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2013: An Optimistic Outlook for Equities
AccommodaLlve global cenLral-bank pollcy, more senslble
US hscal pollcy and aLLracLlve valuaLlon supporL Lhls
poslLlve vlew (see page 2).
4 Investing in China With US Equities
Chinese economic growth is picking up, so the time
may be right for China exposed US stocks.
5 Yearning for Yield
Dividends are often an afterthought for investors,
but they are a large portion of total returns.
6 A Familiar Economic Outlook
Most of the global growth this year is likely to come
from emerging market economies.
7 Easy Money
No letup is in sight for the extraordinary monetary
policy in the US and Europe.
10 The Big Gains Are Over for Credit
Interest rates have declined so much that theres
not much to be earned beyond the coupon.
11 Muni Bond Rally Ends Abruptly
Muni bond investors pull back on concerns that
potential tax-code changes could affect them.
12 High-Quality Stocks in a Low-Quality Economy
Instead of worrying about the economy or the
markets, money manager Don Yacktman focuses
on companies.
On the
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nations sovereign debt markets, is now
in place. While OMT has yet to pay out a
single euro, it underpins European and,
by extension, global risk-asset prices.
LETS MAKE A DEAL. Although it was a
nail biter, Washington nally came to an
agreement on New Year's Day to avert
the scal cli. This action reduced the
threatened scal drag to 1.5% of GDP
from 5% of GDP, and US and global
equities have responded with a sharp
rally. In terms of tax policy, the American
Taxpayer Relief Act of 2012 raises the
marginal tax rates to 39.6% for taxable
incomes of $400,000 for individuals
and $450,000 for couples ling jointly
(see table). Previously, the top rate was
35%, which kicked in at $388,500 for
both individuals and couples. In ad-
dition, for the people in the 39.6% tax
bracket, rates on dividends and long-term
capital gains go to 20% from 15%. For
taxpayers below the $400,000/$450,000
threshold, the Bush-era tax rates are
extended permanently.
Other changes will aect taxpayers
at lower thresholds. For instance, some
provisions phase out personal exemp-
tions and limit itemized deductions,
including those for mortgage interest
and charitable contributions. Those
modications kick in for adjusted gross
incomes of $250,000 for singles and
$300,000 for joint lers. The Social
Security payroll tax rate reverts to
6.2% in 2013 from 4.2% previously,
2013: An Optimistic
Outlook for Equities
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policy and attractive valuation support this positive view.
otvio v. otnsf, crt
Chief Investment Strategist
Morgan Stanley Smith Barney
cntntrs nrinntno
Deputy Chief Investment Officer
Morgan Stanley Smith Barney
,rrr trrtrctfr
Chief Investment Officer
Morgan Stanley Smith Barney
s we enter 2013, the overwhelming
force driving markets and the global
economy will continue to be monetary
policy. The worlds two primary central
banksthe US Federal Reserve and the
European Central Bank (ECB)continue
to pursue record accommodative policies
to bolster nancial markets and, in turn,
spur global growth.
Because monetary policy is now so
essential, all moves by the central banks
are meticulously parsed by market par-
ticipants. For instance, the Dec. 12 pro-
nouncements from the Fed can be viewed
as a signicant step toward transparency.
While the Fed previously said it would
maintain its ultralow interest rate policy
until mid 2015, the central bank has
now tied that policy to achieving a 6.5%
unemployment rate with no more than
2.5% expected ination. As a practical
matter, this should keep the Fed very
accommodative into 2015, but it also
provides more information to investors,
because if the jobless rate approaches
that target then the markets will begin
to anticipate a shift in policy. The Fed
also tweaked Quantitative Ease 3 (QE3)
and initiated a further expansion of the
central banks balance sheet (QE4) to
provide ongoing support to growth.
Likewise, the ECBs Outright Mon-
etary Transactions (OMT) program,
a plan created to backstop European
The New Look in Taxes
Tax rates for high earners went up on Jan. 1.
However, all income earners will pay higher
payroll taxes because as the Social Security
tax reverts to the old rate of 6.2%.
*Wlll be adjusLed or lnaLlon
Source. Morgan SLanley as o an. 2, 20l3
zez stnats nt zez stnats nt
llghesL Tax RaLe on
Taxable lncome
$4S0,000 (jolnL)
$400,000 (slngle)
(jolnL and slngle)
llghesL Tax RaLe on Long-Term
CaplLal Calns and Dlvldends
$4S0,000 (jolnL)
$400,000 (slngle)
$70,700 (jolnL)
$3S,3S0 (slngle)
lersonal LxempLlons lhaseouL and
LlmlL on lLemlzed DeducLlons
$300,000 (jolnL)
$2S0,000 (slngle)
Tax RaLe on LsLaLes 40% $S,000,000* 3S% $S,000,000
Lmployee's Share o
Soclal SecurlLy layroll Tax
Larnlngs up Lo
Larnlngs up Lo
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4%. Ination should be largely stable
both years. Emerging market (EM) GDP
growth should improve in 2013 versus
2012, while US and total developed-market
(DM) GDP growth are not expected to
improve until 2014.
With the nominal global growth
forecast at 6% in 2013, the consensus
global earnings per share (EPS) growth
estimate is 11%. For 2014, given nominal
global GDP growth of more than 7%, the
consensus EPS growth estimate is cur-
rently 12%. While such estimates may
be high, positive EPS growth alongside
P/E expansion should drive strong equity
returns in 2013 and 2014.
Tactical Positioning
Going Into the New Year
We have a modest overweight position in
risk assets. We are tactically overweight
(OW) global equities and alternatives;
we are underweight cash and bonds. Our
more granular overweight positions in
US and EM equities, investment grade
corporate bonds and commodities should
benet from positive economic and prot
growth, as well as from accommodative
monetary policies. Cash and short dura-
tion bonds are likely to yield less than
ination. Dividend yields are higher than
most developed-country sovereign debt
yields, which are also well below the
yields available on high-quality corpo-
rate credit. For more on these and our
other views, please see the tactical asset
allocation reasoning section on page 9.
Mindful of the Risks
While we are selectively OW risk assets,
we have stopped well short of a maximum
OW position because the environment
remains challenging. First, with growth
still slowing, the global economy is more
vulnerable to shocks than would be the
case if growth were accelerating. In ad-
dition, Washington may bungle progress
on credible multiyear decit reduction.
Finally, European policymakers have yet
to agree to a stimulative scal-policy
response to recession. We continually
evaluate our risk exposure and tactical
positioning. As new challenges and op-
portunities appear, we will revisit our
tactical asset allocation as warranted.
and it applies to the rst $113,700 in
individual earnings.
The tax deal also takes ination into
account. For estates above $5 million,
the tax rate increases to 40% from
35%. However, unlike in the past, the
$5 million threshold will be adjusted
for ination going forward. Similarly,
the alternative minimum tax is now in-
dexed to inationand was retroactively
adjusted for 2012.
just completed does not address spend-
ing cuts, nor does it lay out a long-term
deficit-reduction plan. That debate
should start again soon, as the US debt
limit will likely need to be raised by late
February or early March. Therein lies
the opportunity for Washington to enact
a multiyear decit-reduction package.
If leaders can overcome their dier-
ences and enact such a package, it would
be a big deal. If left unaddressed, this
longer-term decit problem threatens
to trigger another US credit downgrade,
a weakermaybe much weakerdollar,
higher debt-maintenance costs and, ulti-
mately, a lower US standard of living than
would otherwise be the case. Reaching a
decit deal is important for the markets.
Indeed, a key relationship exists between
the decits share of GDP and the stock
markets price/earnings multiple (P/E).
History shows that when the decit goes
down, the P/E usually expands.
