Global Investment Outlook

Q2 2016

BLACKROCK INVESTMENT INSTITUTE

2 G L O B A L I N V E S T M E N T O U T L O O K

MARKETS

Sovereigns ..........................8

Credit ..................................9

Equities ............................. 10

Assets in Brief .................. 11

THEMES

Low Returns Ahead ...........4

Divergence Is Slowing ........5

Volatility and Dispersion ...6

Fears of global recession hit markets hard at the start of the year. Yet the anxiety has waned. Stabilizing growth, a slower pace of rate increases by the U.S. Federal Reserve (Fed) and a pause in the U.S. dollar’s rise bode well for markets in the near term, we believe. Our key views:

� Theme 1: We are living in a low-return world. Quantitative easing (QE) and negative interest rate policies

have inflated financial markets. Many assets have had a great run since the financial crisis. This means

future returns are likely to be more muted. We have been borrowing from the future.

� Theme 2: Monetary policy divergence — a key driver of the U.S. dollar’s gains — looks to be slowing.

The eurozone and Japan are reaching the limits of negative interest rates, and we see future easing

coming through QE. The Fed has signaled a slower pace of rate increases. This bodes well for markets.

� Theme 3: We expect more volatility as the Fed normalizes policy, the business and credit cycles mature,

and risks come to the fore. We see sharp momentum reversals as many investors have piled into similar,

correlated trades. This means diversification and security selection are key.

� Risks: Key downside risks are a Chinese yuan devaluation and a U.K. exit from the EU. Upside risks are

an emerging market (EM) rebound and a rise in inflation expectations on improving growth prospects.

� Assets: Income is king in a low-return environment. We like value equities and dividend growers. We are

neutral on credit but favor it over government bonds. And we are warming up to selected EM assets.

Jean BoivinHead of Economic and Markets Research

BlackRock Investment Institute

Jeff RosenbergBlackRock’s Chief Fixed Income Strategist

BlackRock Investment Institute

Richard TurnillBlackRock’s Global Chief Investment Strategist

BlackRock Investment Institute

Setting the Scene ..............3

Risks ...................................7

3G L O B A L I N V E S T M E N T O U T L O O K

Setting the SceneGlobal markets appear ready to leave recession fears behind. U.S.

manufacturing activity has been slowing since mid-2014, yet there are

signs of a bottoming out. U.S. corporate executives show little concern

about recession risk, our analysis of earnings call transcripts shows.

China’s manufacturing sector looks to be stabilizing. And eurozone activity

is rising — albeit at a moderating pace. See the Mixed Signals chart.

Manufacturing weakness is concentrated mostly in sectors exposed to

energy and exports. Yet there are signs the two key headwinds of falling

oil prices and weak EM economies are easing. Also, the services sector

is in much better shape, and financial systems in the U.S. and Europe

are healing. In the longer term, however, we see sluggish growth due to

structural reasons such as aging populations and high debt levels.

We are in the midst of a long, shallow economic recovery — and we do not see a recession on the near-term horizon.

The collapse in energy prices has dragged down inflation expectations

globally. Markets recently were pricing in U.S. consumer price index (CPI)

inflation of as low as 1% annually over the coming five years. This is

puzzling: Core CPI inflation in February surged to the highest level in almost

four years. Core personal consumption expenditures (PCE) inflation — the

Fed’s preferred inflation gauge — hit 1.7%, but remains below the central

bank’s target level of 2%. See the Inflation Puzzle chart. Note, however,

that eurozone core inflation is still falling.

The Fed appears willing to run the risk that inflation overshoots its target

— at least in the short term. It looks more concerned about market-based

inflation expectations catching up with actual inflation.

A stabilization in energy prices could cause such a rebound. This would be

a positive for risk assets — unless the rise in inflation expectations was so

sharp that it led investors to price in a more rapid pace of Fed tightening.

A modest rebound in inflation expectations would ease fears of a deflationary spiral — and could boost investor sentiment. This would likely bode well for cyclicals and beaten-down EM assets.

