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Global Fixed Income Bulletin
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February 15, 2021

Alea iacta est ('the die is cast')

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February 15, 2021

Alea iacta est ('the die is cast')


Global Fixed Income Bulletin

Alea iacta est ('the die is cast')

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February 15, 2021

 
 

January ushered in a pause in the global melt-up in asset prices. Government bond yields rose in most countries with the sell-off in U.S. Treasuries amongst the worse. Only Australian and Canadian government yields rose more, while emerging market countries generally saw their yields rise even more. Returns were muted in credit markets as a deluge of supply in the high yield market counteracted good macro fundamentals. Securitized credit bucked the trend and delivered solid if not stellar returns (in some sectors).

 
 

The big policy news was of course the implications of the Democratic sweep of the Georgia U.S. Senate runoff elections. A Democratic majority in the Senate, combined with the inauguration of President Biden, offers a radical change in prognosis for fiscal policy. Instead of contentious negotiations with a Republican-controlled Senate, the new administration can use the Congressional budget reconciliation process (the one used by Republicans to get their tax cuts passed in 2017) to push through aggressive fiscal expansion. As of early February, it looks like the Democrats will aim to push through another fiscal support package north of $1 trillion. It also looks likely that this stimulus package will be followed by another in the fall of another $1 trillion or more, possibly with tax hikes included.  These, of course, come on the heels of the $900 billion fiscal package passed just recently.  If the Democrats succeed in legislating these two new fiscal deals, a truly extraordinary amount of support/stimulus will be injected into the economy.  Forecasts of 6% plus 2021 U.S. GDP growth could be low.  Indeed, the U.S. might grow faster than China!

What this means is that the hope/belief that yields on government and other high quality bonds would remain stable and low have been challenged.  Expectations of low inflation, the pandemic, central bank quantitative easing (QE), and central bank forward guidance are slowing the rate rise, but rising they are. The Fed and other central banks are unlikely to enter the fray (meaning commenting or doing something policywise) until the consequences are known.  Financial conditions remain very easy in the U.S.; not as easy in the eurozone but with euro credit spreads low, most government bond yields negative and, maybe most importantly, with10-year Italian/German bond yield spreads sub 100 basis points (bps), there is little evidence that financial conditions are not propitious for economic recovery.

On the other hand, the global economy looks to have decelerated in Q1 due to rising COVID-19 infection rates/hospitalizations, renewed/enhanced targeted social distancing and a slow rollout of vaccinations.  The emergence of new COVID-19 strains also gives rise to new risks concerning the efficacy of vaccines and the potential continuation of social distancing restrictions further into the future or continued conservatism of households and companies with regard to normalization of behavior.  The good news is that social distancing restrictions seem to be working in bringing down infection rates, vaccination rates are improving and the Johnson & Johnson vaccine looks likely to be approved for emergency use in the U.S. soon.

As previously discussed, interest rate/duration risk has not been friendly to bond market returns in 2021; this is likely to continue.  Massive (proposed) U.S. fiscal spending is expected to propel the U.S. economy stronger, with some of the spending spilling over to the rest of the world. Increased spending in conjunction with greater normalization of behavior should be good for corporate cash flow (earnings will depend on costs), which should be supportive of credit markets.  We remain positioned to benefit from riskier fixed income assets outperforming and government bonds underperforming, with duration likely to be a headwind to returns rather than a tail wind, like in 2020.

 
 
 
Display 1: Asset Performance Year-to-Date
 

Note: USD-based performance. Source: Bloomberg. Data as of January 31, 2021. The indexes are provided for illustrative purposes only and are not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See below for index definitions

 
 
 
Display 2: Currency Monthly Changes Versus USD
 

Note: Positive change means appreciation of the currency against the USD. Source: Bloomberg. Data as of January 31, 2021.

 
 
 
Display 3: Major Monthly Changes in 10-Year Yields and Spreads
 

Source: Bloomberg, JPMorgan. Data as of January 31, 2021.

