7% -3.0% -8.2% -3.1%

Materials -0.2% 4.5% 18.0% -8.4% -4.7% -18.2% 8.2%

Telecom 6.4% 5.6% 6.5% 17.4% 0.8% -0.1% -10.9%

Utilities 4.5% 4.0% 5.2% 1.0% 0.4% -0.7% 3.4%

S&P 500 3.6% 5.2% 10.1% -0.8% -1.6% -6.5% 4.4%

S&P 500 4Q 2015 Y/Y EPS Growth Estimates and Revisions

S&P 500 2016 Y/Y EPS Growth Estimates and Revisions

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Morgan Stanley & Co. Key Market Forecasts


Bear Base BullEquities

S&P 500 1880 1600 2175 2425MSCI Europe 1282 1100 1500 1720Topix 1369 1230 1640 1880MSCI EM 740 590 850 980

FXUSD/JPY 116.9 105.0 115.0 130.0EUR/USD 1.12 0.92 1.00 1.15GBP/USD 1.45 1.30 1.40 1.58AUD/USD 0.71 0.50 0.62 0.78USD/INR 67.7 68.0 70.0 71.6USD/ZAR 16.0 13.8 15.4 16.5

Rates (%)US Treasury 10-Year 1.84 1.80 2.70 3.65German Bund 10-Year 0.30 0.70 1.20 1.60UK Gilt 10-Year 1.56 1.52 2.60 2.85Japanese Govt. Bond 10-Year 0.03 0.20 0.85 1.20

Credit Spreads (bps)US Investment Grade 204 235 175 125US High Yield 843 874 582 480EUR Investment Grade 179 165 115 97EM Sovereign 502 550 400 348US CMBS 150 180 135 110

CommoditiesBrent Crude Oil (spot) 34.06 42 59 65

Q4 2016 ForecastAs of Feb 5, 2016

Source: Bloomberg, FactSet, Morgan Stanley & Co, Morgan Stanley Wealth Management GIC, The Yield Book® Software and Services. © 2016 Citigroup Index LLC. All rights reserved.