MIXED SIGNALS Global Manufacturing Activity, 2010–2016

IND

EX

LEVE

L

60

China

U.S.

Eurozone

55

50

452010 2012 2014 2016

INCREASE

DECREASE

Sources: BlackRock Investment Institute, Institute for Supply Management and Markit, March 2016. Notes: The lines show purchasing managers’ index levels. A value above 50 indicates an increase in activity, while below 50 indicates a decrease.

INFLATION PUZZLE U.S. Core Inflation and Inflation Expectations, 2005–2016

INFL

ATIO

N

3%

Core CPI

InflationExpectations Core PCE

1

0

2005 2013 201520112007

2

2009

Sources: BlackRock Investment Institute, U.S. Federal Reserve and U.S. Bureau of Labor Statistics, March 2016. Notes: Core consumer price index (CPI) and core personal consumption expenditures (PCE) inflation exclude food and energy prices. Inflation expectations are represented by the five-year breakeven inflation rate. This is the difference between the nominal yield on five-year U.S. Treasuries and that on five-year Treasury Inflation Protected Securities. Breakeven inflation rates briefly fell below zero during the financial crisis; this has been excluded from the chart.

4 T H E M E S L O W R E T U R N S A H E A D

Theme 1: Low Returns AheadThe hunt for yield is getting even harder. Negative short-term interest rate

policies in Europe and Japan have pushed yields on many bonds below zero

— and have made safety deposit boxes popular items.

Almost $7 trillion in government bonds carried negative yields as of March

2016. See the Going Negative chart. This is the equivalent of 27% of the

J.P. Morgan Global Government Bond Index.

A long period of low rates has encouraged investors to assume greater risk

in the stretch for yield. This has inflated asset prices. Higher valuations

today typically mean lower returns in the future. Our five-year Capital

Market Assumptions, for example, are near post-crisis lows. We are in a low-

return, but not no-return, environment. This poses a dilemma for investors:

Accept lower returns or dial up risk by taking equity, credit and interest

rate exposure.

Income is golden in a low-return, low-rate world. Yet it is getting harder to come by.

Global equities have been powered by rising price-to-earnings multiples

in recent years. The multiple expansion includes the impact of share

buybacks, which are hovering near post-recession highs by dollar value

in the U.S., according to FactSet. Companies have been using cash flow

or borrowing to fund share repurchases, rather than investing in future

growth. Earnings growth has been paltry since 2011, and revenue growth

is weak. See the Running on Empty chart. Equity valuations still look

reasonable in a low-rate world. Yet revenue and earnings growth are

needed to sustain the post-crisis recovery, we believe.

“ Negative rates are moving the financial transmission mechanism aggressively back to the Stone Age.”Rick Rieder — Chief Investment Officer of BlackRock Global Fixed Income

GOING NEGATIVEGovernment Bonds with Negative Yields, 2014–2016

France

TRIL

LIO

NS

0

$6

4

2

Other

Germany

Japan

Jun 2014 Dec 2014 Jun 2015 Mar 2016Dec 2015

Swiss National BankAdopts Negative

Rates

ECB AdoptsNegative Rates

ECB Cuts RatesFurther Below Zero

BoJ AdoptsNegative Rates

Total

Sources: BlackRock Investment Institute, J.P. Morgan and Thomson Reuters, March 2016. Notes: The chart is based on the J.P. Morgan Global Government Bond Index.

RUNNING ON EMPTY Global Equity Returns by Source, 1995–2016

40%

20

0

-20

-40

Earnings Total Return

Dividends

Multiple Expansion

TOTA

L R

ETU

RN

1995 2000 2005 2010 2016

Sources: BlackRock Investment Institute, MSCI and Thomson Reuters, March 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 in represented by the share of return not explained by earnings growth or dividends. The 2016 returns are for the first quarter only.

5T H E M E SD I V E R G E N C E I S S L O W I N G

Theme 2: Divergence Is SlowingMonetary policy divergence has been a clear market theme since 2014,

sparking a persistent appreciation in the U.S. dollar. Expectations of a

Fed liftoff contrasted with further easing measures from the European

Central Bank (ECB) and the Bank of Japan. The path of two-year bond

yields illustrates this divergence. Yields have steadily climbed in the U.S.

and declined in the eurozone and (to a lesser extent) Japan. See the

Dealing With Divergence chart.