EURO PROGRESS. With the European
economy in recession and unlikely to
recover until 2014, policymakers con-
tinue to take steps to preserve the euro,
strengthen their common market and
begin to recapitalize their banks. Progress
toward banking union took place last
month, with the ECB obtaining single
supervisory powers over large institutions.
This year, we expect Europe to work toward
creating a common nancial regulatory
authority, setting up a deposit-insurance
program and evolving toward a common
scal policy. Ultimately, we expect that
a Eurobond market will largely supplant
national sovereign debt markets. The
ECB also needs to obtain the authority
to operate as a true lender of last resort.
VALUATION PROPS. In terms of valu-
ation, the US stock market appears at-
tractively valued on several dierent
metrics. For example, the S&P 500s
P/E is quite modest, especially in light
of interest rates being low for both cash
and government bonds (see chart). The
S&P 500s earnings yieldwhich is the
inverse of the P/E ratiois now, for the
rst time, higher than the yield on high
yield bonds. Stocks are also modestly
valued relative to the replacement cost
of corporate assets.
Economic and Earnings Outlooks
Given a good global policy underpin-
ning, Morgan Stanley economists expect
global GDP to stabilize in 2013 at just
above 3%, despite another year of reces-
sion in Europe. As that recession ends
in 2014, growth likely will accelerate to
Measured by the Price/
Earnings Ratio, US
Equities Are Undervalued

The 12-month forward price/earnings ratio
for the S&P 500 Index currently comes in
at 13, while the 60-year average is 15. The
current P/E is modest, especially considering
that interest rates are at record lows.
S&P Index -Month Forward Price/Earnings Ratio
64 68 72 76 80 84 88 92 96 00 04 08 l2
Source. Thomson llnanclal, lacLSeL as o Dec. l3, 20l2
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ccording to Morgan Stanley econo-
mists, in 2013 the global economy is
likely to be stuck in the twilight zone,
an area that divides sustainable growth
from renewed recession.The US leans to
the modest growth side, and Europe to
recession, but one place where growth
prospects are relatively compelling is
China (see rst chart). Indeed, Morgan
Stanley China Economist Helen Qiao
estimates Chinese GDP will expand to
8.2% in 2013, up from the 7.7% rate of
2012. Thats a comedown from the 9%-
to-11% level of just a few years ago but,
in a growth-starved world, it is still a
welcome sight.
Indeed, Chinese economic data
have improved on the margin in re-
cent months as policy-easing measures
implemented in early 2012 appear to
be taking root.For instance, retail sales
rose 13.6% in November, and industrial
production was up 10.1% on a year-
over-year basis. Given this possible
inection point in China's growth, we
believe it is reasonable to add portfolio
exposure to China.
CHlNAXPD5D QUlTl5. Of course,
investing directly in Chinese companies
Investing in China
Through US Stocks
is one way to accomplish that end. The
less obvious method is through what
Morgan Stanley Chief US Equity Strate-
gist Adam Parker calls China exposed
equities. Specically, Parker is referring
to a diversied basket of 39 US compa-
nies that have high current and future
sales exposure to China and sensitivity
to the rate of change in Chinese growth
expectations. The basket includes many
manufacturers and industrial companies,
as well as their suppliers.
In his analysis, Parker looks at the
past performance of China-exposed
equities versus US-centric stocksthose
with virtually no China exposure. The
US-centric portfolio includes domestic
retailers, regional banks and home-
builders. In 2008 and again in 2009,
the relative forward price/earnings ra-
tios of the China-exposed stocks were
high, reecting Chinas relatively strong
economic growth in those periods (see
second chart). However, the relative
position of the China-exposed portfolio
has declined steadily since 2009, such
that it is now near a multiyear low. Said
otnirt skrttv
Equity Strategist
Morgan Stanley Smith Barney
Chinas Estimated Growth
Dwarfs the US and Europe

Even though it has declined from just a few
years ago, economic growth in China far
outpaces growth in the US or Euro Zone.
US Euro Zone China

% Estimated GDP Growth Rate

Source. Morgan SLanley Lconomlcs as o Dec. l7, 20l2
US Stocks With China
Exposure Start to

US stocks with exposure to China have
underperformed US-centric stocks for several
years, but they have now started to pick up.
If China's GDP growth continues to improve,
China-exposed stocks should outperform.
Relative Forward Price/Earnings Ratio of China-Exposed Stocks
to US-Centric Stocks


Source. Morgan SLanley Research as o Nov. 30, 20l2
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another wayand in our viewit is likely
that negativity on China is discounted
materially into China-exposed US equities.
term, we believe that improving industrial
activity in China, perhaps supported by
additional stimulus measures as China's
political transition concludes, may create
opportunities for US manufacturers.Due
largely to his increasingly positive bias
concerning Chinese growth,Parkerre-
cently upgradedindustrials to overweight
within his portfolio strategy for 2013.
Our preferred approach is to include
high-quality, diversified industrial companies
with end-market exposure in aerospace,
construction, process automation, health
care technology and environmental and
food-safety testing. Additionally, we note
that global industrial companies based
in the US are beneting from low energy
costs in many of their manufacturing
processes, which should also support
their margin and earnings outlooks.
a longer-term perspective, we believe
that US consumer franchises with strong
brand recognition, superior scale and
proven managements are likely to benet
from increased discretionary spending
by China's emerging middle class, which
has been fueled by incomeination in
the manufacturing sectorduring the past
10 years. China derives only about 36%
of its GDP from private consumption,
versus 70% in the US and 65% in the
UKa fact that illustrates the upside
potential that an emerging middle class
could provide as the Chinese economy
transitions away from export- and
infrastructure-driven growth. Notably,
Chinas share of global middle-class spend-
ing is projected to increase to 18% in
2030 from 4% in 2010, according to the
Organisation for Economic Co-operation
and Development.
Furthermore, as we have noted pre-
viously (see Seek the Secular Growth
Trend, On the Markets, July 2012), recent
government initiatives to create a stron-
ger safety net, including more robust
health care and retirement services, may
ultimately provide consumers with the
necessary incentives and comfort level to
Chinese consumer. Our preferred plays
include: established consumer-goods
companies; leading restaurant play-
ers with scale and high brand equity;
niche food providers in baby formula;
andaspirational luxury retailers and
accessory makers.
Yearning for Yield
With short-term interest rates near zero and the 10-year US Treasury yield-
ing 1.7%, investing in those equities with reasonably secure growth outlooks
and compelling yields makes sense. The yield on the S&P 500 Index is 2.4%,
and many top-drawer companies within the index pay out well in excess of
that. Adam Parker, Morgan Stanleys chief US equity strategist, notes that
investors who want income will have little choice but to seek it in equities.
While most investors like to receive dividends, they may not realize the
huge contribution dividends provide to the total return of stocks over time.
Between 1930 and 2011, dividend income accounted for more than 40% of
total return (see table).
Of course, when seeking yield in the equity markets, investors need to feel
condent that the dividends are secure, and they should have a reasonable ex-
pectation that their dividend income can grow. On that account, Parker notes
that dividend payouts remain low versus their history, which means there is
room for dividends to increase. Companies have the wherewithal to pay them,
too. Corporate cash coers are teeming and, given sluggish economic growth,
attractive investment opportunities are limited as well. Parker also notes that
managements are increasingly paying themselves with restricted stock units
instead of stock options, which is a development that could prompt an emphasis
on dividend growth over stock-price appreciation. Daniel Skelly
Source. lacLSeL, Morgan SLanley Research
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Dividends Matter
in Equity Investing
Dividends have provided a large portion
of stocks long-term return. Between 1930
and 2011, dividend income accounted for
more than 40% of the total return.
do more discretionary spending. In addi-
tion to a stronger safety net, Qiao argues
that increasing urbanization throughout
central and western China should also
support consumption; she cites recent
trends in online-shopping sales as reec-
tive of the growing power of the urban
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he global growth outlook for 2013
appears to be much like that of the
past few years. Once again, both Mor-
gan Stanley and Citi economists look for
modest overall global growthbut with
marked divergences between regions
and countries (see table). Global GDP
for 2013 is projected to be 3.1%, which
is essentially identical to the expected
nal tallies for 2012. As for emerging mar-
ket growth, Morgan Stanley economists
estimate 5.4% and Citi economists see
5.3%. This level of activity would repre-
sent an improvement from the respec-
tive 2012 estimates of 4.9% and 4.7%.