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GLOBAL INVESTMENT COMMITTEE (GIC) ASSET ALLOCATION MODELS The Asset Allocation Models are created by Morgan Stanley Wealth Management’s GIC. CLIENTS TO CONSIDER THEIR OWN INVESTMENT NEEDS The GIC Asset Allocation Models are formulated based on general client characteristics such as investable assets and risk tolerance. This report is not intended to be a client-specific suitability analysis or recommendation, or offer to participate in any investment. Therefore, do not use this report as the sole basis for investment decisions. Clients should consider all relevant information, including their existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Such a suitability determination may lead to asset allocation(s) results that are materially different from the asset allocation shown in this report. Clients should talk to their Financial Advisor about what would be a suitable asset allocation for them. HYPOTHETICAL MODEL PERFORMANCE (GROSS) Hypothetical model performance results do not reflect the investment or performance of an actual portfolio following a GIC Strategy, but simply reflect actual historical performance of selected indices on a real-time basis over the specified period of time representing the GIC’s strategic and tactical allocations as of the date of this report. The past performance shown here is simulated performance based on benchmark indices, not investment results from an actual portfolio or actual trading. There can be large differences between hypothetical and actual performance results achieved by a particular asset allocation or trading strategy. Hypothetical performance results do not represent actual trading and are generally designed with the benefit of hindsight. Actual performance results of accounts vary due to, for example, market factors (such as liquidity) and client-specific factors (such as investment vehicle selection, timing of contributions and withdrawals, restrictions and rebalancing schedules). Clients would not necessarily have obtained the performance results shown here if they had invested in accordance with any GIC Asset Allocation Model for the periods indicated. Despite the limitations of hypothetical performance, these hypothetical performance results allow clients and Financial Advisors to obtain a sense of the risk/return trade-off of different asset allocation constructs. The hypothetical performance results in this report are calculated using the returns of benchmark indices for the asset classes, and not the returns of securities, fund or other investment products. Performance of indices may be more or less volatile than any investment product. The risk of loss in value of a specific investment is not the same as the risk of loss in a broad market index. Therefore, the historical returns of an index will not be the same as the historical returns of a particular investment a client selects. Models may contain allocations to Hedge Funds, Private Equity and Private Real Estate. The benchmark indices for these asset classes are not issued on a daily basis. When calculating model performance on a day for which no benchmark index data is issued, we have assumed straight line growth between the index levels issued before and after that date. Fees reduce the performance of actual accounts None of the fees or other expenses (e.g. commissions, mark-ups, mark-downs, fees) associated with actual trading or accounts are reflected in the GIC Asset Allocation Models. The GIC Asset Allocation Models and any model performance included in this presentation are intended as educational materials. Were a client to use these models in connection with investing, any investment decisions made would be subject to transaction and other costs which, when compounded over a period of years, would decrease returns. Information regarding Morgan Stanley’s standard advisory fees is available in the Form ADV Part 2, which is available at www.morganstanley.com/adv. The following hypothetical illustrates the compound effect fees have on investment returns: For example, if a portfolio’s annual rate of return is 15% for 5 years and the account pays 50 basis points in fees per annum, the gross cumulative five-year return would be 101.1% and the five-year return net of fees would be 96.8%. Fees and/or expenses would apply to clients who invest in investments in an account based on these asset allocations, and would reduce clients’ returns. The impact of fees and/or expenses can be material. INSURANCE PRODUCTS AND ETF DISCLOSURES Morgan Stanley Smith Barney LLC offers insurance products in conjunction with its licensed insurance agency affiliates. An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock and bond prices. Variable annuities, mutual funds and ETFs are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, or the ETF, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments, or the ETF, are available from your Financial Advisor. Please read the prospectus carefully before you invest. Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk, and possible loss of principal. All guarantees, including optional benefits, are based on the financial strength and claims-paying ability of the issuing insurance company and do not apply to the underlying investment options. Optional riders may not be able to be purchased in combination and are available at an additional cost. Some optional riders must be elected at time of purchase. Optional riders may be subject to specific limitations, restrictions, holding periods, costs, and expenses as specified by the insurance company in the annuity contract. If you are investing in a variable annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the variable annuity. Under these circumstances, you should only consider buying a variable annuity because of its other features, such as lifetime income payments and death benefits protection. Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value.

Asset Allocation Models & Insurance Products Disclosures

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For index definitions to the indices referenced in this report please visit the following: http://www.morganstanleyfa.com/public/projectfiles/id.pdf

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. Investing in foreign markets entails risks not typically associated with domestic markets, such as currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, and the potential for political instability. These risks may be magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies. Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more established companies.

The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer.

High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.

Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if securities are issued within one's city of residence.

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

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.

Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative-like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not suitable for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. Master Limited Partnerships (MLPs) Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk. The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value. MLPs carry interest rate risk and may underperform in a rising interest rate environment. Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities that should be safely stored, which may impose additional costs on the investor. REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Risks of private real estate include: illiquidity; a long-term investment horizon with a limited or nonexistent secondary market; lack of transparency; volatility (risk of loss); and leverage.

Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect the monthly income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds.

Asset-backed securities generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of prepayments.

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Floating-rate securities The initial interest rate on a floating-rate security may be lower than that of a fixed-rate security of the same maturity because investors expect to receive additional income due to future increases in the floating security’s underlying reference rate. The reference rate could be an index or an interest rate. However, there can be no assurance that the reference rate will increase. Some floating-rate securities may be subject to call risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. Credit ratings are subject to change. Companies paying dividends can reduce or cut payouts at any time. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations. Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected. Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy. Investors should consult with their tax advisor before implementing such a strategy. Any type of continuous or periodic investment plan does not assure a profit and does not protect against loss in declining markets. Since such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his financial ability to continue his purchases through periods of low price levels. Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates. Besides the general risk of holding securities that may decline in value, closed-end funds may have additional risks related to declining market prices relative to net asset values (NAVs), active manager underperformance, and potential leverage. Some funds also invest in foreign securities, which may involve currency risk. Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We and our third-party data providers make no representation or warranty with respect to the accuracy or completeness of this material. Past performance is no guarantee of future results. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation. This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC. Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”) and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC. © 2016 Morgan Stanley Smith Barney LLC. Member SIPC.

Asset Class Risk Considerations (cont’d)

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