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Global
Investment
Outlook
Q4 2017

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Growth is cruising at above-trend rates across the world. We see inflation picking up in the US
but moving sideways at low levels in the eurozone, supporting monetary policy divergence.
Remarkably steady growth is fostering subdued market volatility. We see this providing fertile
ground for risk-taking in equities and emerging market (EM) assets.
•• Inflation is key to the policy and market outlook. Our new BlackRock Inflation GPS suggests US core inflation
will rise back towards 2%, giving the Federal Reserve comfort in pushing ahead with policy normalisation. In the
eurozone, the lagging recovery means there is plenty of slack left in the economy. The European Central Bank
Richard Turnill
(ECB) may prolong its ultra-easy policies longer than markets expect.
Global Chief
Investment Strategist
•• We see upbeat economic growth pushing bond yields up after a dip caused by a soft inflation patch,
BlackRock Investment
Institute geopolitical unease and a downshift in Fed rate increase expectations. Yet we see any yield rises capped by
structural factors such as greying populations, excess savings and tepid productivity growth. US policy
normalisation and potential for upside economic surprises support the US dollar, in our view.

•• What are the risks? Policy missteps or miscommunications cannot be ruled out as the Fed and some other
THEMES......................... 3– 4 central banks reduce accommodation. China’s economy could slow if the country re-emphasises reforms over
Sustained expansion short-term growth after a crucial party congress. Geopolitical risks also lurk. But we see few triggers that could
Rethinking risk; rethinking returns shock markets out of their low-volatility regime reinforced by steady growth.

•• Structurally lower yields underpin our positive view on equities and other risk assets. We are bullish on EM:
valuations are attractive, investors are returning and EM stocks are increasingly tilted towards high-growth
SPECIAL TOPICS. . ......... 5– 6
companies. We like European and Japanese stocks and prefer equities overall to credit, where much good news
Inflation
Geopolitics appears priced in. We like the momentum and value equity style factors.

MARKETS.....................7–11
Government bonds
Credit
Equities
Equity style factors
Assets in brief
Jean Boivin Isabelle Mateos y Lago Kate Moore Jeff Rosenberg
Head of Economic and Chief Multi-Asset Strategist Chief Equity Strategist Chief Fixed
Markets Research BlackRock Investment BlackRock Investment Income Strategist
BlackRock Investment Institute Institute BlackRock Investment
Institute Institute

2 GLOBAL INVESTMENT OUTLOOK SUMMARY

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Themes: sustained expansion Spreading the wealth

Breadth and level of global composite PMI, 2003–2017
The increasing breadth of the global economic expansion is pointing 100% 70
to a longer lifespan. Roughly three-quarters of countries are clocking up growth.
See the Spreading the wealth chart. All economies in the eurozone are improving –
75 60
a first in the post-crisis period. China’s growth surprised to the upside this year as

Share above 50
Beijing kept the economy humming ahead of the Communist Party’s key National

PMI level
People’s Congress (NPC) in October. We could see a policy reset after the NPC, 50 50
with greater focus on long-term structural reforms at the expense of growth in the
Global composite PMI
short run.
25 40
Overall, however, we see no change to the big picture of a global expansion
Share of countries with The recovery in global
chugging along at an above-trend pace. Drops this year in developed market PMI above 50 growth is broadening
(DM) bond yields and the US dollar were unexpected given the robust growth 0 30

backdrop. We see potential for rebounds in both as inflation firms and the Fed 2003 2005 2007 2009 2011 2013 2015 2017
presses on with removing monetary accommodation. Sources: BlackRock Investment Institute, with data from Markit, September 2017. Notes: the blue line is the global composite
Purchasing Managers’ Index (PMI) and includes manufacturing and services activity for 34 countries. The green line shows the
A broadening of steady growth beyond the US gives us confidence the global share of countries in this index with a PMI above 50, indicating expanding activity.

expansion is sustainable.
Room to recover
The US economic expansion is getting long in the tooth. Or is it? Some slack US wage growth across cycles, 1981–2017 Click to view interactive data

remains in the economy – even as the jobless rate touches levels rarely seen since 6%
the 1950s. Slower growth – a function of structural changes such as an aging society – US wage growth has been
weak this cycle
5