For the developed-market economies,
Morgan Stanley looks for just 0.7% growth,
a slowing from 2012's expectation for an
already sluggish 1.2%; Citi anticipates a
similar slowing to 0.9%.
CHINESE POWER. Although Chinas
economy is transitioning to a more mod-
erate growth path, it should remain
a powerful contributor to the global
economy. Indeed, Morgan Stanley sees
Chinese GDP expanding at an 8.2%
rate this year, while Citis projection, at
7.8%, anticipates little change. In either
case, China is expected to account for
some 40% of 2013 global GDP growth.
A Familiar Growth Outlook
favorable outlook, the Euro Zone stakes
that claim with continued recessionary
conditions. Morgan Stanley economists
anticipate a 0.5% decline in GDP; Citi
forecasters see a 0.7% fall. In fact, we
believe those GDP estimates could be
revised lower in the months ahead. Whats
more, we believe that continued delever-
aging, scal austerity and tight nancing
conditions are not likely to let up anytime
soon and may continue into 2014.
BEYOND THE CLIFF. Both Morgan Stanley
and Citi economists assume modest scal
drag in the US as a result of the Jan. 1 tax
law, mainly coming from higher payroll
taxes. Each of these economics teams
sees GDP straddling the 1.5% linea
slowing from 2012s expected 2.2% pace.
Morgan Stanley economists expect house-
hold spending and the housing sector
to be positive contributors to growth
in 2013, while declining government
expenditures are likely to have a nega-
tive impact.
In addition, investment spending in
2013 will most likely exceed outlays
from the US and Euro Zone combined.
Still, Chinas projected growth is mark-
edly lower than its 2009-to-2011 pace
of between 9.2% and 10.4%.
EURO ZONE FUNK. In terms of the least
krvin rttntctn
Chief Fixed Income Strategist
Morgan Stanley Smith Barney
Morgan Stanley and Citi Global GDP
and lnat|cn Fcrecasts (year-over-year percenL change)
NoLe. Clobal orecasLs are CDl-welghLed averages, uslng lurchaslng lower larlLy esLlmaLes, whlch glve
greaLer welghLs Lo developlng economles.
*lersonal ConsumpLlon LxpendlLure
Source. Morgan SLanley Research, ClLl Research, Morgan SLanley SmlLh arney as o Dec. 26, 20l2
Morgan Stanley
% Contribution
to Growth
20l2 20l3 20l4 2013
Global GDP 3.l 3.l 4.0
l.2 0.7 l.9 2l
US 2.2 l.4 2.7 lS
Luro Zone -0.S -0.S 0.9 -2
UK -0.2 0.8 l.6 0
apan l.7 0.4 0.8 3
5.0 5.4 5.9 79
razll l.6 2.8 3.4 2
Russla 3.6 3.l 3.7 4
lndla S.0 6.l 6.9 ll
Chlna 7.7 8.2 8.0 39
Global Consumer Prices
Clobal lnaLlon 3.4 3.l 3.3
2.0 l.4 l.7
4.7 4.8 4.8
US Core* 2.3 2.2 2.2
US Cll 2.l l.3 l.6
% Contribution
to Growth
201220l3 20l4 2013
Global GDP 3.0 3.2 3.7
l.2 0.9 l.5 22
US 2.2 l.6 3.0 lS
Luro Zone -0.4 -0.7 -0.4 0
UK -0.l 0.8 l.0 0
apan l.6 0.7 0.7 4
4.7 5.3 5.3 78
razll l.4 3.9 S.S 2
Russla 3.6 3.2 3.8 4
lndla S.4 6.2 6.9 l2
Chlna 7.7 7.8 7.3 40
Global Consumer Prices
Clobal lnaLlon 3.3 3.2 3.l
l.9 l.7 l.8
4.4 4.6 4.7
US Core* l.8 l.9 2.0
US Cll l.8 l.9 l.9
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rom the US and Europe to many
emerging markets, the message is
that the extraordinarily accommodative
policy of the last several years will stay
in place during 2013 (see chart). In fact,
within the developed markets, central
bankers view themselves as a counter-
weight to the potential drag coming from
more-austere scal policies.
Although the European Central Bank
(ECB) did not lower the re rate at its
December policy meeting, the market still
expects at least one more 25-basis-point
cut. Along these lines, ECB President Ma-
rio Draghi mentioned in his postmeeting
remarks that the decision to keep rates
steady at 0.75% was not unanimous. Rather,
some members of the governing council
supported a rate cut, leading us to believe
a path has been set for such action early
this year. Both Morgan Stanley and Citi
forecasts call for a rate cut in the rst
quarter (see table).
QE3 WITH A TWIST. The Federal Re-
serve is showing no signs of letting up
on its aggressive policy. At the Feds
December policy meeting, the end of
Operation Twist morphed into a new
and more forceful form of Quantitative
EaseQE3+ or QE4. Specically,
the Fed has taken its plan to purchase
$40 billion in mortgage-backed securi-
ties per month and added $45 billion in
Treasuries to the shopping list. This is
an open measure with no specic limit
on the duration of the program or its
size. Also at the December meeting,
the Federal Open Market Committee
(FOMC) adopted new rate-guidance
language. Until then, the FOMC had
taken a calendar-based approach by say-
ing it anticipated that todays low fed
funds rate would continue until mid
2015. Now, the Fed will stick with the
current rate as long as the unemploy-
ment rate remains above 6.5%, ination
one-to-two-years ahead is projected to
be no more than a half percentage point
above the FOMCs 2% longer-run goal
and longer-term ination expectations
continue to be well anchored. The Fed
says this new language is consistent
with its earlier date-based guidance.
FED FORECASTS. The new focus on eco-
nomic data increases the importance of
the Fed's central-tendency forecasts.
While they are adjusted throughout the
year, the Fed forecasts tend to come in on
the high side. This overshoot provides
policymakers some cover when enact-
ing easing measures. For example, the
central-tendency estimate for real GDP
in November 2011 looked for a gain of
2.5% to 2.9% in 2012. The latest forecast
now places 2012 at 1.7% to 1.8%. For 2013,
the range is 2.3% to 3.0%well above the
Morgan Stanley and Citi forecasts of
1.4% and 1.8%, respectively.
*Morgan SLanley's currenL and orecasL pollcy raLes use Lhe one-year lendlng raLe.
**ClLl's currenL and orecasL pollcy raLes use Lhe one-year deposlL raLe.
Source. Morgan SLanley Research, ClLl Research as o Dec. 27, 20l2
Morgan Stanley Current Rate 1Q13 4Q13
Policy Rate (%)
US 0.00~0.2S 0.lS 0.lS
Luro Zone 0.7S 0.S0 0.S0
apan 0.l0 0.0S 0.0S
UK 0.S0 0.S0 l.00
Chlna 6.00* 6.00* 6.00*
10-Year Government Bond Yield (%)
US l.70 l.84 2.24
Cermany l.30 l.42 l.68
apan 0.79 0.9S l.20
UK l.80 l.74 2.20
Citi Current Rate 1Q13 4Q13
Policy Rate (%)
US 0.00~0.2S 0.2S 0.2S
Luro Zone 0.7S 0.S0 0.2S
apan 0.l0 0.l0 0.l0
UK 0.S0 0.S0 0.S0
Chlna 3.00** 3.00** 3.2S**
10-Year Government Bond Yield (%)
US l.70 l.7S 2.S0
Cermany l.30 l.S0 l.S0
apan 0.79 l.l0 l.30
UK l.80 l.80 l.7S
Morgan Stanley and Citi Policy Rate and
Government Bond Yield Forecasts
Easy Money
krvin rttntctn
Chief Fixed Income Strategist
Morgan Stanley Smith Barney
Global Policy Remain
Low and Steady
In response to slowing growth, central
banks around the world have cut policy
rates drastically. The Federal Reserve, for
one, is likely to keep its policy rate low
through mid 2015.
