Finding Return In A Low Growth World

Richard Turnill, Global Chief Investment Strategist

Q2 2016

Investing involves risks, including possible loss of principal. This material represents an
assessment of the market environment as of the date indicated; is subject to change; and is
not intended to be a forecast of future events or a guarantee of future results. This
information should not be relied upon by the reader as research or investment advice
regarding the funds or any issuer or security in particular. The strategies discussed are
strictly for illustrative and educational purposes and should not be construed as a
recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any
security. There is no guarantee that any strategies discussed will be effective.

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Agenda

Set the stage for global market conditions

Discuss key market themes and risks
Focus on equities and where to find returns in times of low growth

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Macro backdrop and themes

Fears of a global recession hit hard at the start of the year, but we believe this storm has abated.
Stabilizing growth, a slower pace of tightening by the U.S. Federal Reserve (Fed) and a pause in the U.S.
dollars rise bode well in the near term.
Our key investment themes:
Theme 1: Were living in a low-return world. This means outsized returns will be harder to come by.
Theme 2: Monetary policy divergence is slowing. This is supportive of risk assets.
Theme 3: Volatility may continue, dispersion will rise. This means diversity and security selection are critical.
Risks: Key downside risks include a Chinese yuan devaluation and a UK exit from the EU. Upside risks
include a rebound in emerging market (EM) assets or an uptick in inflation expectations
Assets: Income is king in a low-return environment.

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Growth is low, but we believe the US economy is not heading into a recession

Manufacturing activity may have bottomed

Global manufacturing activity, 2014-2016

BlackRock Investment Institute, Institute for Supply Management and Markit, April 2016.
Notes: The lines show purchasing managers' index levels. A value above 50 indicates
expansion, while below 50 indicates contraction.

Actual inflation and inflation expectation have picked up

U.S. inflation expectations vs. actual inflation, 2014-2015

Source: Thomson Reuters Datastream and BlackRock Investment Institute, as of April 4,

2016.

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Theme 1: Low returns ahead

The era of supernormal returns amplified by monetary

policy has ended

Equity returns have borrowed from the future as

evidenced by a large share of return coming from multiple
expansion

Sources: BlackRock Investment Institute, MSCI and Thomson Reuters, April 2016. Notes:
Global equities are based on the MSCI All-Country World index. Earnings growth is based
on aggregate 12-month forward earnings forecasts. Multiple expansion is represented by
the share of return not explained by earnings growth or dividends. The 2016 returns are
for the first quarter only.
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Theme 2: Monetary policy divergence is slowing

Policy divergence has been significant, but is starting to

wane
Two-year government bond yields, 2013-2016

Source: QE stands for quantitative easing. BoJ stands for Bank of Japan. ECB stands for
European Central Bank, April 2016

Dollar appreciation is on hold as Federal Reserve pauses

U.S dollar index, 2014-2016

Source: BlackRock Investment Institute and Thomson Reuters, April 2016. The chart
shows the DXY Dollar Index. The lines have been rebased to 100 at January 1, 2014.

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Theme 3: Volatility is poised to rise

Volatility is now low compared to long-term historical

average

Political risk abounds, diversification is key to protecting

portfolio

Sources: Thomson Reuters Datastream, May 2016

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Risks cut both ways

Until recently, China has been under pressure from capital

outflow. Reserves have been drawn down to fend off a
large devaluation of yuan. Will Beijing succeed?

Source: BlackRock Investment Institute, People's Bank of China and Thomson Reuters,
May 2016.

EM currencies have come a long way since 2013 taper

tantrum when Fed first hinted at unwinding QE. Many EM
countries current accounts have improved dramatically.