Annual wage growth

means economic slack created in the last recession is being eroded at a sluggish
2001–2007
pace. Our work suggests the expansion can run for much longer – likely years – until 1981–1990
4
the economy reaches potential and then the peak that marks the end of the cycle.
1990–2001
Wage growth has been a pain point since the crisis. But when looking at economic 3

cycles based on their peaks and troughs, rather than time elapsed, we see
2
the trend is not too far off from past cycles. See the Room to recover chart. 2007–present
Lingering wage weakness is one reason we think this recovery still has legs. 1
Prior Trough Potential Peak
A sustained expansion supports company earnings growth, we believe, reinforcing peak
our upbeat view on equities. It is also why we like the momentum style factor,
Sources: BlackRock Investment Institute, with data from the US Bureau of Labor Statistics, September 2017. Notes: the chart
which historically has outperformed in expansions. shows the annual pace of US wage growth (average hourly earnings) across cycles. Each line begins with the previous cycle’s peak,
as determined by the National Bureau of Economic Research. Cycles are aligned based on their peaks, troughs and point when
Amid a steady US expansion, we favour stocks and the momentum style. potential output is reached. For our interactive graphic: blackrockblog.com/cycles-in-context.

3 T H E M E S S U S TA I N E D E X PA N S I O N

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Themes: rethinking risk; rethinking returns Collapsed into calm

Volatility of US economic data, 1970–2017
Market volatility (vol) has been testing lows. What is less appreciated is that this 100%
is happening at a time of historically subdued volatility in economic data. These Economic volatility has
plunged to historical lows
low-vol environments – both market and macro – tend to overlap each other.
75
Indicators such as US employment and inflation today are among their least

Percentile
volatile in the past 50 years. See the Collapsed into calm chart. Low-vol regimes
are the historical norm, not the exception – especially if systemic vulnerabilities in 50

the financial system are kept in check, we find. See Learning to live with low vol
Payrolls
of July 2017. 25

We are concerned about valuations in some corners of the credit markets at this
point. We also see the potential for mispricings as seemingly low-risk strategies 0 Core inflation
that involve selling volatility have become a popular way of generating income
1970 1980 1990 2000 2010 2017
across asset classes. Yet we do not spot broader signs of ‘irrational exuberance’
Sources: BlackRock Investment Institute, with data from the US Bureau of Labor Statistics, September 2017. Notes: the lines
in financial markets today. show the historical percentile ranking of the five-year rolling standard deviation of US core consumer price inflation and
monthly change in payrolls.
Spotting systemic risks in advance is difficult, but we see none on the
immediate horizon that might undercut the current economic expansion. Patience needed
Global equity annualised returns by holding period from September 2007
Equity indexes hitting new highs inevitably stirs talk of stretched valuations.
The assumption is that valuations are bound to some long-term mean – and will 4.4% 5.1%
3.0% 3.9%
1.9%
necessarily revert. We have a different take. We find historical comparisons less
useful today. Why? We expect the future to look different from the past, partly
-1.2%
due to structurally lower interest rates. Viewed through this lens, equity valuations
-3.7%
are not that extreme, we believe. As a result, we favour taking advantage of
-8.2% Global equities climbed back
temporary equity market sell-offs, particularly in the current environment of low from crisis-induced losses
volatility and solid corporate earnings.
-14.9%
What if a market shock were to morph into a systemic crisis? Buying on the dip -17.5%
only works if the investor takes a long view and has a stomach for volatility. 1 2 3 4 5 6 7 8 9 10
Patience eventually was rewarded after the 2008 crisis – but it took six volatile Holding period (years)
years to claw back losses from the 2007 peak. See the Patience needed chart.
Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017. Notes: the bars represent the
We favour taking advantage of temporary equity sell-offs in the current annualised return of the MSCI World Index from the beginning of September 2007 over various holding periods in years.
For example, the bar for a four-year period shows the annualised return from the beginning of September 2007 to the end
landscape of low volatility and strong earnings growth. of 2011. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index.