US Japan Euro Zone UK
2000 2002 2004 2006 2008 2010 2012

Source. lacLseL, Morgan SLanley SmlLh arney as o Dec. 26, 20l2
vonctn sftntrv svifn etnnrv l ,tnutnv zc+ 7
on fnr vtnkrfs / rixro incovr
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
The Global Investment Committee provides guidance on asset allocation decisions through
its various model portfolios. The eight models below are recommended for investors with
$1 million to $20 million in investable assets. They are based on an increasing scale of risk
(expected volatility) and expected return.
Global Investment Committee
Tactical Asset Allocation
cLoenL cnsn
cLoenL eouos
cLoenL equifies
cLoenL nLfeaunfive /nesoLufe
aefuau iuvesfueufs
couszavntvz uoczantz
68% Investment Grade Bonds
23% Global
9% Ination-
Linked Securities
54% Investment
Grade Bonds
1% High Yield
7% Developed
ex US
10% US
3% Emerging
1% REITs
3% Managed Futures 5% Hedge Funds
11% Global Cash
2% Ination-
Linked Securities
3% Commodities
39% Investment
Grade Bonds
2% Ination-
Linked Securities
2% High Yield
3% Emerging
17% US
7% Developed
ex US
6% Global Cash
8% Hedge Funds
5% Managed
3% Commodities
7% Emerging
1% REITs
29% Investment
Grade Bonds
3% Global Cash
20% US
4% Emerging
3% High Yield
10% Emerging
3% Commodities
5% Managed Futures
11% Hedge Funds
8% Developed
ex US
2% REITs
2% Ination-
Linked Securities
11% Hedge Funds
23% US 10% Emerging
3% REITs
3% Commodities
5% Managed Futures
1% Global Cash
ex US
2% Ination-
Linked Securities
Grade Bonds
4% High Yield
10% Hedge Funds
33% US
11% Emerging
3% REITs
1% Ination-Linked
5% High Yield
5% Emerging
5% Investment
Grade Bonds
6% Managed
4% Commodities
ex US
10% Hedge Funds
ex US
5% REITs
5% Managed
40% US
6% Commodities
10% Hedge Funds
ex US
5% REITs
5% Managed
38% US
6% Commodities
8 vonctn sftntrv svifn etnnrv l ,tnutnv zc+
on fnr vtnkrfs / ronfrotios
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
Global Bonds
Relative Weight
Within Bonds
ShorL DuraLlon UnderwelghL
We recenLly reduced our exposure. WlLh ylelds exLremely low ln many markeLs, relaLlve perormance
wlll lag over any reasonable holdlng perlod excepL ln an envlronmenL o negaLlve reLurns on rlsk asseLs.
CovernmenL UnderwelghL The prlce o saeLy ls very expenslve ln percelved sae-haven markeLs. We see beLLer value elsewhere.
lnvesLmenL Crade CorporaLe
& SecurlLlzed
We recenLly lncreased our exposure. These securlLles oer an aLLracLlve comblnaLlon o hlgh credlL
quallLy and ylelds LhaL are somewhaL above Lhose on sae-haven governmenL bonds. ln Lhe US,
securlLlzed bonds are benehLlng rom Lhe lederal Reserve's uanLlLaLlve Lase J (L) purchases.
lnaLlon-Llnked SecurlLles UnderwelghL WlLh breakeven raLes a blL above Lhelr long-Lerm averages, we see beLLer value elsewhere.
llgh Yleld UnderwelghL We recenLly reduced our exposure. Ylelds are near record lows, urLher upslde seems llmlLed.
Lmerglng MarkeLs CverwelghL The yleld spread ls above lLs long-Lerm Lrend llne.
Global Equities
Relative Weight
Within Equities
US CverwelghL
We recenLly lncreased our exposure. AL Lhe caplLallzaLlon level, our preerence ls large caps,
aL Lhe sLyle level, our preerence ls growLh agalnsL a backdrop o deceleraLlng earnlngs growLh.
RelaLlve-valuaLlon readlngs also supporL Lhls poslLlonlng.
Developed MarkeLs ex US UnderwelghL
AL Lhe reglonal level, we recenLly lncreased our exposure Lo Lhe Lurope ex UK reglon, ellmlnaLlng
our underwelghL poslLlon. We are markeL welghL Canada and Lhe Asla laclhc ex apan reglon
(predomlnanLly AusLralla) and underwelghL apan, where challenges Lo economlc growLh appear Lo
be sLrucLural as well as cycllcal.
Lmerglng MarkeLs CverwelghL
lollcymakers' ocus has generally shlLed away rom conLalnlng lnaLlon and Loward supporLlng
growLh, and Lhere ls more scope or pollcy supporL Lhan ln Lhe developed economles.
Clobal Alternatve/
Absolute Return
Relative Weight
Within Alternative
RLlTs UnderwelghL
lurLher upslde seems llmlLed agalnsL a backdrop o slowlng global economlc growLh. lor US real
esLaLe lnvesLmenL LrusLs, Lhe dlvldend yleld spread versus Lhe S&l S00 dlvldend yleld ls well
below lLs long-Lerm average.
CommodlLles CverwelghL
We recenLly lncreased our exposure. lrlor rounds o Lhe led's L have been assoclaLed wlLh
hlgher commodlLy prlces, especlally ln Lhe preclous-meLals secLor. SLlll, much depends on
Chlna's economlc perormance.
Managed luLures CverwelghL
As a parLlal hedge agalnsL a less avorable ouLcome Lhan our base case, we remaln LacLlcally
overwelghL. Thls asseL class oLen provldes proLecLlon durlng exLended perlods o adverse
hnanclal markeL condlLlons.
Tactical Asset Allocation Reasoning
vonctn sftntrv svifn etnnrv l ,tnutnv zc+ 9
on fnr vtnkrfs / ronfrotios
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
uring 2012, credit investors were
forced to grapple with potentially
explosive situations such as Greeces
debt restructuring, Spain and Italys
vulnerabilities to debt-crisis contagion,
the US presidential election and central-
bank intervention. Still, credit spreads
narrowed and long-term bond yields
fell. Total returns have been solid for
both investment grade and high yield
credit. Thus, while year-end results
are yet to be tabulated, it is likely that
2012 will show the fourth straight year
of positive total returns (see chart).
STUCK IN THE MIDDLE. Will 2013 be yet
another year of strong returns fueled
by prodigious investor inows and the
search for yield, or will interest rates
rise suddenly, prompting investors to
rush to the exits? We think credit in-
vestors will be stuck somewhere in the
middle of these two scenarios, as we
believe the 10-year US Treasury yield
will likely remain in the 1.2%-to-2.0%
range throughout the year.
The interest rate outlook provides
some good news for investors with du-
ration exposure, but it also leaves little
room for capital gains. Heres why: Both
investment grade and high yield credit
are trading at spreads that oer the
potential for upside, at 143 basis points
and 532 basis points, respectively; yet,
the yields on both asset classes are near
all-time lows. In fact, as recently as
mid October, investment grade credit
hit a new all-time low of 2.62% and
now trades at only 2.68%. On Dec. 19,
the high yield market dropped to its
all-time low yield of 5.95% and rose
to an all-time-high price of 105.0; by
Dec. 26, the yield was slightly higher
and the price, slightly lower.