Source: BlackRock Investment Institute, JP Morgan, Bloomberg, May 2016

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Asset class views in Q2

OVERWEIGHT

NEUTRAL

*Views from a U.S. dollar perspective over a three month time horizon

UNDERWEIGHT

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Equities

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Global equity valuations have come down

Equity valuations across regions have come down

Japan, emerging market and some parts of Europe saw greater decline in valuation
US remain near its 2015 peak
Equity valuations lower than last year

Sources: BlackRock Investment Institute and Thomson Reuters, Apr. 29, 2016
Notes: The percentile bars show valuations of assets as of 29 Apr 2016, versus their historical ranges. For example, U.S.
equities are currently in the 75th percentile. This means U.S. equities trade at a valuation equal to or greater than % of their
history. The dots show where valuations were a year ago.
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Positioning are no longer as crowded as they once were

Crowding describes investors herding behaviour in a given asset. It typically occurs when
market sentiment is either overly bullish or bearish.
When a position is crowded, subsequent unwinding can lead to significant volatility.
Currently, positioning in major equity regions is no longer as crowded as it was in February.
Flow, positioning and price momentum jointly determines crowdedness

Sources: BlackRock, State Street, EPFR; The unit of macro crowdedness position dashboard are composite Z-scores based on
BlackRock analysis of portfolio flows, reported positions by fund managers and price momentum. A score >1 means that market is very
crowded on the long side, and a score <-1 means the market is very crowded on the short side.
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United States:
US is still in a sweet spot, helped by a patient Fed and abating headwinds to corporate
earnings

Unlike the US economy, rising oil prices are good for

US companies

Source: BlackRock Investment Institute, May 2016

Value performance has turned around

Source: Bloomberg, as of April 5, 2016.

Notes: The lines show the MSCI value indexes divided by their respective total
market indexes, rebased to 100 as of January 2002.

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Europe:
Valuations are attractive and European Central Bank (ECB) is supportive, but watch
political risk and earnings trends

Eurozone stock valuations are below the long-term average

Source:BlackRock, April 2016.

Loan growth has picked up on the back of ECB easing.

Improving credit condition lent support to domestic
consumption recovery.

Source:BlackRock, May 2016.

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Japan:
Strong yen poses downside risk to inflation and earnings. Await progress on fiscal
stimulus and structural reform

Inflation expectations are falling despite aggressive

central bank action

Further reform or fiscal stimulus could change the market

dynamic
Corporate governance is a bright spot
Agricultural reforms and Trans-Pacific Partnership are on
track
Corporate tax rate has been reduced to below 30%, and
another cut likely
Watch for further deregulation and labor reforms
Fiscal stimulus may be announced later this year

Sources:BlackRock, Thomson Reuters Datastream, Bank of Japan Tankan Survey,

2016 April

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Emerging Markets:
Green shoots are showing, but risks remain

EM macro backdrop has improved. EM economic

indicators have bounced off the trough

Chinas property market recovery has broadened out

from metropolitan areas to smaller cities

Composite PMI

Emerging vs Developed PMI

58
57
56
55
54
53
52
51
50
49
48
2010

2011

2012

Emerging

2013

2014

2015

2016

Developed

Sources: BlackRock, Thomson Reuters, May 2016;

Sources: BlackRock, Thomson Reuters, May 2016;
Note: Purchasing Managers Index(PMI) are economic indicators derived from
monthly survey of private sector companies. A number above 50 indicates
expansion, while anything below 50 suggest a contraction.

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Dividend growth offers a source of returns in a low return environment

Equity yields look attractive when compared with bonds

Sources: Bloomberg, BlackRock, MSCI. MSCI Country indices have been used to source
the respective equity index yields. Data as of 3.31.16.

Dividend growers are attractively priced

Source: BlackRock , April 2016.

Valuations are based on the median forward P/E multiples for the highest quintile of
S&P 500 companies by dividend growth and dividend yield.

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Conclusion

Continue to be a low return world.

Volatility is likely to rise.
Global central bank policies are having dramatic effect on markets.
Take a global approach to equities, we see opportunities in US and Europe.
Income is king in a low-return environment, we prefer dividend growth.

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