4 THEMES RETHINKING RISK; RETHINKING RETURNS

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Special topic: inflation Inflation’s demise exaggerated

Future inflation implied by BlackRock Inflation GPS vs. actual Click to view
GPS interactive
The inflation outlooks in the US and eurozone stand in stark contrast. 3%
Our BlackRock Inflation GPS points to core US inflation climbing back near 2% in
Our GPS shows some upside
coming months. See the Inflation’s demise exaggerated chart. Such an outcome for inflation in coming months

Annual inflation rate

should reassure Fed officials that this year’s inflation misses were mostly due to 2

one-offs such as a price war in wireless data charges. We see the Fed pushing
ahead with a rate rise later in the year given a strong labour market and steady BlackRock GPS
1
economic expansion. We see further rate increases as likely in 2018, even with
looming changes to the Fed’s leadership. Inflation rate

By contrast, we see core eurozone inflation stuck at much lower levels. That 0
UK US CPI US PCE Canada Eurozone
should keep the ECB cautious about winding down its bond purchases. We
believe policy divergence supports the US dollar against the euro, and see US
yields rising more than eurozone yields. We favour US inflation-protected
Sources: BlackRock Investment Institute and BlackRock Scientific Active Equity group, with data from Thomson Reuters, September
securities over nominal bonds and over similar UK and eurozone instruments. 2017. Notes: the BlackRock Inflation GPS shows where the core (excluding food and energy) Consumer Price Index (CPI) for each
economy may stand in six months’ time. US PCE shows core personal consumption expenditures price inflation.
Contrasting inflation outlooks suggest greater monetary policy divergence
between the US and eurozone than markets are expecting. Domestic drag
Factors driving eurozone core inflation, 2008–2017
Economic slack is the culprit in the eurozone’s sluggish inflation outlook.

Percentage point deviation from trend

Our work finds that domestic activity, primarily spare capacity in the jobs market, 0.5% Spare capacity has held
down eurozone inflation
is the main drag. Other key drivers of inflation are monetary policy and global
factors such as commodity prices and the exchange rate. The ECB’s quantitative 0
easing program has been only mildly effective in offsetting lingering domestic
Domestic activity
slack. See the Domestic drag chart. -0.5
The eurozone recovery should keep eroding this slack, but it still has a long way
Others Net deviation
to go. Extra-loose policy is needed to ensure that inflation climbs back to target -1
and stays there, we believe. Any sustained strength in the euro could weigh on Monetary policy
inflation. Winding down monetary accommodation too quickly would risk inflation -1.5
being stuck below target for even longer. See our September 2017
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Getting to inflation’s core for details.
Sources: BlackRock Investment Institute, with data from Thomson Reuters and Eurostat, September 2017.
Notes: the chart breaks down the economic drivers causing eurozone inflation to slow below its long-term trend, based on
Ongoing ECB policy accommodation is needed to help get inflation back near a 2000–2008 mean. The breakdown, in percentage points, is based on an ECB model published in the January 2017 paper
its 2% target. Missing disinflation and missing inflation: the puzzles that aren’t.

5 S P E C I A L T O P I C I N F L AT I O N

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Special topic: geopolitics A world of risk

BlackRock’s top-10 geopolitical risks, September 2017
If markets are a sea of calm, geopolitics are anything but. We have our eyes on
Major cyber attack Major terror attack
10 geopolitical risks and are tracking their likelihood and potential market impact.
See the A world of risk map. We focus on two here: the North Korea crisis and the
related risk of deteriorating US-China relations.
North American Russia-NATO conflict South China Sea
We view North Korea’s missile and nuclear weapons program as a major threat to trade tensions conflict
regional stability, US security and nuclear non-proliferation. The possibility of
armed conflict has risen, we believe, given North Korea’s missile launches over
Japan, a nuclear test and an intense war of words. This has raised the chance of
misstep or miscalculation, and we could see limited action such as the shooting
down of missiles. Yet we currently see a low probability of all-out war; the costs
are too high on all sides. Instead, we expect the US to intensify its ‘peaceful
pressure’ campaign, imposing unilateral sanctions and leaning hard on China to
participate. We see the crisis straining US-China relations just as economic
tensions are rising.

Long-term government bonds are useful diversifiers against volatility and equity
market sell-offs sparked by geopolitical risks.

We see frictions between the US and China heating up over time. The countries US-China tensions Escalation in Syria and Iraq North Korea conflict
risk falling into the ‘Thucydides Trap,’ a term coined by Harvard scholar Graham
Allison to describe clashes between rising powers and established ones.
We see trade and market access disputes straining an increasingly competitive Fragmentation in Europe Gulf conflicts
US-China relationship in the long run, and believe markets have yet to factor in
Source: BlackRock Investment Institute, September 2017. Notes: the graphic shows the top 10 geopolitical risks BlackRock
this gradual deterioration. tracks. Flags denote key nations exposed to these risks; major cyber attack and major terror attack are global in nature. This is
for illustrative purposes only.
In the short term, tensions could rise if Chinese President Xi Jinping pursues an
even more nationalistic agenda in the wake of the NPC. Economic tit for tats “The US and China are drifting toward greater tensions
could lead to an erosion of relations – and have sector-specific effects. US military because of increased economic competition and the
action against North Korea and/or an accidental clash in the South China Sea inevitable friction of a rising power challenging an
would deal a blow to the relationship, in our view, and hurt risk assets. But our established one.”
base case is that the US and China avoid these land mines in the short term, and
Tom Donilon – Chairman, BlackRock Investment Institute
try to use US President Donald Trump’s upcoming visit to emphasise cooperation.

6 SPECIAL TOPIC GEOPOLITICS

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Government bonds Getting real

US 10-year Treasury yield breakdown, 2016–2017
The softness in bond yields this year has wrong-footed many investors. We see 2.5%
upside in yields as attention returns to the Fed and some other central banks Nominal yield
gradually removing policy accommodation. The slide in nominal yields after 2

midyear was mostly driven by real (inflation-adjusted) yields rather than inflation
expectations, which were the key driver earlier in the year. See the Getting real 1.5

chart. Real yields fell as some market participants doubted central banks’ Inflation breakeven
1 Real yields dragged
willingness to withdraw stimulus. Fading hopes for a fiscal boost from US tax nominal rates lower
Real yield
cuts also played a role.
0.5
Inflation expectations have been relatively steady. This suggests they do not have
to rise for nominal yields to climb higher again. A revaluation of the outlook for 0
monetary policy normalisation would be enough. This may already be in motion,
Jan. 2016 Jan. 2017 Sept.
with a rebound in yields since early September. Any lift in inflation expectations –
Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017. Notes: the nominal yield is based
or US tax cuts – could add fuel to the move. on the benchmark 10-year Treasury yield. The real yield is based on the 10-year benchmark inflation-linked Treasury. The
inflation breakeven is calculated as the nominal yield minus the real yield.
Bond yields should rise as some central banks remove stimulus.

The injection of monetary stimulus to the global economy is set to decelerate.

Easing off
G3 central bank net asset purchases, 2006–2018
Policymakers are taking confidence from a sustained global expansion and
Central bank asset purchases Estimates
re-emerging inflation. The Fed has set out how it will wind back its crisis-era
are set to roll over in 2018

12-month rolling flow in trillions

balance sheet. See Crossing the river by feeling the stones of June 2017 for details. $1.5
The ECB faces challenges maintaining its current level of stimulus as it runs into
1
self-imposed limits. We see the central bank trimming its bond purchases, but
perhaps at a slower clip than many market participants expect. We expect the Bank Japan
0.5
G3 total
of Japan (BoJ) to keep up the pace of its mega stimulus in a bid to revive inflation.
Eurozone
The net result: central banks will still be net purchasers of assets in 2018, but at 0

a slower rate. See the Easing off chart. Investors will have to digest a larger share
-0.5 US
of bond issuance globally. We expect yields to rise only gently given strong
demand for income. Yet any increase in fiscal deficits could lift bond issuance – 2006 2008 2010 2012 2014 2016 2018

a reason to keep tabs on the prospects for US tax cuts.
We see higher yields ahead, but structural factors such as aging populations
and strong demand for income limit upward moves.
Sources: BlackRock Investment Institute, with data from the Fed, ECB and BoJ, September 2017. Notes: data from 30 Sept. 2017,
are estimates. G3 refers to the US, Japan and the eurozone. The US estimate is based on the addendum to the Policy Normalization
Principles and Plans issued by the US Fed. The ECB estimate is based on a BlackRock survey of 15 dealers on Sept. 26; it assumes the
ECB will cut monthly purchases to 40 billion euros at the start of 2018, gradually reduce them further and complete the program by
year-end. The BoJ estimate assumes the central bank maintains its monthly pace of asset purchases in place since September 2016.

7 MARKETS GOVERNMENT BONDS

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Credit Shrinking credit world

Investment grade credit spreads, 2016–2017
Yes, credit spreads are close to historically tight levels. Yet we believe credit is CSPP CSPP
announced launched
an attractive source of income – and one seeing persistent demand in the context

Spread versus government bonds

2.25%
of a low-yield fixed income universe. Spreads have widened slightly in the past
Credit spreads have tightened since the
few months in both the US and European investment grade markets, offering ECB said it would buy corporate bonds
some value even if valuations look a bit rich at these levels. See the Shrinking 1.75

credit world chart.

Today’s valuations imply future returns will come from clipping coupons (carry) 1.25 Asia
rather than tightening spreads. As a result, we believe credit offers less upside US

than equities on a risk-adjusted basis if our scenario of sustained global Eurozone

0.75
expansion pans out. But this environment of low market and economic volatility is
one where corporate defaults are expected to be limited. In the US, we prefer an Jan. 2016 Jan. 2017 Sept.

up-in-quality stance. In Europe, we like earning spread in supranational, covered
and subordinated financial bonds.
We like credit for income in a low-yield world, and prefer an up-in-quality stance
given relatively tight spreads.
We see opportunities in EM debt. Key reasons: support from synchronised global
growth, buoyant commodity prices and global investor thirst for yield. Unlike DM
central banks, many of their EM counterparts have room to cut rates amid steady
Sources: BlackRock Investment Institute, with data from Bloomberg, September 2017. Notes: the lines show the yield spread
between investment grade corporate credit and government bonds in percentage points for each region. US data are based on
the Bloomberg Barclays US Credit Index, eurozone data on the Bloomberg Barclays EuroAgg Credit Index, and Asia data on the JP
Morgan JACI Diversified Investment Grade Index. CSPP refers to the ECB’s corporate sector purchase program.
EM divergence
EM currency volatility and yield differential vs. DM, 2003–2017
30 8%

EM local vs. DM yield differential

EM vs. DM yield differential is wide

EM currency volatility index

growth and subdued inflation. This should lead to a further narrowing of interest given low currency volatility
rate differentials versus the rest of the world as the Fed leads its DM peers in 20 6
normalisation. We expect relative price outperformance in EM debt as a result.
EM currency volatility
Stronger EM currencies have boosted the performance of EM local-currency debt
this year. Subdued EM currency volatility lends support to the asset class. See the 10 4

EM divergence chart. We see the US dollar appreciating only modestly and

EM vs. DM yield differential
gradually – and not diluting the EM investment case. So what are the main risks?
A stalling of global growth momentum, a yield spike caused by slowing monetary 0 2

stimulus, or a rapidly resurging dollar. 2003 2005 2007 2009 2011 2013 2015 2017

Sources: BlackRock Investment Institute, with data from Bloomberg, September 2017. Notes: EM currency volatility is represented
We like selected EM debt for income and potential price appreciation amid low by the JP Morgan Emerging Market Volatility Index. The EM vs. DM yield differential is based on the JP Morgan GBI-EM Global
inflation and currency volatility in the emerging world. Diversified Index and the JP Morgan GBI Global Index.

8 MARKETS CREDIT

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Equities Earning their keep

Analyst forecasts of 2017 corporate earnings growth
The sustained global expansion is providing a positive backdrop for corporate Emerging
20% markets
earnings. Earnings are growing at a faster than 10% pace in all major regions for
the first time since 2005, excluding the post-crisis bounce, our research shows.
EM and Japanese earnings
Analyst forecasts are holding steady in the US and Europe, are up in Japan and
expectations have jumped this year

Annual change
have almost doubled this year in EMs. See the Earning their keep chart. These
trends give us comfort taking risk in stocks. Japan
15
We favour non-US markets, including Europe and Japan. EM stocks top our list,
even after a strong rally this year. Economic reform momentum, improving cash
Europe
flows and reasonable valuations make a solid investment case. This year’s top
sector also holds appeal: tech has posted outsized earnings growth and
10 US
accounted for roughly half of US and EM Asia equity returns. We still see ample
runway, as outlined in Tech for the long run of September 2017. We also like US Jan. April July Sept.

bank stocks, with steeper yield curves set to boost lending margins, and prospects Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017. Note: the lines show the path of
for deregulation and increased payouts. aggregate analyst expectations of 2017 earnings growth for companies in various regions.

Steady economic and strong earnings growth bode well for equities. Disruption fear bubble
US retail equity performance, 2014–2017
Much has been made of rock-bottom equity volatility. Yet low volatility at the
150%
equity index level masks a lot of action below the surface. Worries about
widespread technological disruption are causing major valuation swings within Internet
sectors – as disruptors chip away at traditional business models saddled with high Internet retailers have sprinted
100
fixed costs and real estate footprints. ahead of traditional players

Total return
Retail is a prime example. A boom in online shopping and shifting consumer
Speciality
preferences (towards experiences versus things) are challenging business models. 50

Returns for Internet retailers once trailed their traditional counterparts but have Food & staples
skyrocketed since 2016. The casualty: every other retail subsector. See the
0
Disruption fear bubble chart. Some of these moves look overdone. This can mean
Multiline
opportunity for stock pickers. We like innovative retailers that can differentiate -25
themselves, and look for opportunities in other sectors hit by disruption. 2014 2015 2016 2017

Low volatility at the market’s surface can conceal great dispersion – and Sources: BlackRock Investment Institute, with data from Standard and Poor’s, September 2017. Notes: the lines show the total
return for S&P 1500 retail subsectors from January 2014. Past performance is no guarantee of future results. It is not possible
opportunities – in individual stocks beneath. to invest directly in an index.

9 MARKETS EQUITIES

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Equity style factors Hot, but not too hot

Positioning across equity factors, 2016–2017
The momentum style factor has been on a tear this year. Many US and global stocks 3
with strong price momentum have posted double-digit gains. Is the outperformance Popular overweight
2
overdone? We don’t think so. Our outlook for a steady, sustained expansion
Minimum
suggests momentum should remain in the lead. It has historically outperformed the 1 volatility

Position score
broader market except in cases of recession or financial crisis, our work suggests. Momentum
0 Value
Our analysis finds the momentum factor is not too popular for its own good.
Quality
In fact, none of the major equity style factors is flashing warning signs from overly -1
hot positioning. See the Hot, but not too hot chart. We also like the value factor,
-2
home to the cheapest companies across sectors. Caution has kept investors away Popular underweight
from discounted segments of the market. A sentiment shift, underpinned by -3
confidence in the sustained global expansion, could help value add to strong Jan. 2016 July Jan. 2017 Aug.
third-quarter returns, we believe.
Sources: BlackRock Investment Institute and BlackRock Risk and Quantitative Analysis, with data from Bloomberg, EPFR and State Street,
Momentum in developed markets has more upside potential, we believe. Value August 2017. Notes: data based on BlackRock’s analysis of portfolio flows, fund manager positions as reported by State Street, and price
momentum. A positive score means investors are overweight; a negative score indicates the reverse.
could benefit amid a solid macro backdrop and improved sentiment.

Style factors can’t be ignored. Any investment in an equity index has an Unintended exposures
Factor decomposition for MSCI All-Country World Index, 2002–2017
embedded style exposure. In fact, most market-cap-weighted equity indexes are
100%
heavily slanted towards just a handful of style factors, dominated by momentum
Click to view interactive data Quality
and value, the BlackRock Factor-Based Strategies Group finds. For example,

Share of each factor

75
momentum and value made up nearly 60% of the MSCI ACWI Index by market Size
cap as at March 2017. See the Unintended exposures chart. Conclusion: many Value
50
investors may not be as diversified as they think. Adding exposure to
Minimum
underrepresented factors can help diversify portfolios. 25 volatility

Momentum
0
“Most indexes are effectively exposed to just two or 2002 2004 2006 2008 2010 2012 2014 2017
three factors. Adding factors that are missing or
Sources: BlackRock Investment Institute, with data from MSCI, September 2017. Notes: the analysis breaks down the style factor
muted can bring better balance – and significant exposure of the MSCI ACWI using stock-by-stock style scores derived from the Barra equity risk model. We then seek to mimic the
style factor exposure of the benchmark index as closely as possible with a hypothetical portfolio composed of the following five
diversification benefits.” MSCI World style indexes: Enhanced Value, Momentum, Mid-Cap Equal Weighted (size), Minimum Volatility and Sector Neutral
Quality. For further details on the methodology see the paper What's in your benchmark? A factor analysis of major market
Andrew Ang – Head of BlackRock Factor-Based Strategies indexes by Ang, Madhavan and Sobczyk (2017). For illustrative purposes only. It is not possible to invest directly in an index. Past
performance is no guarantee of future results.

10 M A R K E T S EQ U I T Y S T Y L E FAC TO R S

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Assets in brief
Views on assets, September 2017
Asset class View Comments

—
2017 earnings momentum is strong. Policy progress, particularly related to tax reform, would provide additional support to earnings in 2018.
US
We like value, momentum, financials, technology and dividend growers.

We see sustained above-trend economic expansion and a steady earnings outlook supporting cyclicals. Companies with much of their cost
Europe ▲ base overseas should have some cover against a strong euro in the short term, we believe.

Positives are improving global growth, more shareholder-friendly corporate behaviour and solid earnings amid a stable yen outlook. We see
Equities Japan ▲ BoJ policy and domestic investor buying as supportive. Yen strength is a risk.

Economic reforms, improving corporate fundamentals and reasonable valuations support EM stocks. Sustained above-trend expansion in
EM ▲ the developed world are other positives. Risks include sharp changes in currency, trade or other policies.

The region’s economic backdrop is encouraging. China’s economic growth and corporate earnings outlook look solid in the near term.
Asia ex-Japan ▲ We like India, China and selected Southeast Asian markets.

US government Sustained economic expansion challenges nominal bonds. We favour TIPS for the long run after valuations cheapened amid weaker inflation
bonds ▼ readings. We are neutral on agency mortgages due to current valuations and potential future impacts of the Fed’s balance sheet run-off.

US municipal
—
Demand for income and diversification are likely to drive further demand for munis despite tightening spreads. We see seasonally weak
bonds supply supporting the sector in coming months and favour intermediate to 20+ year maturities.

Stronger growth favours credit over Treasuries. We generally prefer up-in-quality exposures and investment grade bonds due to elevated
US credit ▲ credit market valuations. Floating rate bank loans appear to offer insulation from rising rates, but we find them pricey.

European High valuations and the market’s focus on improving economic data make us cautious. Waning political risks should cause core eurozone
Fixed income
sovereigns ▼ yields to rise and spreads of semi-core and selected peripheral government bonds to narrow.

Risks are tilted to the downside amid heady valuations and the possibility of shifting market expectations for central bank support. We are
European credit ▼ defensive and prefer selected subordinated financial debt.

—
We see sustained global growth benefiting EM debt. The asset class tends to perform well in such an environment – even if the Fed is raising
EM debt
rates. We focus on income as high valuations make further capital gains less likely.

—
We like US dollar Asian credit given a benign economic backdrop and supportive corporate fundamentals. We favour investment grade
Asia fixed income
credits in China and India due to improving credit trends and have a selective stance overall on high yield.

Commodities and Oil prices are underpinned by supply-and-demand rebalancing. The US dollar has scope to strengthen, with the Fed normalising ahead of its
Other NA
currencies DM peers and potential for US economic upside. The British pound is supported by a more hawkish central bank.

Note: views are as at 30 Sept. 2017 and are from a US dollar perspective.

▲ Overweight      — Neutral     ▼ Underweight

11 MARKETS ASSETS IN BRIEF

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