This means investors will have a
more difficult starting point for 2013.
Still, we believe that both investment
grade and high yield bonds will remain
appealing to conservative investors for
their extra yield versus US govern-
ment securities, as well as to aggressive
investors for the lower volatility they
offer relative to equities.
INFLOW OUTLOOK. Inows into both
asset classes should remain relatively
strong. New issuance is likely to decline
a little in 2013, in our view, because many
companies have likely pulled forward
their nancing plans amid low rates and
uncertainty about the scal cli. We
expect buying to be stronger than sell-
ing as funds look to invest their cash in
the secondary market as new issuance
slows. True, both corporate earnings
and revenues have declined in the last
quarter. However, we believe this de-
terioration is limited and will not aect
corporate access to fundingnor will it
have a material eect on the high yield
default rate, which is likely to remain
near 2% this year.
BEST POSITIONS. We maintain our
preference for a quality barbell ap-
proach: Focus on lower-quality invest-
ment grade bonds because the BBBs oer
roughly 80 basis points more in yield
than A-rated bonds. We would take the
opposite tack in high yield bonds, focus-
ing on BBs and higher-quality Bs. The
higher-quality junk bonds limit volatility
while still providing anywhere from
200 to 375 basis points in additional
yield. We suggest three-to-seven-year
maturities in investment grade credit and
two-to-ve-year maturities in high yield
as another way to mitigate volatility.
The Big Gains
Are Over for Credit
,ontfntn vtcktv
Senior Fixed Income Strategist
Morgan Stanley Smith Barney
Citi BIG US Corporate Index
Citi High Yield Market Index

2010 2011 2012 (year to date)
9.1% 8.3%
Source. The Yleld ook as o Dec. 26, 20l2
Credit Heads Toward a
Fourth Straight Year of
Positive Returns
Investment grade and high yield bonds have
delivered solid returns in each of the past
three yeors. Wheo the jool tolly |s Jooe
we expect that 2012 will be the fourth
consecutive year with positive results.
10 vonctn sftntrv svifn etnnrv l ,tnutnv zc+
on fnr vtnkrfs / conrontfr eonos
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
unicipal bonds enjoyed an impres-
sive price rally that began right
after Election Day and ran into Decem-
ber. While much of the momentum was
driven by the US Treasury market, munis
outperformed Treasuries, temporarily
bringing the 10-year municipal-to-Treasury
relative-value ratio down to levels not
seen since early 2012 (see chart).
What made the outperformance all
the more interesting is that it took place
amid concerns that tax negotiations in
Washington could result in a change in
the federal tax exemption for municipal
bonds. President Obama has proposed
to limit the value of the municipal tax
exemption to 28% for high-income tax-
payers. That would mean taxing the muni
interest payments at the dierence be-
tween 28% and the applicable marginal
rate, which is as yet unknown. Then, in
early December, as tax talks in Washing-
ton heated up, muni investors started to
focus on this possibility and the market
reversed course. Between Dec. 7 and
Dec. 19, yields jumped 34 basis points.
LOW ABSOLUTE YIELDS. The prior rally
had driven yields down to absolute levels
not seen in almost 50 years. Credit spreads
tightened and the muni yield curve at-
tened. It appears that initially the market
had focused on what is known, only to
become roiled by the seemingly endless
Sharp Rally Ends Abruptly
,onn oitton
Chief Municipal Bond Strategist
Morgan Stanley Smith Barney
Muni Yield and
Relative-Value Ratio
Start to Climb
As yields on municipal bonds have fallen,
so has the relative-value ratio. Since early
December, however, both measures have risen,
the result of a muni market sell-off.
Yield on -Year Muni Bonds (left scale)
-Year Relative-Value Ratio (right scale)
Feb 12 Apr 12 Jun 12 Aug 12 Oct 12
Dec 12
Source. Thomson ReuLers as o Dec. 26, 20l2
possibilities of the unknownincluding if
or how the scal cli will be resolved and
if that resolution will include a change in
the tax status of muni bonds.
Among the known positive factors is
that bond redemptions usually rise dur-
ing December and January, as well an
expected decline in the new-issue supply.
On the negative side, muni bond funds
recently experienced the largest weekly
outows in two years.
NEUTRAL STANCE. With these factors in
the mix, we are neutral at current market
levels, acknowledging the power of favor-
able near-term technicals but mindful
that tax-policy risk has not gone away.
New bond purchases should be made with
careful consideration to interest rate ex-
posure, and credit-quality choices should
reect the anticipated continuation of
tepid economic growth in 2013.
Our strategy is to focus on mid-tier,
A-rated general-obligation bonds. For
essential-service bondssuch as water,
sewer and electricwe include mid-level
BBB-rated bonds and higher. Our target
maturity is ve to 11 years. In addition,
prerefunded muni bonds selling at yields
higher than corresponding US Treasuries
are also compelling.
vonctn sftntrv svifn etnnrv l ,tnutnv zc+ 11
on fnr vtnkrfs / vunicirtt eonos
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
your outlook for the global economy?
DON YACKTMAN (DY): Long term, the
economies in the developed world [all] face
a similar problem: increasing longevity
and a declining birthrate. Thats what I
call the 800-pound-gorilla problem. We
have a tremendous amount of unfunded
transfer-payment programs that have
been put into placethe biggest one in
the US being Medicareand we have
a flawed process to deal with [them]. I
think that problem exists throughout
the developed world, and its going to
take a long time to deal with because
its going to aggravate people any way
[government officials] try to solve it.
DS: Is that going to be a headwind
to economic growth?
DY: Well, nobody spends other peoples
money as well as his or her own. Ev-
ery study Ive seen indicates that the
more money you plow through central
think bonds are basically overpriced,
particularly government bonds.
DS: The Federal Reserve has indicated
that short-term interest rates are likely
to stay exceptionally low for another
few years. Do you think thats the most
likely outcome as well?
DY: As long as you have slower eco-
nomic growth, its a likely outcome.
The Feds main job is to protect the
banking system. In my opinion, what
the Fed has [to do] is to try to reate
the economy as a way of raising the
price levels of all things so as to cre-
ate a bottom for the housing market.
All recessions are basically inven-
tory corrections. In this case, the big
inventory problem is housing. While
we have pretty much washed through
the inventory based on some sort of a
normalized housing production, the
problem is that households have merged.
In other words, youve had young people
moving back in with parents and things
like thatso the number of household
formations is below the trend line. As a
result, theres still some inventory out
there, but a turn in housing is some-
where close at hand.
As I keep emphasiz-
ing to people, we cant
control the wind, but
we can set the sails. We
have to adapt and react
to whatever the envi-
ronment isbecause,
ultimately, this busi-
ness boils down to what
securities you buy and
what you pay for them.
DS: What is your
investment theme right now, and are
there any areas that youre avoiding?
DY: The one on which we have the most
conviction is large-cap companies with
governments, the slower the growth
rate. So, while Im not disappointed
or negative, I think the reality is that
growth rates will probably be slower
than they would have been otherwise,
because more money
seems to be moving
in that direction.
DS: What type of
stock market per-
formance are you
DY: We do not spend
a lot of time trying to
predict short-term
stock market per-
formance. There is
a tremendous spread
between the rate on
US Treasuries and what we can get on
equities we own. They are not neces-
sarily greatly priced, but theyre still
a much better deal than Treasuries. I
Seeking High-Quality
Stocks in a Low-Quality
After more than three decades in the investment management business, Don Yacktman
has seen plenty of uncertainty and challenges in the economy and the markets.
|es v|, Yec|men, pros|don end ccc||o |nvosmon cncor c Yec|men Asso
Management, instead concentrates on investing in businesses that generate stable
prcns end |evo s|ero|c|dorr|ond|, menegomons. |o Aus|n|esod menegor,
v|cso nrm |es $9.: |||||cn undor menegomon, e|sc soors eve, rcm ccmpen|os
v|| |e|enco s|oos |urdonod |, |ergo emcuns c nxod essos.
