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August's Tactical Asset Allocation Change

August 27, 2012

Although we are increasing our exposure to risk assets, we recognize that the next several months are not without risks.

-Global Investment Commitee, Morgan Stanley Smith Barney


MARKETS

       We are raising our exposure to risk assets, moving from underweight tomarket weight. This change is primarily based on our view that further easing by the major central banks will support risk-asset markets and eventually the global real economy.

       We now are underweight cash, developed-country sovereign debt, inflation-linked securities and global real estate investment trusts; we are market weight equities, commodities and both short-duration and high yield bonds; and overweight investment grade and emerging market bonds and managed futures.

       Within global equities, we continue to overweight both the emerging market and US regions whileunderweighting other developed markets. Within US equities, our capitalization preference is large caps and our style bias is growth.

ECONOMIES

       Europe is in recession and growth is slowing in the US and in most emerging market economies. Still, we expect global growth to remain positive this year and next.

       Fundamentals and policy options in emerging market economies are generally more robust they are in the developed market economies. Globally, we expect core inflation to abate.

PROFITS

       Expectations for 52-week forward earnings per share continue to soften. The S&P 500 forward earnings figure remains below $111, down from nearly $112 in early summer.

       Forward earnings per share for global equities has dropped under $28 from more than $30 last summer.


INTEREST RATES

       Developed market central-bank policy rates are likely to remain low at least into 2014. Moreover, the Federal Reserve will probably embark on a third round of Quantitative Ease. We expect that the European Central Bank will further support EU sovereign debt markets and major European banks. Meanwhile, emerging market central banks have begun easing to offset slower growth.

CURRENCIES

       In the short-term, we expect US-dollar strength versus the euro. Longer term, major developed market currencies will likely decline against several emerging market currencies.

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