Gic Ten Ideas 010410
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Gic Ten Ideas 010410 Gic Ten Ideas 010410 Document Transcript

  • 10 Investment Ideas for 2010 gloBal invEStmEnt CommittEE The Morgan Stanley Smith Barney Global Investment Committee (GIC) JanuarY 2010 believes the global recovery that began in the second half of 2009 will transition into a global economic expansion in 2010. In the broadest sense, By Jeff Applegate the GIC recommends that investors position their portfolios for this Chief Investment Officer scenario by overweighting investment-grade and high yield bonds, equities By David M. Darst, CFA Chief Investment Strategist and alternative/absolute return investments such as commodities and real estate investment trusts (REIT). The GIC also advises underweighting By Barbara Reinhard, CFA Emerging Markets Strategist developed-market sovereign bonds, short-duration bonds and cash. By Charles Reinhard Global Investment Strategist In line with that guidance, the GIC has tapped the global resources of By Douglas Cohen Morgan Stanley Smith Barney to formulate what it believes to be the 10 Senior Equity Strategist best investment ideas for 2010. These ideas cut across global equities, fixed Morgan Stanley & Co. income, currency and alternative/absolute return investments—and all are By John M. Dillon Senior Fixed Income Strategist consistent with the GIC view of the global economy. The order in which By Kevin Flanagan the ideas are presented is not indicative of preference. Senior Fixed Income Strategist 1. EmErging markEtS EquitiES: BriC One of our most significant equity By Marshall Kaplan Senior Equity Strategist themes for the year ahead is that emerging markets equities should again outpace Private Client Investment Strategy developed-market equities. Our expectation is that, during 2010, the developing Citi economies will grow at about three times the rate of the developed economies. More- By Edward M. Kerschner, CFA over, valuations are reasonable—at 13 times the 2010 consensus earnings forecast. Senior Strategy Consultant By Dan Nelson The economic outlook favors the emerging markets, too. In the 19 of 22 years since Head of Portfolio Strategy & Research Group 1988 that the US economy was recovering from a recession or was expanding, emerg- By Nicolas Richard ing markets equities outperformed the developed markets by an average of 9% (see Director of Strategic Asset Allocation Chart 1). This analysis includes the challenging 1994 through 1998 period, when the By Douglas Schindewolf emerging markets were racked by crises in Mexico, Asia and Russia. Director of Tactical Asset Allocation morgan StanlEY Smith BarnEY llC
  • gloBal invEStmEnt CommittEE 10 Investment Ideas for 2010 Chart 1 MSCI Emerging Markets Index Minus MSCI World Index (Developed Markets) Returns by Year 60% 48 Emerging Market Equity Outperforms Developed Market Equity 42 43 40 37 38 27 18 20 20 14 11 12 12 7 9 3 0 -10 7.5% -14 -14 -20 -19 -28 -29 Developed Market Equity Outperforms Emerging Market Equity -40 -52 -60 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 YTD '09 Source: MSCI as of Dec. 21, 2009 Within the emerging markets, the Morgan Stanley strategy 3. ForEign EXChangE In our opinion, one of the key team favors Brazil, Russia, India and China—the so-called developments in the currency markets this year will be a BRICs. Though investors often see them as a block, we have rebound in the US dollar versus the major developed cur- specific reasons for recommending each country: Brazil’s rencies, especially versus the euro and the yen. We believe economic recovery is strengthening and the outlook for pri- the dollar’s strength will be a result of the diverging GDP vate consumption is bright; Russia features a valuation dis- growth rates in the developed-market economies—with count of more than 40% from the MSCI Emerging Markets the US growing the fastest at 2.8%, followed by Europe at Index, based on its forward P/E ratio, and is a beneficiary 1.2% and Japan at 0.4%, according to the Morgan Stanley of higher oil prices; India gets a nod for its forecasted 2010 economics team. By the same measure of relative economic GDP growth rate of 8% combined with improved political growth driving currency appreciation, we expect that the stability; and China—the largest of the emerging markets— US dollar will weaken against the majority of emerging carries the best growth expectations, up 10% in 2010. markets currencies. For example, Mexico, Brazil and Korea are forecast to grow at 3.8%, 4.8% and 5.0%, respectively, 2. EmErging markEtS DEBt Expectations for global which will tend to favor their currencies vis-à-vis the dollar. economic growth and an even more favorable outlook in the developing economies will be a positive for emerging 4. muniCipal BonDS The opportunity for municipal markets debt, in our view. We note that, in the wake of the bonds appears compelling, especially with the prospect of recession, many developing countries have stronger current- higher US Treasury yields later this year. On the positive account positions and better fiscal policies than many of the side, some formidable offsets may enable municipal bonds developed markets. As that view becomes more wide- to outperform Treasuries, thus mitigating rising yields. These spread among investors, we believe emerging markets debt include: the impact of the federally taxable Build America spreads—the extra yield over Treasuries—will continue to Bonds program, which diverts what would otherwise be tax- tighten. In addition, there is potential for upgrades from the exempt issuance into taxable securities; a very strong history debt ratings agencies, which leads us to favor this asset class of debt repayment and low default rates among investment- for 2010. grade bonds; and unusual yield differentials in moderate investment-grade debt. For example, spreads for both A- and 2/ January 2010
  • gloBal invEStmEnt CommittEE 10 Investment Ideas for 2010 Chart 2 Municipal Bonds: Incremental Yield by Credit Rating 400 BBB-Rated General-Obligation 10-Year Municipal-Bond Spread Over Comparable-Maturity AAA-Rated Municipal Bonds 350 A-Rated General-Obligation 10-Year Municipal-Bond Spread Over Comparable-Maturity AAA-Rated Municipal Bonds 300 250 Basis Points 200 150 100 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Municipal Market Data Co. as of Dec. 22, 2009 BBB-rated bonds over comparable maturity AAA-rated Key drivers of investment opportunity within the global municipal bonds stand at almost 2.5 times their respective water market include: significant capital-expenditure re- long-term averages, according to Municipal Market Data quirements; increased recognition of the value of water, wa- Co. (see Chart 2). As the economy continues to recover and ter quality, water sanitation and the security of supply and market sentiment improves, we expect these relationships to sanitation; political willingness to price water according to gradually tighten. economic principles, thereby charging users accordingly; political willingness to include environmental protections We enter 2010 favoring general-obligation and essential- in water pricing; and the potential for consolidation within service revenue bonds from larger issuers holding investment- a fragmented global industry. grade ratings in the upper-BBB-and-higher tiers. We also view the new-issue market as an efficient way to access the 6. YiElD StoCkS The current low interest rate environ- municipal-bond market. Given their defensive nature, we ment places renewed focus on investors’ “thirst for yield.” also advocate the purchase of premium-priced securities With money-market returns in single-digit basis points and over bonds trading at par or at a discount to par. While we Treasury yields low, we believe the case for high-quality view prerefunded securities as fairly priced in the current dividend-paying stocks is compelling as a solution to unmet market, they represent a reasonable consideration for those investor-income needs. interested in ultra-high credit quality. Many global equity opportunities provide levels of current 5. WatEr There is an immense need to build and upgrade income comparable to those of bonds, with the potential for the water infrastructure in both the developed and de- both capital appreciation and growth in the income stream veloping economies. The coming growth around delivery over time. Indeed, our work suggests that the relationship and disposal of this essential commodity leads us to have a between global equities and relevant benchmark govern- positive view on water-related investments. Areas of focus ment yields currently stands at historically attractive levels. include the production of drinking water in the face of population growth where resources are scarce or of low These stocks are more than a substitute for bonds. Divi- quality, water distribution networks and the collection and dends have played an important role in equity returns for treatment of wastewater. most multiyear periods during the past 100 years. Dividend- 3/ January 2010
  • gloBal invEStmEnt CommittEE 10 Investment Ideas for 2010 Chart 3 US & China Contributions to Commodity Demand Growth, 2003-2008 120% 107 China 104 99 101 100 US 80 60 55 40 37 37 22 20 19 11 5 0 -5 -10 -20 -16 -23 -29 -40 Cotton Corn Copper Zinc Crude Aluminum Sugar Soybeans Source: Morgan Stanley Research, IEA, USDA as of Dec. 17, 2009 paying stocks have other advantages as well, including Moreover, the chronic lack of investment needed to boost the potential for lower volatility and better returns. Our production could also lead to tighter supplies and higher analysis indicates that dividends—one of the few financial prices. The crude oil market is one example. The Morgan metrics that cannot be restated—often have proven to be a Stanley commodities team points out that as demand better use of corporations’ excess cash than many of the ill- picks up, the market’s attention is apt to turn to long-term conceived investments and acquisitions of that have taken structural-supply issues. The team is forecasting that global place over time. What’s more, the aging of the baby-boomer spare capacity in crude oil production will start declining in generation creates a constituency for yield stocks since, un- 2011; by 2012, supply levels could be as tight as they were like fixed income securities, they have the ability to increase in 2007 and 2008, when such constraints led to record-high their payouts over time. prices. The Morgan Stanley forecast is for oil to average $85 per barrel in 2010, $95 in 2011 and $105 in 2012. 7. CommoDitiES Extremely easy monetary policy undoubtedly helped lead commodity prices higher in 2009, 8. CrEDit-rElatED FiXED inComE Within the but monetary policy may become less accommodative as we credit-related fixed income markets, 2009 was a blockbuster move further into 2010. Still, we believe commodities will year. Investment-grade bonds, as measured by the Barclays continue their uptrend, as global economic expansion acts Capital Credit Index, gained 16% and high yield securi- as a propellant for prices—more than making up for liquid- ties, as measured by the Barclays Capital High Yield Index, ity losses. In particular, rising demand from the developing gained 58% (through Dec. 29, 2009). We think 2010 can economies is likely to have a positive impact. For example, be another good year for these assets, seeing improved in the 2003 to 2008 period, China’s growth in demand for economic and default-risk outlooks in an economy moving most commodities outpaced US growth in demand (see from recovery to expansion. Thus, we think credit spreads Chart 3). On the supply side, inventories accumulated dur- will likely tighten further in 2010, offering investors a cush- ing the recession will likely be drawn down over the next ion against potentially rising interest rates. year, thereby tightening supply/demand balances. 4/ January 2010
  • gloBal invEStmEnt CommittEE 10 Investment Ideas for 2010 In the investment-grade universe, we favor bonds within keep pace with global equity markets in the year ahead. We sectors that should benefit from the economic recovery and note that substantial improvements in credit-market condi- a rising rate environment, such as paper and forest products, tions are positive for the sector. There are also noticeable im- cable television, consumer goods and metals and mining. provements under way in property fundamentals. US REITs For investors willing to accept higher volatility, there are alone raised over $24 billion in new capital in 2009, which high-quality opportunities in bank and insurance senior will likely help the financial conditions of many firms—and and subordinate debt, as yields are still attractive compared perhaps fuel acquisitions and real estate transactions in 2010. to nonfinancials. Under a moderately rising rate scenario, we think it is timely to start to extend maturities in credit- 10. auStralian anD CanaDian EquitiES We have related fixed income. On a risk-reward basis, we believe a positive view of Australian and Canadian equities and believe the most attractive opportunity in the high-grade market these two markets are well positioned to benefit as the economic resides in the seven-year maturity range. recovery leads to an expansion. Their enviable position comes from their heavy index weightings in materials and—especially For high yield investors, we recommend higher-quality issu- in the case of Canada—energy companies. These two nations are ers. Our preference is for B- and BB-rated issuers within the leveraged to global commodity consumption and should benefit cable, industrial, energy and consumer-goods sectors with from commodity prices, which we expect to move higher this maturities between two and five years. year. From a valuation perspective, Australia and Canada have solid returns on equity of 8.1% and 7.1%, respectively, versus 9. rEal EStatE invEStmEnt truStS We have a favor- 6.8% for the MSCI World Index. Dividend yields are relatively able outlook for the global REIT asset class in 2010. While attractive as well, at 4.0% for Australia and 2.6% for Canada they may be unlikely to repeat the 37% total return generated versus 2.5% for the MSCI World Index. in 2009 (through Dec. 29), we do think global REITs can 5/ January 2010
  • Index Definitions (In order of appearance) mSCi EmErging markEtS inDEX This free-float-adjusted market-capitalization- BarClaYS Capital high YiElD inDEX The index covers the US dollar-denom- weighted index is designed to measure performance of 22 emerging equity markets. inated, fixed rate, taxable corporate bonds that are rated below investment grade. Securities are classified as high yield if the middle rating of Moodyís, Fitch, and S&P mSCi WorlD inDEX This is a free-float-adjusted market-capitalization-weighted is Ba1/BB+/BB+ or below. index that is designed to measure the equity market performance of 23 developed markets. BarClaYS Capital uS CrEDit inDEX This index includes publicly issued US corporate bonds, specified foreign debentures and secured notes denominated in US dollars. All expressions of opinion are subject to change without notice and are not intended to be a guarantee of future events. This document is for information only and does not constitute a solicitation to buy or sell securities. Opinions expressed herein may differ from the opinions expressed by other businesses of Morgan Stanley Smith Barney LLC, are not intended to be a forecast of future events or a guarantee of future results or investment advice and are subject to change based on market and other conditions. Past performance is not a guarantee of future results. Although information in this document has been obtained from sources believed to be reliable, Morgan Stanley Smith Barney LLC and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use. Throughout this publica- tion where charts indicate that a third party (parties) is the source, please note that the source references the raw data received from such parties. Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Morgan Stanley Smith Barney (Australia) Pty Ltd., participants of the ASX Group are regulated by the Australian Securities & Investments Commission. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. 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. REITs investing risks are similar to those associated with direct investments in real estate: lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions. Asset allocation does not assure a profit or protect against a loss in declining financial markets. The indexes 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 spe- cific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable govern- ments and less established markets and economics. Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity. 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. The initial interest rate on an inflation-linked 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 CPI. However, there can be no assurance that these increases in CPI will occur. Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC. © 2010 Morgan Stanley Smith Barney LLC. (2841)