Yacktman, whose Yacktman Fund and Yacktman Focus Fund are part of the
Managers Investment Group, recently discussed his outlook with Douglas Schindewolf,
director of asset allocation for Morgan Stanley Wealth Management. The following is
an edited version of their conversation.
Long term, the
economies in the
developed world
[all] face a similar
problem: increasing
longevity and a
declining birthrate.
Don Yacktman
12 vonctn sftntrv svifn etnnrv l ,tnutnv zc+
on fnr vtnkrfs / qat
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
high returns on assets. A lot of these tend
to be in the consumer area. They have
relatively predictable cash ows and,
in a lot of cases, high dividend yields.
The area that we tend to avoid
most of the time is companies that
have enormous amounts of xed as-
setsbusinesses like steel or autos or
other heavy industry. We rarely have
very much of our investment dollars in
those kinds of things. The other area
that we are avoiding is businesses that
have enormous amounts of leverage
and therefore low returns on assets,
such as generic banking.
DS: What is your strategy for identify-
ing attractive investment opportunities?
DY: Our long-term goal is to rst pro-
tect our clients money.
That means reducing
the likelihood of mate-
rial permanent losses of
capital and also protect-
ing it against ination.
In the last 50 years,
i nfl ati on has com-
pounded at approxi-
mately 4% a year, which has driven
the dollar down to 13 cents. Ination
in America seems inevitableits just
a matter of how much. Thats why we
seek to protect against not only absolute
losses but also the purchasing-power
loss of our investors dollars.
The second goal is to do well over a
long cycle, peak to peak. That leads into
the process we use, which is basically
to look at every investment as though it
were a long-term bond and on a yield-
to-maturity basis. We take into account
how much money a company generates
and its growth rate. Then we estimate,
to the best of our ability, that if we were
to buy it and own it indenitely, what
kind of compound rate of return would
we expect to earn? Nobody can see the
future with absolute certainty, so the
more predictable the business is, the
more condence were going to have
on that and the narrower the range of
outcomes will be. Less predictable busi-
nesses have a wider range of outcomes,
and you need a higher expected rate of
return to compensate for that.
In todays world, what we have
found is that the spread of alternatives
creates a relatively narrow range of
outcomes. Usually, its very disruptive
periods, as we had in 2008 to 2009,
that create bigger tails in the bell
curve and more opportunity. Today,
as a result of this, we have found
that the best risk-adjusted forward
returns tend to be in very high-quality
companies. In a lot of cases, these
big, high-qualityrelatively slow unit
growth but very profitablebusi-
nesses have yields in excess of the
30-year US Treasury. Its very rare
if you go through a long period of
history to see that kind of situation.
DS: What are your long-term infla-
tion expectations?
DY: I think it depends on how we
govern each situation. Theres no mag-
ic rule thats going to tell us. I think
what the Fed is doing is going to be
interesting down the road, because
at some point we are going to see the
economy turn. Then, the Fed is going
to have to turn off the spigot to some
degree. Otherwise you may get a lot of
inflation, and that may lead to much
higher interest rates. With the amount
of money being borrowed, that could
create real problems, so its a little bit
of a tightrope that theyre walking.
DS: Is the uncertainty about how
Washington will navigate the fiscal
cliff affecting the day-to-day manage-
ment of your fund?
DY: No. We have a very long-term
strategy thats very consistent, and we
use the same strategy over and over.
Well adapt to whatevers out there, but
by using this long-term, risk-adjusted
forward rate of return, we feel were
going to give clients the best potential
DS: What is your approach to cash
in the funds?
DY: Our cash is re-
sidual, so wed rather
be owners than credi-
tors. We have roughly
15%, as of the end of
the last quarter. Over
the last 10-plus years,
that has not been un-
usual for us.
DS: Any parting thoughts?
DY: I think the main way in which
we differ from a lot of people is in our
time horizon. We have a very long-term
horizon and very patient investors. In a
world with high volatility in the equity
market and a decline in transaction
costs, I think there is a central tendency
for people to do more speculation, to
try to call things in a very short time
frame. I think thats very difficult to
do. We feel very comfortable with what
were doing.
Don Yacktman is not an employee
of Morgan Stanley Smith Barney.
Opinions expressed by him are solely
his own and may not necessarily
reect those of Morgan Stanley
Smith Barney or its aliates.
There is a tremendous spread between the rate on US
Treasuries and what we can get on equities we own.
They are not necessarily greatly priced, but theyre
still a much better deal than Treasuries.
Don Yacktman
vonctn sftntrv svifn etnnrv l ,tnutnv zc+ 13
on fnr vtnkrfs / qat
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
Amld slowlng global economlc growLh, Lhe
Clobal lnvesLmenL CommlLLee recommends
an underwelghL ln global real esLaLe
lnvesLmenL LrusLs (RLlTs). As or US RLlTs,
relaLlve valuaLlon provldes anoLher reason
Lo be wary. The spread beLween Lhe
dlvldend yleld on US RLlTs and Lhe S&l
oo dlvldend yleld ls well below lLs
long-Lerm average.
lowever, Mlchael llerman, Lhe RLlT
analysL aL ClLl Research, says US RLlTs
are sLarLlng zo1 wlLh Lhe wlnd aL Lhelr
backs. Lven Lhough domesLlc RLlTs earned
a 16.8% LoLal reLurn ln zo1z (as o Dec. z),
llerman Lhlnks Lhey can log double-dlglL
reLurns agaln Lhls year based on lmprovlng
undamenLals and an ldeal caplLal
envlronmenL. Those Lwo drlvers have
enabled RLlTs Lo ralse some $6; bllllon
durlng Lhe pasL year. le belleves LhaL Lhe
caplLal lnuslon should enable RLlTs Lo
lmprove Lhelr balance sheeLs whlle allowlng
or expanslon and acqulslLlons.
5tartng wth the .6% dvdend
yield, Bilerman builds his forecast with
a :.% ncrease n cash ow and a .6%
improvement in same-store net operating
ncome, whch comes to a .6% expected
total return. Addng .% Irom an estmated
zo-bass-pont compresson n cap rates and
:.% n external growth rates, the potental
total return s :.:%, and perhaps nearly :;%
I external growth s stronger (see chart).
Can lL be LhaL easy? llerman
acknowledges LhaL US RLlTs ace a
poLenLlally 'choppy paLh,' and he agrees
wlLh skepLlcs who polnL ouL LhaL a cycle
cannoL lasL orever~and LhaL Lhls one has
Laken RLlTs up zp% rom Lhelr March zoop
nadlr. lowever, llerman does Lhlnk Lhls
cycle can lasL one more year.
ln Lrylng Lo solve Lhe Luro Zone's hnanclal
woes, mosL o Lhe aLLenLlon rom
pollcymakers ls on Lhe soverelgn debL crlsls.
To LhaL end, Lhe Luropean CenLral ank's
CuLrlghL MoneLary TransacLlons program
ls a major sLep ln LhaL lL can backsLop
LeeLerlng soverelgn bond markeLs. Another
approach that gets little attention involves
boosting private investmentwhich,
according to a study by the McKinsey
Clobal |nsttute (MC|), Iell :.% n
constant euros between zoo; and zo::
(see chart).
Private investment was the hardest-hit
component of the European Unions GDP,
and t s vtal Ior recovery, says the report.
The reason ls LhaL, ln Lhe pasL, prlvaLe
consumpLlon has drlven mosL economlc
rebounds. Now, hlgh unemploymenL and
personal debL have made consumers
cauLlous abouL spendlng, and governmenLs
are noL ln any poslLlon Lo plck up Lhe slack.