Bond futures point to a further divergence in yields across countries.

Yet we believe this is mostly priced in. The era of ever-widening policy

divergence through interest rates is likely behind us. We believe future

divergence will be more subtle, driven by incremental QE in Europe and

Japan as well the trajectories of U.S. growth and rate increases.

Policy divergence is slowing — and appears mostly priced in. Surprises at the margin are what matters now.

The dollar’s rise has led to a de-facto tightening of global financial

conditions as it is the world’s premier funding currency. It pressured

commodity prices, pulling down U.S. inflation expectations. It hit EM assets

hard. And it weighed on the earnings of U.S. companies with overseas

revenues. Conclusion: The U.S. dollar has become a key driver of

investment returns.

Yet further significant dollar appreciation appears less certain from here.

This is partly because central banks have expressed concerns about the

global impact of a stronger dollar, and agreed at a recent G-20 meeting to

consult closely on exchange rate markets.

The dollar’s rise petered out against other G3 currencies (70% of the DXY

Index) in early 2015, but remains on an uptrend versus a broader set of

currencies. See the Dollar Pause chart. A halt in this trend could light a fire

under oversold commodity and EM assets.

We see dollar appreciation slowing in the near term. This bodes well for markets, we believe. The dollar will likely only resume its uptrend once markets start pricing in faster Fed rate increases.

DEALING WITH DIVERGENCE Two-Year Government Bond Yields, 2013–2016

YIE

LD

1%

ECB Announces QE

BoJ Cuts RatesBelow Zero

Germany

U.S.

Japan

Fed Raises Rates

Fed Ends QE

Bernanke Taper Speech

0.5

0

-0.5

2013 2014 2015 2016

Sources: BlackRock Investment Institute and Thomson Reuters, March 2016. Notes: QE stands for quantitative easing. BoJ stands for Bank of Japan. ECB stands for European Central Bank.

DOLLAR PAUSE U.S. Dollar Index, 1975–2016

200

160

120

80

1975 19951985 2005 2016

IND

EX

125

115

105

95201620152014

Sources: BlackRock Investment Institute and Thomson Reuters, March 2016. Notes: The chart shows the DXY Dollar Index. The lines have been rebased to 100 at Jan. 1, 2014.

6 T H E M E S V O L AT I L I T Y A N D D I S P E R S I O N

Theme 3: Volatility and DispersionMarkets today are characterized by a lot of “me-too” trades. Many

investors have piled into similar strategies. Trends have been persistent —

and counting on yesterday’s winners rising (or falling) further has often

paid off. Popular trades have included overweighting the U.S. dollar and

underweighting EM and commodity assets. See the Copycats chart.

We see two problems with this picture. First, many of these trades are

highly correlated. This means portfolios may be riskier than they appear.

Second, monetary policy normalization is likely to increase volatility, we

believe. This raises the risk of rapid momentum reversals and shifts in

market leadership. Positioning in popular trades has moderated from

recent peaks. This has coincided with a slowing of the U.S. dollar’s rise

and signs of stabilization in EM economies.

Gold, inflation-linked bonds, government debt and currency exposures can be useful portfolio hedges for volatility spikes.

Extraordinary monetary policies have suppressed volatility. This has

made it harder for fundamental investors to exploit expert knowledge of

individual securities. Yet we are starting to see the gap between winners

and losers widen again. Cross-sectional dispersion in global equities — a

measure of the variation in returns across individual securities — recently

reached its highest level in four years. See the Rising Opportunity chart.

We see similar trends in other asset classes such as credit.

Volatility and dispersion tend to rise late in monetary policy cycles when

central banks start raising rates and shrinking their balance sheets, our

research suggests. This favors an active approach to investing, we believe,

including market-neutral strategies such as long/short equity and credit.

We see volatility and dispersion rising to normalized levels as the Fed lifts

rates and markets pay more attention to lurking tail risks (see page 7). This

creates opportunities for security selection, but also a need to diversify.

Investors can no longer rely on a rising tide lifting all boats. Security selection is crucial as dispersion re-emerges in asset markets.

COPYCATSCrowded Positions, 2013–2016

SC

OR

E

-2

-1

0

1

2

U.S. Dollar

Jan 2016Jul 2015Jan 2015Jul 2014Jan 2014Jul 2013

Emerging Markets

Commodities

Source: BlackRock Investment Institute, March 2016. Notes: Data are based on BlackRock analysis of portfolio flows, reported positions by fund managers and price momentum. A positive score means investors are overweight the asset class; a negative score indicates the reverse. The emerging markets line is based on an average of emerging market currency and equities positioning. Commodities are based on an average of energy and industrial metals.

RISING OPPORTUNITY Cross-Sectional Global Equity Return Dispersion, 2008–2016

DIS

PE

RS

ION

2

6

10

14

18%

20162014201220102008

20-Year Average

QE3QE2QE1

Sources: BlackRock Investment Institute and MSCI, March 2016. Notes: Cross-sectional return dispersion is the standard deviation of monthly returns of individual securities within the MSCI World Index. QE refers to the U.S. Federal Reserve’s quantitative easing programs.

7R I S K S

“ EM FX and equities have been stuck in a vicious cycle of yuan depreciation fears begetting outflows and growth worries. Breaking this loop is key not only for EM, but for global stabilization.”Helen Zhu — Head of China Equities, BlackRock Fundamental Active Equity

Downside and Upside RisksA possible devaluation of the Chinese yuan has kept markets on edge.

Capital outflows are draining China’s foreign reserves, pressuring the

currency. See the Reserves Drain chart. A large, sudden devaluation could

trigger competitive devaluations. It could suggest policy makers had lost

control and hit risk assets globally, in our view. We place a low probability

on this scenario for now. Chinese policy makers have tightened capital

account rules to prevent seepage and are targeting the yuan rate against

a basket of currencies. Yet fears of a major devaluation could return in the

long run due to economic imbalances. We watch for signs of capital flight.

Other risks include a “Brexit,” or British exit from the European Union after

a June referendum; a chaotic U.S. presidential election campaign; further

disintegration in the Middle East; and another leg down in oil prices.

Markets have become more susceptible to geopolitical risks as the Fed slowly undoes its volatility-suppressing monetary policy.

An EM recovery is a key upside risk. EM currencies have lost a third of

their value since 2013 on a trade-weighted basis. Those of commodity

exporters Brazil and South Africa have fallen almost as much as during

the Asian financial crisis. See the Currency Collapse chart. A lot of EM

adjustment is now behind us, and trade balances are improving. EM equity

exchange-traded funds were on track to attract about $9 billion in inflows

in March, the highest monthly total in three years, BlackRock research

shows. Another upside risk is a stabilization in oil boosting inflation

expectations. It would be a positive — provided the rise was not fast

enough to prompt a more rapid pace of Fed tightening.

RESERVES DRAINChinese Foreign Exchange Reserves, 2006–2016

CH

AN

GE

(BIL

LIO

NS

)

TOTA

L (T

RIL

LIO

NS

)

-100

-50

0

50

$100 $4

3

201620142012201020082006

2

1

0

Monthly Change

China Weakens Fixing by 1.9%

Total Reserves

Sources: BlackRock Investment Institute, People’s Bank of China and Thomson Reuters, March 2016.

CURRENCY COLLAPSEEmerging Market Currency Declines: Current vs. Asia Crisis

Since 2013 Asia Crisis

-100

-75

-50

-25

WonRupeeZlotyRupiahPesoLiraRandRealRuble

0%

Sources: BlackRock Investment Institute and Thomson Reuters, March 2016.Notes: The chart shows the peak-to-trough decline in currency value versus the U.S. dollar during the Asia crisis (1996-2000), compared with the decline from the peak value since the start of 2013 to today.

8 M A R K E T S S O V E R E I G N S

Sovereigns: Expensive but UsefulGovernment bond yields around the world are exceptionally low. This

leaves little cushion against the risk of rising growth or inflation. Yet low

yields arguably make sense in a world where interest rates are falling in

many countries, central banks are gobbling up a big share of issuance and

investors are more worried about return of capital than return on capital.

We do see sovereigns such as U.S. Treasuries (including inflation-linked

bonds) playing their traditional role as portfolio diversifiers. Long-duration

bonds have historically outperformed in risk-off scenarios. They also have

a steady bid in a low-growth, low-rate world. For income investors, we

favor longer-dated peripheral European sovereigns such as Spain and

Portugal, which offer a yield advantage over Germany. See the Compression

Coming chart. We see ECB asset buying narrowing the gap.

We see government bonds as useful portfolio diversifiers, yet this benefit comes at the cost of very low yields.

U.S. municipal debt looks attractive against other bond sectors. Its

tax-exempt status almost doubles the effective yield for U.S. investors in

top tax brackets. See the Municipal Magic chart. Munis are a diversifier,

with negative correlations to equities and high yield, our analysis shows.

Munis also have been the least volatile fixed income sector, based on daily

moves in the past three years. We favor revenue bonds backed by revenue

streams such as water or sewer utilities over general obligation debt that

is vulnerable to local pension deficits. We also favor selected exposure to

high yield munis, except those of troubled Puerto Rico.

“ The relative weakness of munis so far this year offers a compelling entry point. Investors can buy at lower valuations and capture the tax-exempt income.”Peter Hayes — Head of the Municipal Bonds Group, BlackRock Fundamental Fixed Income

COMPRESSION COMING10-Year Government Bond Yields, 2015–2016

YIE

LD

4%

U.S.

3

2

0

Jan 2015 Apr 2015 Jul 2015 Jan 2016

Portugal

Spain Italy

Germany

1

Oct 2015

Sources: BlackRock Investment Institute and Thomson Reuters, March 2016.

MUNICIPAL MAGIC Current Fixed Income Yields and Volatility by Sector, 2013–2016

MunicipalHigh Yield

CorporateHigh Yield

$ EM Debt

MunicipalsInvestmentGrade

CMBSMBSU.S.Aggregate

Treasuries

YIE

LD/V

OLA

TILI

TY

0

2

4

6

8%HIGH YIELD

Tax-Adjusted

YieldVolatility

Yield

Sources: BlackRock Investment Institute, Barclays, J.P. Morgan and S&P, March 2016. Notes: Volatility is based on annualized standard deviation of daily total returns over the last three years. The tax-adjusted yield for municipal bonds is based on a 43.4% overall tax rate. All data are based on Barclays indexes except for emerging markets (J.P. Morgan EMBI Diversified Index) and municipal high yield (S&P Municipal Bond High Yield ex Puerto Rico Index).

9M A R K E T SC R E D I T

Credit: Short-Term Gain, Long-Term PainCredit fundamentals look decent in the short term. Investment flows into

the asset class are positive, and income is king in a low-rate environment.

Most yields are far below pre-crisis levels, helped by the sell-off earlier this

year. Yet they are well above those on government debt. See the Attractive

Credit chart.

We generally prefer high yield over investment grade in corporate debt.

The former offers greater compensation for the risks entailed, we believe.

Yet security selection is crucial in high yield as the market is bifurcated.

It is a mix of distressed energy companies (often cheap for a reason) and

stronger players offering much lower yields, but less risk. In the medium

term, we see rising risks to corporate credit. These include increasing

defaults and ratings downgrades of investment-grade energy issuers.

Credit markets look attractive for now in a low-return world, yet we are wary of rising medium-term risks. This leaves us neutral overall.

Rising corporate leverage is another key risk. Leverage has been

increasing rapidly as companies take advantage of rock-bottom rates to

issue cheap debt, especially in the U.S. See the Leverage Rising chart.

In the eurozone, by contrast, leverage has stayed relatively muted.

Many companies have used the proceeds to buy back shares or acquire

other businesses, rather than to finance capital spending projects that

could boost future profits. These actions make corporate balance sheets

more fragile, in our view. Some companies are struggling with greater debt

loads as their revenues start to roll over.

The good news? The excesses are concentrated in the energy sector.

Our U.S. investment-grade overweights include subordinated bank debt,

pharmaceuticals and energy pipelines, while we are underweight the

energy, consumer and auto sectors. In U.S. high yield, we like cable,

building materials and gaming companies, and are avoiding utilities and

resources. In the eurozone, ECB asset purchases underpin demand.

Rising leverage and issuance are risks for U.S. credit. Sector and security selection are crucial.

ATTRACTIVE CREDIT Selected Asset Yields: Current vs. Pre-Crisis

YIE

LD

0

2.5

5

7.5

10%

Cash

Pre-Crisis

10-Year Sovereigns

Investment Grade

High Yield

EM Debt

Equity Earnings Yield

Loca

l

U.S

.

Eur

ozon

e

U.K

.

Japa

n

U.S

.

Eurozone

U.K

.

Japa

n

U.S

.

Eurozone

U.K

.

U.S

.

Eurozone

US

D

U.S

.

Eurozone

U.K

.

Japa

n

EM

Sources: BlackRock Investment Institute, Thomson Reuters, Bank of America Merrill Lynch, J.P. Morgan and MSCI, March 2016. Notes: Pre-crisis refers to June 2007 levels. Cash is based on one-month interbank rates. Corporate bonds are based on Bank of America Merrill Lynch index yields; U.S. dollar emerging debt is based on the J.P. Morgan EMBI; local emerging market debt is based on the J.P. Morgan GBI-EM. The equity earnings yield is based on the inverse of the 12-month forward P/E ratio for MSCI indexes.

LEVERAGE RISING Net Debt to EBITDA for U.S. and Eurozone Equities, 2006–2016

NE

T D

EB

T TO

EB

ITD

A

200

150

100

2006 2008 2010 20162014

Eurozone

U.S.

2012

Sources: BlackRock Investment Institute and Thomson Reuters, March 2016. Notes: The chart shows the ratios of net debt to 12-month forward EBITDA for U.S. and Eurozone Datastream Total Market Index excluding financials. The ratios are rebased to 100 at the start of 2006.

1 0 M A R K E T S E Q U I T I E S

THE CASE FOR EQUITIESEquity Dividend Yields vs. Government Bond Yields, 2016

YIE

LD

Equity Dividend Yield 10-Year Government Bond Yield

-1

0

2

4

6%

U.S.JapanGermanyCanadaFranceSwitzerlandU.K.Australia

Sources: BlackRock Investment Institute, MSCI and Thomson Reuters, March 2016. Note: The chart shows the eight largest developed equity markets based on MSCI market capitalization.

REDISCOVERING VALUEValue Equities Relative to Overall Market, 2014–2016

115

105

100

95

90

2002 2006 2010 2014 2016

IND

EX

110100

95

90

201620152014

U.S.

Europe

Sources: BlackRock Investment Institute and MSCI, March 2016. Notes: The lines show the MSCI value indexes divided by their respective total market indexes, rebased to 100 as of January 2002. For example, the purple line shows the MSCI Europe Value Index relative to the MSCI Europe Index.

“ A dovish Fed and central bank coordination to reduce currency stresses are positive for EM equities and should allow value stocks to do well — except financials.”Nigel Bolton — Chief Investment Officer of BlackRock International Fundamental Equity

Equities: There Is Some Value HereEquities look attractive versus government debt, offering dividend yields

above the yield on 10-year government bonds in all major markets. The

gap is widest in negative-rate countries such as Japan and Switzerland.

See the The Case for Equities chart. The U.S. is the only major region where

bond yields rival equity dividends. We like dividend growers here, and see

strength in consumption and housing supporting equities overall.

We also favor European equities due to a supportive ECB. We have long

liked Japanese stocks, but now are neutral because of the strengthening

yen and mounting doubts over the progress of structural reforms. We are

warming up to EM equities after a long underweight. Valuations are cheap.

Signs the Fed will go easy on raising rates bode well for the asset class.

And we see progress on structural reforms in countries such as Argentina.

We do not see any major equity markets as materially overvalued (even the U.S.) — and we consider EM equities to be cheap.

Global value stocks have underperformed for years. Value today includes

battered sectors such as energy and materials. Yet we are starting to see

signs of a turnaround. See the Rediscovering Value chart. First, global

value equities traded at a 35% discount to the broader market as of March

2016, compared with a 20% discount over the last decade, our analysis

based on forward earnings shows. Second, inflation expectations have

picked up, and global factory activity is stabilizing. Third, many investors

are still underweight, so there is plenty of room for inflows. We do not favor

all value stocks. Many European financials, for example, struggle with

negative rates, increased regulation and the need to raise capital.

11M A R K E T S

Asset Class View Notes

EQUITIESOVERWEIGHT

United StatesThe U.S. consumer and housing sectors are strong, and growth appears to be stabilizing.

We see peak margins and payout ratios limiting returns, however.

EuropeReasonable valuations and ECB policy are supportive, but weak growth and a challenged

banking system are risks. Domestic U.K. equities look vulnerable to Brexit fears.

JapanAttractive relative value and improving corporate governance are positives. Yet much is priced

in, and the Bank of Japan may have reached its limits in weakening the yen.

EMStructural challenges such as excess debt persist. Yet we see value for long-term investors.

An expected slower pace of Fed rate increases is a positive.

FIXED INCOME UNDERWEIGHT

TreasuriesImproving data are a short-term risk. Long bonds have a structural bid amid low rates and are

portfolio diversifiers, but vulnerable to upticks in inflation in the short run.

Inflation-LinkedWe like Treasury Inflation-Protected Securities (TIPS) as potential substitutes for nominal bond

exposures. Yet we are neutral overall as valuations have risen fast and oil could retest lows.

MunicipalsWe like relatively attractive (tax-exempt) yields and low volatility. We see potential for inflows

after recent strong performance.

Investment GradeFading fears of recession or rapid rate rises are near-term positives. We prefer going down in

capital structure within higher-quality sectors to capture yield. Rising leverage is a risk.

High YieldWe prefer high yield over investment grade due to better compensation for risks. Yields look

attractive again, but this is partly due to the troubled resources sector skewing the averages.

DM ex U.S.

Fixed Income

Both sovereigns and credit outside the U.S. are underpinned by very easy monetary policies.

Slowing Fed normalization is checking the dollar’s rise, supporting returns on non-USD bonds.

EM DebtWe lean toward local-currency EM debt. Currencies have adjusted, yields have risen to

attractive levels, and the U.S. dollar has slowed its appreciation trend.

COMMODITIES NEUTRAL

CommoditiesCommodity markets are oversupplied and sensitive to downward global growth revisions.

A strategic allocation to gold may make sense for diversification.

OVERWEIGHT UNDERWEIGHTNEUTRALA S S E T A L L O C AT I O N

Assets in BriefViews on Assets for Q2 on an Unhedged Currency Basis

WHY BLACKROCK®

BlackRock helps millions of people, as well as the world’s largest institutions

and governments, pursue their investing goals. We offer:

� A comprehensive set of innovative solutions

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blackrock.comWant to know more?

BLACKROCK INVESTMENT INSTITUTEThe BlackRock Investment Institute provides connectivity between

BlackRock’s portfolio managers, originates research and publishes

insights. Our goals are to help our fund managers become better investors

and to produce thought-provoking content for clients and policy makers.

EXECUTIVE DIRECTOR

Lee Kempler

GLOBAL CHIEF INVESTMENT STRATEGIST

Richard Turnill

HEAD OF ECONOMIC AND MARKETS RESEARCH

Jean Boivin

EXECUTIVE EDITOR

Jack Reerink

Unless indicated otherwise, all publications mentioned are issued by BlackRock Investment Institute and can be found on its website.

This material is part of a series prepared by the BlackRock Investment Institute and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2016 and may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

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The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

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Lit. No. BII-OUTLOOK-2016-Q2 6337A-BII-0416 / BII-0129