 
 

Fixed Income Outlook

Policy news continues to be good for the global economy. Despite wobbles in Europe and deceleration in the U.S., the economic outlook remains positive, leading to a rebound in growth over the course of the first quarter into the second.  The benefits of vaccinations should become more and more apparent as vaccination rates rise, targeted restrictions on social mobility should be relaxed; and fiscal policy is running at its most procyclical in generations.  The Biden administration appears determined to add another huge dollop of spending to the U.S. economy as it accelerates later in Q1.  Moreover, the likely surge in the U.S. economy will occur when other countries are also expanding again, resulting in a synchronized global expansion.  Financial conditions are easy: policy rates are zero (in most of the world outside of emerging markets (EM); short and long-term real yields are negative; corporate yields are low (if not negative in real terms for higher quality companies); companies continue to report better-than-expected earnings; commodity prices are rising; inflation is rising but off very low levels; and, big time fiscal easing is coming in the U.S., more modestly in Europe, and importantly, no tightening anywhere else.  These conditions are an excellent backdrop for risk taking; not so good for government bonds.

With policymakers fixated on expansionary policies, obsessed with not making the same mistakes post-global financial crisis, we may end up with pro cyclical monetary and fiscal policies for the first time in a generation.  There is a commitment to get unemployment down in the U.S. almost at any cost, it seems.  The logic is that any delays (not related to COVID imposed restrictions) will lead to hysteresis in unemployment, the tendency of high unemployment to persist such that we end up in an equilibrium with too high an unemployment rate and a very unequal distribution of that resultant unemployment.   Thus, expect monetary and fiscal policy to focus on creating boom-like conditions, risking of course, that inflation rises sooner than later, an outcome welcomed if contained; problematic if it rises too quickly.

Thus, outside of ongoing pandemic risks (vaccination rates, vaccine-resistant new strains), policies are looking very, very easy, risking going too far, resulting in inflation rising faster and more than expected, putting pressure on central banks to dial back monetary policy, before employment/growth targets are achieved.   We think central banks will resist any calls to reign in policy measures and will allow inflation and nominal yields to rise.  Indeed, with short rates anchored, this is a recipe for steeper yields curves globally. Of course, the more vaccines work, the more powerful effect easy policies will likely have, creating a powerful virtuous circle in terms of stronger and stronger growth and lower and lower unemployment and higher yields.  And, as long as rises in yields do not tighten financial conditions, central banks are likely to stand aside and let them rise (a big change from market views at the beginning of the year).  This reflation process is unlikely to be smooth, and asset prices and interest rates will likely fluctuate along the way.  In this environment, we believe active management, security selection and valuation will be critical to generate a robust fixed income strategy. 

This suggests that one of the impediments to investment returns in 2021 might be duration, the reverse of 2020 when falling government bond yields significantly boosted the returns of other assets.  The duration of the bond universe has lengthened significantly in recent years, helping boost returns as yields fell.  Now markets are at risk of the reverse: longer-duration bonds with higher yields lead to even lower returns.  While we are not looking for large upward movement in yields, they are likely to trend higher. Indeed, markets may decide, as they want to, to test the Fed’s mettle when it comes to levels which might be construed as uncomfortable for the Fed.  This is a recipe for overshooting to the upside.  All this suggests the optimal investment strategy is to reduce interest rate sensitivity where one can. 

Given the procyclical policies expected in 2021 and beyond; the synchronized nature of the global business cycle and the relatively low level of nominal and real yields, we believe fixed income asset allocation should be oriented towards cyclical assets and away from high quality/high interest rate-sensitive ones.  However, discrimination remains key given valuation levels.  The search for yield in a yield-starved world has eliminated undervaluation in most sectors.  But, we believe to generate reasonable income, more risk needs to be taken.  Given the very strong macro outlook, a movement to generally reduce credit quality; reduce interest rate sensitivity; overweight emerging markets and look for reasonable risk premium seems appropriate.  This includes moving down the credit spectrum in high yield from BB to B; from A to BBB in investment grade: more default risk, less interest risk.  Of course, the major risk to this outlook is a resurgence of the pandemic, or more likely, the inability of the world to rid itself of COVID-19 to the degree it does not keep households socially distant. 

Therefore, discrimination remains key in our choice of assets, and we continue to try to avoid the two tails of the risk spectrum: very high-quality/low yielders and very low-quality/high yielders in credit, securitized and sovereign markets.  We want to own exposure in those areas that can withstand some further volatility in macro/virus backdrop and higher yields but have enough yield/spread to offer reasonable 2021 return potential.

Developed Market (DM) Rate/Foreign Currency (FX)

Monthly Review

In anticipation of a strong rebound in growth by the end of 2021, government bond yields across the developed markets moved higher in January, despite the emergence of new, more contagious COVID-19 strains. The “reflation trade” continued to pick-up momentum in the markets, as inflation breakevens hit multiyear highs.

Outlook

We expect a global economic recovery, especially in procyclical sectors. Central banks will likely remain accommodative and keep yields low almost regardless of how robust the recovery turns out to be due to a desire to close output gaps and return inflation to target levels, or possibly higher. Having arguably tightened too quickly in the previous economic cycle, having inflation stay below target is more of a credibility threat to most central banks than having it above. In addition, higher inflation is likely to help the post-COVID deleveraging process. Nonetheless, this still means the risks are skewed to government bond yields rising. In terms of currencies, we expect the U.S. dollar to weaken due to continued easy monetary policy and fiscal policy, risk-positive sentiment and a relative decline in U.S. real yields versus other currencies.

Emerging Market (EM) Rate/FX                                             

Monthly Review

EM debt posted negative returns in January across the board, i.e., in both local and hard currency bonds. From a sector perspective, companies in the Financial, Diversified and Infrastructure segments led the market, while those in the Oil & Gas, Telecom (TMT), and Transport sectors underperformed.

Outlook

Despite the performance setback in January, we still hold a positive outlook on EM debt for the rest of 2021.Our constructive view on risk assets, and expectations of a weaker U.S. dollar, should be supportive for the emerging market asset class. Excessive optimism about reduced trade frictions under the Biden administration (particularly, in U.S.-China relations) could challenge our positive scenarios for global trade and growth, and thus negatively impact the performance of growth-sensitive EM assets.

Credit

Monthly Review

Spreads were unchanged over the month in spite of an increase in equity market volatility and increased political risk in Italy. On the technical front, January supply was heavy, as expected, and credit funds and ETFs experienced net outflows.

Market Outlook

We see credit being supported by expectations of an economic rebound in 2021. Our base case reflects the consensus view that COVID-19 is transitory and continued positive support from monetary and fiscal policy will likely drive spreads tighter in the medium term. We expect an overshoot in valuations in H1 2021, especially given central banks continue to support credit markets directly and indirectly, but with a likely correction in H2 as M&A activity increases and corporates shift some of the cash they have hoarded to business expansion activities.   We think issuance could be lighter, given many companies prefunded in 2020.

Securitized Products

Monthly Review

Agency MBS and securitized credit continued to perform very well. Mortgage prepayment speeds showed no signs of slowing as mortgage rates again hit new historic lows in January. U.S. asset-backed securities (ABS) were generally tighter, while European RMBS spreads were largely unchanged in January. U.S. non-agency residential mortgage-backed securities (RMBS) and U.S. commercial mortgage-backed securities (CMBS) spreads tightened in January, with AAA CMBS spreads now trading 75-90 bps above comparable duration swaps. 

Outlook

We expect continued strong performance in the coming months. Agency MBS looks moderately expensive, but benefits from continued Fed buying. U.S. non-agency RMBS have largely recovered to pre-pandemic levels, but still offer reasonably attractive relative value. U.S. ABS has a mixed outlook for 2021, with traditional consumer ABS (credit cards and auto loans) looking relatively expensive while the most COVID-challenged ABS sectors offer much greater recovery potential. CMBS valuations have also richened over the past few months, but the sector remains very idiosyncratic, with some attractive value opportunities and some potential credit problems as well. Multifamily housing (apartments) and office buildings have performed better and have lower risks of near-term default, but could still face challenges if there are fundamental shifts in how people want to live and work in the post-pandemic world. European markets are experiencing similar sector-specific performance dynamics, and overall European credit performance has been comparable to U.S. markets.

 
 

RISK CONSIDERATIONS

Diversification neither assures a profit nor guarantees against loss in a declining market.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Certain U.S. government securities purchased by the strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. High-yield securities (junk bonds) are lower-rated securities that may have a higher degree of credit and liquidity risk. Sovereign debt securities are subject to default risk. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. The currency market is highly volatile. Prices in these markets are influenced by, among other things, changing supply and demand for a particular currency; trade; fiscal, money and domestic or foreign exchange control programs and policies; and changes in domestic and foreign interest rates. Investments in foreign markets entail special risks such as currency, political, economic and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with foreign investments. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Due to the possibility that prepayments will alter the cash flows on collateralized mortgage obligations (CMOs), it is not possible to determine in advance their final maturity date or average life. In addition, if the collateral securing the CMOs or any third-party guarantees are insufficient to make payments, the portfolio could sustain a loss.

 
 
 
The Global Fixed Income team follows a seamless process with a global outlook. They seek to identify and capture the potential value in situations where the market's implied forecasts are extreme.
 
 
 
 
 

DEFINITIONS

R* is the real short term interest rate that would occur when the economy is at equilibrium, meaning that unemployment is at the neutral rate and inflation is at the target rate. Basis point: One basis point = 0.01%.

INDEX DEFINITIONS

The indexes shown in this report are not meant to depict the performance of any specific investment, and the indexes shown do not include any expenses, fees or sales charges, which would lower performance. The indexes shown are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The Bloomberg Barclays Euro Aggregate Corporate Index (Bloomberg Barclays Euro IG Corporate) is an index designed to reflect the performance of the euro-denominated investment-grade corporate bond market.

The Bloomberg Barclays Global Aggregate Corporate Index is the corporate component of the Barclays Global Aggregate index, which provides a broad-based measure of the global investment-grade fixed income markets.

The Bloomberg Barclays U.S. Corporate Index (Bloomberg Barclays U.S. IG Corp) is a broad-based benchmark that measures the investment-grade, fixed-rate, taxable corporate bond market.

The Bloomberg Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

The Bloomberg Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. The Bloomberg Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market.

The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. Introduced in 1985, the GNMA, FHLMC and FNMA fixed-rate indexes for 30- and 15-year securities were backdated to January 1976, May 1977 and November 1982, respectively. In April 2007, agency hybrid adjustable-rate mortgage (ARM) pass-through securities were added to the index.

Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Euro vs. USD—Euro total return versus U.S. dollar.

German 10YR bonds—Germany Benchmark 10-Year Datastream Government Index; Japan 10YR government bonds —Japan Benchmark 10-Year Datastream Government Index; and 10YR U.S. Treasury—U.S. Benchmark 10-Year Datastream Government Index.

The ICE BofAML European Currency High-Yield Constrained Index (ICE BofAML Euro HY constrained) is designed to track the performance of euro- and British pound sterling-denominated below investment-grade corporate debt publicly issued in the eurobond, sterling

The ICE BofAML U.S. Mortgage-Backed Securities (ICE BofAML U.S. Mortgage Master) Index tracks the performance of U.S. dollar-denominated, fixed-rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market.

The ICE BofAML U.S. High Yield Master II Constrained Index (ICE BofAML U.S. High Yield) is a market value-weighted index of all domestic and Yankee high-yield bonds, including deferred-interest bonds and payment-in-kind securities. Its securities have maturities of one year or more and a credit rating lower than BBB-/Baa3, but are not in default.

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Italy 10-Year Government Bonds—Italy Benchmark 10-Year Datastream Government Index.

The JP Morgan CEMBI Broad Diversified Index is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities.

The JPMorgan Government Bond Index—Emerging markets (JPM local EM debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JPMorgan Government Bond Index Emerging Markets (JPM External EM Debt) tracks local currency bonds issued by emerging market governments. The index is positioned as the investable benchmark that includes only those countries that are accessible by most of the international investor base (excludes China and India as of September 2013).

The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for traded external debt instruments in the emerging markets and is an expanded version of the EMBI+. As with the EMBI+, the EMBI Global includes U.S. dollar-denominated Brady bonds, loans and eurobonds with an outstanding face value of at least $500 million.

The JP Morgan GBI-EM Global Diversified Index is a market-capitalization weighted, liquid global benchmark for U.S.-dollar corporate emerging market bonds representing Asia, Latin America, Europe and the Middle East/Africa.

JPY vs. USD—Japanese yen total return versus U.S. dollar.

The National Association of Realtors Home Affordability Index compares the median income to the cost of the median home.

The Nikkei 225 Index (Japan Nikkei 225) is a price-weighted index of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

The MSCI AC Asia ex-Japan Index (MSCI Asia ex-Japan) captures large- and mid-cap representation across two of three developed markets countries (excluding Japan) and eight emerging markets countries in Asia.

The MSCI All Country World Index (ACWI, MSCI global equities) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends.

MSCI Emerging Markets Index (MSCI emerging equities) captures large- and mid-cap representation across 23 emerging markets (EM) countries.

The MSCI World Index (MSCI developed equities) captures large and mid-cap representation across 23 developed market (DM) countries.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

The Russell 2000® Index is an index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The S&P 500® Index (U.S. S&P 500) measures the performance of the large-cap segment of the U.S. equities market, covering approximately 75 percent of the U.S. equities market. The index includes 500 leading companies in leading industries of the U.S. economy.

The S&P/LSTA U.S. Leveraged Loan 100 Index (S&P/LSTA Leveraged Loan Index) is designed to reflect the performance of the largest facilities in the leveraged loan market.

The S&P GSCI Copper Index (Copper), a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the copper commodity market.

The S&P GSCI Softs (GSCI soft commodities) Index is a sub-index of the S&P GSCI that measures the performance of only the soft commodities, weighted on a world production basis. In 2012, the S&P GSCI Softs Index included the following commodities: coffee, sugar, cocoa and cotton.

Spain 10-Year Government Bonds—Spain Benchmark 10-Year Datastream Government Index.

The Thomson Reuters Convertible Global Focus USD Hedged Index is a market weighted index with a minimum size for inclusion of $500 million (U.S.), 200 million euro (Europe), 22 billion yen, and $275 million (Other) of convertible bonds with an equity link.

U.K. 10YR government bonds—U.K. Benchmark 10-Year Datastream Government Index. For the following Datastream government bond indexes, benchmark indexes are based on single bonds. The bond chosen for each series is the most representative bond available for the given maturity band at each point in time. Benchmarks are selected according to the accepted conventions within each market. Generally, the benchmark bond is the latest issue within the given maturity band; consideration is also given to yield, liquidity, issue size and coupon.

The U.S. Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies.

The Chicago Board Options Exchange (CBOE) Market Volatility (VIX) Index shows the market’s expectation of 30-day volatility.

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U.S.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A BANK DEPOSIT

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IMPORTANT INFORMATION

EMEA: This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42,  Ireland.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

A separately managed account may not be appropriate for all investors.

Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing.

The views and opinions are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment teams at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

This communication is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This material is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. All investments involve risks, including the possible loss of principal. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

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