LxporLs were a blg poslLlve conLrlbuLor Lo
CDl ln Lhe zoo;-Lo-zo11 perlod, buL Lhey
ace headwlnds now because Lurope lLsel
ls Lhe blggesL markeL.
heslLaLed Lo launch Lhelr own dormanL
lnvesLmenL plans. There's no quesLlon
LhaL Luropean companles have Lhe cash Lo
lnvesL l Lhey choose Lo do so. AL Lhe end
o zo11, MCl esLlmaLed hrms ln Lurope had
excess cash holdlngs o abouL C;o bllllon.
To help Lhe Luropean economy, MCl
says governmenLs could remove regulaLory
barrlers aL a relaLlvely low cosL, Lhereby
unlocklng shorL-Lerm prlvaLe lnvesLmenL
LhaL would conLrlbuLe Lo growLh and
lnsplre conhdence ln hrms LhaL have
Building Blocks for REITs

4.6% 9.6%
5.5% 1.5% 16.6%
Free Cash
NOI Growth at
Flat Cap Rate
Total Return
Compression in
Cap Rates
Total Return
Components of REIT Total-Return Forecast
Source. ClLl Research as o Dec. l4, 20l2
Private Investment: Down and Out in Europe
Change in Real GDP, EU- Countries, to
Real GDP
Net Exports

Source. llS Clobal lnslghL, LconomlsL lnLelllgence UnlL, McKlnsey Clobal lnsLlLuLe as o December 20l2
14 vonctn sftntrv svifn etnnrv l ,tnutnv zc+
on fnr vtnkrfs / cntnf eook
lndex Dehn|t|cns
sar see uczx This capitalization-weighted
index includes a representative sample of 500
leading companies in leading industries of the
US economy.
ct us eaonc uvzstuzut cancz eouc
uczx This index represents securities that
are investment grade, SEC registered, taxable
and dollar denominated.
ct us ncn vztc unaxzt uczx This
index captures the performance of below
investment grade debt issued by corporations
domiciled in the US.
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
nnenc|e| |nsrumon cr c per|c|peo |n en, red|ng sreog,. ||s |s nc e rosoerc| ropcr end ves nc properod |, |o |osoerc| |opermons c |crgen Sen|o,
& Co. LLC or Citigroup Global Markets Inc. The views and opinions contained in this material are those of the author(s) and may differ materially from the views
end cp|n|cns c c|ors e |crgen Sen|o, Sm|| |erno, ||C cr en, c |s en||eo ccmpen|os. |es porcrmenco |s nc nocosser||, e gu|do c uuro porcrmenco.
||oeso roor c |mpcren |ncrme|cn, d|sc|csuros end que||nce|cns e |o ond c ||s meor|e|.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including
que||, end eccurec, c |o|r vcr|, nrm rovonuos ,|nc|ud|ng red|ng end cep|e| mer|os rovonuos), c||on ood|ec| end ccmpo||vo eccrs. |crgen Sen|o,
Smith Barney 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
prcspoc|vo per|c|pens ero roorrod. ||s meor|e| |s |esod cn pu|||c |ncrme|cn es c |o spoc|nod deo, end me, |o se|o |oroeor. Wo |evo nc c|||ge|cn
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 Smith Barney has no obligation to provide updated information on the securities/instruments mentioned herein.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend
cn en |nvoscrs |nd|v|due| c|rcumsencos end c|joc|vos. |crgen Sen|o, Sm|| |erno, roccmmonds |e |nvoscrs |ndopondon|, ove|ueo spoc|nc |nvosmons end
sreog|os, end onccuregos |nvoscrs c soo| |o edv|co c e nnenc|e| edv|scr. |o ve|uo c end |nccmo rcm |nvosmons me, ver, |oceuso c c|engos |n |noros
reos, cro|gn oxc|engo reos, doeu| reos, prope,mon reos, socur||os/|nsrumons pr|cos, mer|o |ndoxos, cpore|cne| cr nnenc|e| ccnd||cns c ccmpen|os end
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
c|engos c en, essump|cns me, |evo e meor|e| |mpec cn en, prcjoc|cns cr os|meos. O|or ovons nc e|on |nc ecccun me, cccur end me, s|gn|ncen|, eoc
the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections
cr os|meos, end |crgen Sen|o, Sm|| |erno, dcos nc roproson |e en, suc| essump|cns v||| rooc ecue| uuro ovons. Acccrd|ng|,, |oro cen |o nc
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
c, end s|cu|d nc, crm e pr|mer, |es|s cr en, |nvosmon doc|s|cns |e ,cu me, me|o. |crgen Sen|o, Sm|| |erno, |s nc ec|ng es e nduc|er, undor o||or |o
|mp|c,oo |o|romon |nccmo Socur|, Ac c 9~, es emondod cr undor soc|cn ~9b c |o |norne| rovonuo Ccdo c 98C es emondod |n prcv|d|ng ||s meor|e|.
Morgan 5tanley 5mth arney and ts aIhlates do not render advce on tax and tax accountng matters to clents. Ths materal was not ntended or wrtten
to be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties that may be imposed on
the taxpayer under U.5. Iederal tax laws. Lach clent should consult hs/her personal tax and/or legal advsor to learn about any potental tax or other
mplcatons that may result Irom actng on a partcular recommendaton.
International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties
c cro|gn ccunr|os es vo|| es |o r|s| c curronc, ucue|cns. |oso r|s|s ero megn|nod |n ccunr|os v|| omorg|ng mer|os, s|nco |oso ccunr|os me, |evo
relatively unstable governments and less established markets and economies.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bonds 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.
|o mer|o ve|uo c do| |nsrumons me, ucueo, end prccoods rcm se|os pr|cr c meur|, me, |o mcro cr |oss |en |o emcun cr|g|ne||, |nvosod cr |o
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.
|cnds reod |o|cv |nvosmon gredo me, |evo spocu|e|vo c|erecor|s|cs end proson s|gn|ncen r|s|s |o,cnd |cso c c|or socur||os, |nc|ud|ng groeor crod|
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 ones state of residence and, if applicable, local tax-exemption applies if securities are issued within ones city of residence.
A taxable equivalent yield is only one of many factors that should be considered when making an investment decision. Morgan Stanley Smith Barney and its
Financial Advisors do not offer tax advice; investors should consult their tax advisors before making any tax-related investment decisions.
Crcv| |nvos|ng dcos nc guerenoo e prcn cr o||m|neo r|s|. |o scc|s c |oso ccmpen|os cen |evo ro|e|vo|, ||g| ve|ue|cns. |oceuso c |oso ||g|
valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.
Ve|uo |nvos|ng dcos nc guerenoo e prcn cr o||m|neo r|s|. Nc e|| ccmpen|os v|cso scc|s ero ccns|dorod c |o ve|uo scc|s ero e||o c urn |o|r |us|noss
around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.
Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures funds, and
unds c |odgo unds, pr|veo oqu|,, end menegod uuros unds, ero spocu|e|vo end one|| s|gn|ncen r|s|s |e cen |nc|udo |cssos duo c |ovoreg|ng cr c|or
spocu|e|vo |nvosmon prec|cos, |ec| c ||qu|d|,, vc|e|||, c rourns, rosr|c|cns cn rensorr|ng |noross |n e und, pcon|e| |ec| c d|vors|nce|cn, e|sonco end/
or delay 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 advisor.
|nvos|ng |n ccmmcd||os one||s s|gn|ncen r|s|s. Ccmmcd|, pr|cos me, |o eocod |, e ver|o, c eccrs e en, |mo, |nc|ud|ng |u nc ||m|od c, ,|) c|engos |n
supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events,
vonctn sftntrv svifn etnnrv l ,tnutnv zc+ 15
(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.
||,s|ce| proc|cus moe|s ero ncnrogu|eod prcducs. |roc|cus moe|s ero spocu|e|vo |nvosmons, v||c| me, oxpor|onco s|crorm end |cng orm pr|co vc|e|||,.
|o ve|uo c proc|cus moe|s |nvosmons me, ucueo end me, epproc|eo cr doc||no, dopond|ng cn mer|o ccnd||cns. | sc|d |n e doc||n|ng mer|o, |o pr|co ,cu
receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals
me, nc |o su|e||o cr |nvoscrs v|c roqu|ro curron |nccmo. |roc|cus moe|s ero ccmmcd||os |e s|cu|d |o seo|, scrod, v||c| me, |mpcso edd||cne| ccss cn
|o |nvoscr. |o Socur||os |nvoscr |rcoc|cn Ccrpcre|cn ,S||C) prcv|dos core|n prcoc|cn cr cuscmors ces| end socur||os |n |o ovon c e |rc|orego nrms
|en|rupc,, c|or nnenc|e| d|ncu||os, cr | cuscmors essos ero m|ss|ng. S||C |nsurenco dcos nc epp|, c proc|cus moe|s cr c|or ccmmcd||os.
|r|nc|pe| |s rournod cn e mcn||, |es|s cvor |o ||o c e mcrgego|ec|od socur|,. |r|nc|pe| prope,mon cen s|gn|ncen|, eoc |o mcn||, |nccmo sroem end |o
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/CMOs 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/CMOs 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/CMOs market price to fall. Some MBS/CMOs may have original issue discount (OID). OID occurs if the
MBS/CMOs 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.
roesur, |ne|cn |rcoc|cn Socur||os ,||S) ccupcn pe,mons end undor|,|ng pr|nc|pe| ero eucme|ce||, |ncroesod c ccmponseo cr |ne|cn |, rec||ng |o
ccnsumor pr|co |ndox ,C||). W|||o |o roe| reo c rourn |s guerenood, ||S ond c cor e |cv rourn. |oceuso |o rourn c ||S |s ||n|od c |ne|cn, ||S me,
s|gn|ncen|, undorporcrm vorsus ccnvon|cne| U.S. roesur|os |n |mos c |cv |ne|cn.
|qu|, socur||os me, ucueo |n rospcnso c novs cn ccmpen|os, |ndusr|os, mer|o ccnd||cns end gonore| occncm|c onv|rcnmon.
|nvos|ng |n sme||or ccmpen|os |nvc|vos groeor r|s|s nc esscc|eod v|| |nvos|ng |n mcro ose|||s|od ccmpen|os, suc| es |us|noss r|s|, s|gn|ncen scc| pr|co
ucue|cns end ||||qu|d|,.
Scc|s c mod|ums|zod ccmpen|os one|| spoc|e| r|s|s, suc| es ||m|od prcduc ||nos, mer|os, end nnenc|e| roscurcos, end groeor mer|o vc|e|||, |en socur||os
of larger, more-established companies.
Asso e||cce|cn end d|vors|nce|cn dc nc essuro e prcn cr prcoc ege|ns |css |n doc||n|ng nnenc|e| mer|os.
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
en, spoc|nc |nvosmon.
The indices selected by Morgan Stanley Smith Barney to measure performance are representative of broad asset classes. Morgan Stanley Smith Barney retains
the right to change representative indices at any time.
|||s |nvos|ng r|s|s ero s|m||er c |cso esscc|eod v|| d|roc |nvosmons |n roe| oseo. prcpor, ve|uo ucue|cns, |ec| c ||qu|d|,, ||m|od d|vors|nce|cn end
sensitivity to economic factors such as interest rate changes and market recessions.
Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Asso|ec|od socur||os gonore||, docroeso |n ve|uo es e rosu| c |noros reo |ncroesos, |u me, |onon |oss |en c|or nxod|nccmo socur||os rcm doc||n|ng
interest rates, principally because of prepayments.
Core|n socur||os roorrod c |n ||s meor|e| me, nc |evo |oon rog|sorod undor |o U.S. Socur||os Ac c 9::, es emondod, end, | nc, me, nc |o corod
or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of
rights or performance of obligations under any securities/instruments transaction.
|es porcrmenco |s nc guerenoo c uuro rosu|s. |s|meos c uuro porcrmenco ero |esod cn essump|cns |e me, nc |o roe||zod. ||s meor|e| |s nc e
sc||c|e|cn c en, cor c |u, cr so|| en, socur|, cr c|or nnenc|e| |nsrumon cr c per|c|peo |n en, red|ng sreog,.
|nd|cos ero unmenegod. |o, dc nc rooc en, menegomon, cuscd,, rensec|cn cr c|or oxponsos, end gonore||, essumo ro|nvosmon c d|v|donds, eccruod
|nccmo end cep|e| ge|ns. |es porcrmenco c |nd|cos dcos nc guerenoo uuro rosu|s. |nvoscrs cennc |nvos d|roc|, |n en |ndox.
|orcrmenco c |nd|cos me, |o mcro cr |oss vc|e||o |en en, |nvosmon prcduc. |o r|s| c |css |n ve|uo c e spoc|nc |nvosmon |s nc |o semo es |o r|s| c
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.
Fees reduce the performance of actual accounts: None of the fees or other expenses (e.g. commissions, mark-ups, mark-downs, advisory fees) associated with
ecue| red|ng cr ecccuns ero roocod |n |o C|C esso e||cce|cn sreog, cr |does. |oos end/cr oxponsos vcu|d epp|, c c||ons v|c |nvos |n |nvosmons |n
an account based on these asset allocations, and would reduce clients returns. The impact of fees and/or expenses can be material.
Investing in the market entails the risk of market volatility. The value of all types of securities may increase or decrease over varying time periods.
Credit ratings are subject to change.
||s meor|e| |s d|ssom|neod |n Ausre||e c roe|| c||ons v|||n |o moen|ng c |o Ausre||en Ccrpcre|cns Ac |, |crgen Sen|o, Sm|| |erno, Ausre||e |,
|d ,A.|.N. 9 009 ~b bbb, |c|dor c Ausre||en nnenc|e| sorv|cos ||conso Nc. 2~08:).
|crgen Sen|o, Sm|| |erno, |s nc |nccrpcreod undor |o |ocp|os |opu|||c c C||ne ,||C) |ev end |o rosoerc| |n ro|e|cn c ||s ropcr |s ccnducod cus|do
|o ||C. ||s ropcr v||| |o d|sr||uod cn|, upcn roquos c e spoc|nc roc|p|on. ||s ropcr dcos nc ccns|uo en cor c so|| cr |o sc||c|e|cn c en cor c
|u, en, socur||os |n |o ||C. ||C |nvoscrs mus |evo |o ro|oven que||nce|cns c |nvos |n suc| socur||os end mus |o rospcns|||o cr c|e|n|ng e|| ro|oven
epprcve|s, ||consos, vor|nce|cns end cr rog|sre|cns rcm ||Cs ro|oven gcvornmone| eu|cr||os.
|crgen Sen|o, |r|veo Woe|| |enegomon |d, v||c| |s eu|cr|zod end rogu|eod |, |o ||nenc|e| Sorv|cos Au|cr|,, epprcvos cr |o purpcso c soc|cn 2
of the Financial Services and Markets Act 2000, content for distribution in the United Kingdom.
Morgan Stanley Smith Barney is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice
v|||n |o moen|ng c Soc|cn 9b c |o |cdd|ren| We|| Sroo |ocrm end Ccnsumor |rcoc|cn Ac.
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.
Morgan Stanley Smith Barney material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney.
16 vonctn sftntrv svifn etnnrv l ,tnutnv zc+
20: |crgen Sen|o, Sm|| |erno, ||C. |om|or S||C. CW|0~0C :98b90 |SS| 0/: