Global Investment OutlookQ4 2017

FOR INSTITUTIONAL, PROFESSIONAL, WHOLESALE AND QUALIFIED INVESTORS/CLIENTS. FOR PUBLIC DISTRIBUTION IN U.S.

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2

Kate MooreChief Equity Strategist

BlackRock Investment Institute

Jean BoivinHead of Economic and Markets Research

BlackRock Investment Institute

Isabelle Mateos y LagoChief Multi-Asset Strategist

BlackRock Investment Institute

Jeff Rosenberg Chief Fixed Income Strategist

BlackRock Investment Institute

Richard TurnillGlobal Chief

Investment Strategist

BlackRock Investment Institute

THEMES ........................ 3–4Sustained expansionRethinking risk; rethinking returns

SPECIAL TOPICS .......... 5–6InflationGeopolitics

MARKETS ....................7–11Government bondsCreditEquitiesEquity style factorsAssets in brief

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

Growth is cruising at above-trend rates across the world. We see inflation picking up in the U.S. 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 U.S. core

inflation will rise back toward 2%, giving the Federal Reserve comfort in pushing ahead with policy

normalization. In the eurozone, the lagging recovery means there is plenty of slack left in the economy.

The European Central Bank (ECB) may prolong its ultra-easy policies longer than markets expect.

• We see upbeat economic growth pushing bond yields up after a dip caused by a soft inflation patch,

geopolitical unease and a downshift in Fed rate increase expectations. Yet we see any yield rises

capped by structural factors such as graying populations, excess savings and tepid productivity growth.

U.S. policy normalization and potential for upside economic surprises support the U.S. dollar, in our view.

• What are the risks? Policy missteps or miscommunications cannot be ruled out as the Fed and some

other central banks reduce accommodation. China’s economy could slow if the country re-emphasizes

reforms over short-term growth after a crucial party congress. Geopolitical risks also lurk. But we see

few triggers that could 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 toward high-

growth companies. We like European and Japanese stocks and prefer equities overall to credit, where

much good news appears priced in. We like the momentum and value equity style factors.

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Spreading the wealthBreadth and level of global composite PMI, 2003–2017

PMI level

20172015

Shar

e ab

ove

50

Global composite PMI

Share of countries with PMI above 50

30

40

50

60

70

0

25

50

75

100%

201320112009200720052003

The recovery in global growth is broadening

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 share of countries in this index with a PMI above 50, indicating expanding activity.

Room to recoverU.S. wage growth across cycles, 1981–2017

Ann

ual w

age

gro

wth

Prior peak

Trough Potential Peak

1

2

3

4

5

6%

2007–present

2001–20071981–1990

1990–2001

U.S. wage growth has been weak this cycle

Sources: BlackRock Investment Institute, with data from the U.S. Bureau of Labor Statistics, September 2017. Notes: The chart shows the annual pace of U.S. 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 potential output is reached. For our interactive graphic: blackrockblog.com/cycles-in-context.

3

Themes: sustained expansion

The increasing breadth of the global economic expansion is pointing

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 — a first in the post-crisis period. China’s growth surprised to

the upside this year as Beijing kept the economy humming ahead of the

Communist Party’s key National People’s Congress (NPC) in October. We

could see a policy reset after the NPC, with greater focus on long-term

structural reforms at the expense of growth in the short run.

Overall, however, we see no change to the big picture of a global expansion

chugging along at an above-trend pace. Drops this year in developed

market (DM) bond yields and the U.S. dollar were unexpected given the

robust growth backdrop. We see potential for rebounds in both as inflation

firms and the Fed presses on with removing monetary accommodation.

A broadening of steady growth beyond the U.S. gives us confidence the

global expansion is sustainable.

The U.S. economic expansion is getting long in the tooth. Or is it? Some

slack remains in the economy — even as the jobless rate touches levels

rarely seen since the 1950s. Slower growth — a function of structural

changes such as an aging society — means economic slack created in the

last recession is being eroded at a sluggish pace. Our work suggests the

expansion can run for much longer — likely years — until the economy

reaches potential and then the peak that marks the end of the cycle.

Wage growth has been a pain point since the crisis. But when looking at

economic cycles based on their peaks and troughs, rather than time

elapsed, we see the trend is not too far off from past cycles. See the Room to

recover chart. Lingering wage weakness is one reason we think this recovery

still has legs. A sustained expansion supports company earnings growth, we

believe, reinforcing our upbeat view on equities. It is also why we like the

momentum style factor, which historically has outperformed in expansions.

Amid a steady U.S. expansion, we favor stocks and the momentum style.

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

Click to view interactive data

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4

Collapsed into calmVolatility of U.S. economic data, 1970–2017

Perc

enti

le

2017

0

25

50

75

100%

20102000199019801970

Payrolls

Core inflation

Economic volatility has plunged to historical lows

Sources: BlackRock Investment Institute, with data from the U.S. Bureau of Labor Statistics, September 2017. Notes: The lines show the historical percentile ranking of the five-year rolling standard deviation of U.S. core consumer price inflation and monthly change in payrolls.

Patience neededGlobal equity annualized returns by holding period from September 2007

Holding period (years)

10987654321

-17.5%

5.1%3.9%3.0%

4.4%1.9%

-14.9%

-8.2%

-3.7%-1.2%

Global equities climbed back from crisis-induced losses

Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017.Notes: The bars represent the annualized 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 annualized return from the beginning of September 2007 to the end of 2011. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index.

Themes: rethinking risk; rethinking returns

Market volatility (vol) has been testing lows. What is less appreciated is

that this is happening at a time of historically subdued volatility in economic

data. These low-vol environments — both market and macro — tend to

overlap each other. Indicators such as U.S. employment and inflation today

are among their least 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 the financial system are kept in check,

we find. See Learning to live with low vol of July 2017.

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 that involve selling volatility have become a popular way of

generating income across asset classes. Yet we do not spot broader signs

of “irrational exuberance” in financial markets today.

Spotting systemic risks in advance is difficult, but we see none on the

immediate horizon that might undercut the current economic expansion.

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 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 due to structurally lower interest rates. Viewed through

this lens, equity valuations are not that extreme, we believe. As a result, we

favor taking advantage of temporary equity market sell-offs, particularly in

the current environment of low volatility and solid corporate earnings.

What if a market shock were to morph into a systemic crisis? Buying on the

dip only works if the investor takes a long view and has a stomach for

volatility. Patience eventually was rewarded after the 2008 crisis — but it

took six volatile years to claw back losses from the 2007 peak. See the

Patience needed chart.

We favor taking advantage of temporary equity sell-offs in the current

landscape of low volatility and strong earnings growth.

T H E M E S R E T H I N K I N G R I S K ; R E T H I N K I N G R E T U R N S

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Special topic: inflation

The inflation outlooks in the U.S. and eurozone stand in stark contrast.

Our BlackRock Inflation GPS points to core U.S. inflation climbing back

near 2% in coming months. See the Inflation’s demise exaggerated chart.

Such an outcome should reassure Fed officials that this year’s inflation misses

were mostly due to 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

labor market and steady economic expansion. We see further rate increases

as likely in 2018, even with looming changes to the Fed’s leadership.

By contrast, we see core inflation stuck at much lower levels in the

eurozone. That should keep the ECB cautious about winding down its bond

purchases. We believe policy divergence supports the U.S. dollar against

the euro, and see U.S. yields rising more than eurozone yields. We prefer

U.S. inflation-protected securities over nominal bonds and see them

offering better value than similar instruments in the UK and eurozone.

Contrasting inflation outlooks suggest greater monetary policy

divergence between the U.S. and eurozone than markets are expecting.

Economic slack is the culprit in the eurozone’s sluggish inflation outlook.

Our work finds that domestic activity, primarily spare capacity in the jobs

market, 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 easing program has been only mildly effective in

offsetting lingering domestic slack. See the Domestic drag chart.

The eurozone recovery should keep eroding this slack, but it still has a long

way to go. Extra-loose policy is needed to ensure that inflation climbs back

to target and stays there, we believe. Any sustained strength in the euro

could weigh on inflation. Winding down monetary accommodation too

quickly would risk inflation being stuck below target for even longer.

See our September 2017 Getting to inflation’s core for details.

Ongoing ECB policy accommodation is needed to help get inflation back

near its 2% target.

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

Inflation’s demise exaggeratedFuture inflation implied by BlackRock Inflation GPS vs. actual

Ann

ual i

nflat

ion

rate

BlackRock GPS

Inflation rate

0

1

2

3%

EurozoneCanadaU.S. PCEU.S. CPIUK

Our GPS shows some upside for inflation in coming months

Sources: BlackRock Investment Institute and BlackRock Scientific Active Equity group, with data from Thomson Reuters, September 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. U.S. PCE shows core personal consumption expenditures price inflation.

Domestic dragFactors driving eurozone core inflation, 2008–2017

Perc

enta

ge

po

int d

evia

tion

fro

m tr

end

2008

-1.5

-1

-0.5

0

0.5%

2014 2015 2016 20172009 2010 2011 2012 2013

Monetary policy

Others Net deviation

Spare capacity has held down eurozone inflation

Domestic activity

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 a 2000–2008 mean. The breakdown, in percentage points, is based on an ECB model published in the January 2017 paper Missing disinflation and missing inflation: the puzzles that aren’t.

Click to view GPS interactive

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Special topic: geopolitics

If markets are a sea of calm, geopolitics are anything but. We have our

eyes on 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 U.S.-China relations.

We view North Korea’s missile and nuclear weapons program as a major

threat to regional stability, U.S. 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 U.S. to intensify its “peaceful pressure” campaign, imposing

unilateral sanctions and leaning hard on China to participate. We see the

crisis straining U.S.-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 U.S. and China heating up over time. The

countries 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 U.S.-China relationship in the long run, and

believe markets have yet to factor in this gradual deterioration.

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 could lead to an erosion of relations — and have

sector-specific effects. U.S. military action against North Korea and/or

an accidental clash in the South China Sea would deal a blow to the

relationship, in our view, and hurt risk assets. But our base case is that

the U.S. and China avoid these land mines in the short term, and try to use

U.S. President Donald Trump’s upcoming visit to emphasize cooperation.

S P E C I A L T O P I C G E O P O L I T I C S

A world of riskBlackRock’s top-10 geopolitical risks, September 2017

Major cyber attack Major terror attack

Russia-NATO conflictNorth American trade tensions

South China Sea conflict

North Korea conflict

Fragmentation in Europe

U.S.-China tensions

Gulf conflicts

Escalation in Syria and Iraq

Source: BlackRock Investment Institute, September 2017. Notes: The graphic shows the top 10 geopolitical risks BlackRock 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.

“ The U.S. and China are drifting toward greater

tensions because of increased economic

competition and the inevitable friction of a rising

power challenging an established one.”

Tom Donilon — Chairman, BlackRock Investment Institute

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7 M A R K E T S G O V E R N M E N T B O N D S

Government bonds

The softness in bond yields this year has wrong-footed many investors.

We see upside in yields as attention returns to the Fed and some other

central banks gradually removing policy accommodation. The slide in

nominal yields after 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 chart. Real yields fell as some market

participants doubted central banks’ willingness to withdraw stimulus.

Fading hopes for a fiscal boost from U.S. tax cuts also played a role.

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 monetary policy normalization would be enough. This may

already be in motion, with a rebound in yields since early September. Any

lift in inflation expectations — or U.S. tax cuts — could add fuel to the move.

Bond yields should rise as some central banks remove stimulus.

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

decelerate. Policymakers are taking confidence from a sustained global

expansion and re-emerging inflation. The Fed has set out how it will wind

back its crisis-era balance sheet. See Crossing the river by feeling the

stones of June 2017 for details. The ECB faces challenges maintaining its

current level of stimulus as it runs into 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 of Japan (BoJ) to

keep up the pace of its mega stimulus in a bid to revive inflation.

The net result: Central banks will still be net purchasers of assets in 2018,

but at a slower rate. See the Easing off chart. Investors will have to digest a

larger share 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 — a reason to keep tabs on the prospects for U.S. tax cuts.

We see higher yields ahead, but structural factors such as aging

populations and strong demand for income limit upward moves.

Getting realU.S. 10-year Treasury yield breakdown, 2016–2017

0

0.5

1

1.5

2

2.5%

Jan. 2016 Jan. 2017

Real yield

Inflation breakeven

Nominal yield

Real yields dragged nominal rates lower

Sept.

Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017.Notes: The nominal yield is based 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.

Easing off G3 central bank net asset purchases, 2006–2018

12-m

ont

h ro

lling

flo

w in

trill

ions

2018

-0.5

0

0.5

1

$1.5

2006 2008 2010 2012 2014 2016

U.S.

EurozoneG3 totalJapan

Central bank asset purchases are set to roll over in 2018 Estimates

Sources: BlackRock Investment Institute, with data from the Fed, ECB and BoJ, September 2017. Notes: Data from Sept. 30, 2017, are estimates. G3 refers to the U.S., Japan and the eurozone. The U.S. estimate is based on the addendum to the Policy Normalization Principles and Plans issued by the U.S. 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.

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8 M A R K E T S C R E D I T

Credit

Yes, credit spreads are close to historically tight levels. Yet we believe

credit is an attractive source of income — and one seeing persistent

demand in the context of a low-yield fixed income universe. Spreads

have widened slightly in the past few months in both the U.S. and European

investment grade markets, offering some value even if valuations look a bit

rich at these levels. See the Shrinking credit world chart.

Today’s valuations imply future returns will come from clipping coupons

(carry) rather than tightening spreads. As a result, we believe credit offers

less upside than equities on a risk-adjusted basis if our scenario of

sustained global expansion pans out. But this environment of low market

and economic volatility is one where corporate defaults are expected to be

limited. In the U.S., we prefer an 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 synchronized

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 growth and subdued inflation. This should lead to a

further narrowing of interest rate differentials versus the rest of the world as

the Fed leads its DM peers in normalization. We expect relative price

outperformance in EM debt as a result.

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 EM divergence chart. We see the U.S. dollar appreciating

only modestly and 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 stimulus, or a rapidly resurging dollar.

We like selected EM debt for income and potential price appreciation

amid low inflation and currency volatility in the emerging world.

Shrinking credit worldInvestment grade credit spreads, 2016–2017

Spre

ad v

ersu

s g

ove

rnm

ent b

ond

s

Eurozone

U.S.

Asia

0.75

1.25

1.75

2.25%

Jan. 2017Jan. 2016

CSPP announced

CSPP launched

Sept.

Credit spreads have tightened since the ECB said it would buy corporate bonds

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. U.S. data are based on the Bloomberg Barclays U.S. 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 divergenceEM currency volatility and yield differential vs. DM, 2003–2017

EM

cur

renc

y vo

lati

lity

ind

ex

EM

local vs. D

M yield

differen

tial

0

10

20

30

20172015201320112009200720052003

2

4

6

8%

EM currency volatility

EM vs. DM yield differential

EM vs. DM yield differential is wide given low currency volatility

Sources: BlackRock Investment Institute, with data from Bloomberg, September 2017.Notes: EM currency volatility is represented by the JP Morgan Emerging Market Volatility Index. The EM vs. DM yield differential is based on the JP Morgan GBI-EM Global Diversified Index and the JP Morgan GBI Global Index.

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9 M A R K E T S E Q U I T I E S

Equities

The sustained global expansion is providing a positive backdrop for

corporate 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. Analyst forecasts are holding steady in the U.S. and

Europe, are up in Japan and have almost doubled this year in EMs. See the

Earning their keep chart. These trends give us comfort taking risk in stocks.

We favor non-U.S. markets, including Europe and Japan. EM stocks top our

list, even after a strong rally this year. Economic reform momentum, improving

cash flows and reasonable valuations make a solid investment case. This year’s

top sector also holds appeal: Tech has posted outsized earnings growth

and accounted for roughly half of U.S. and EM Asia equity returns. We still

see ample runway, as outlined in Tech for the long run of September 2017.

We also like U.S. bank stocks, with steeper yield curves set to boost lending

margins, and prospects for deregulation and increased payouts.

Steady economic and strong earnings growth bode well for equities.

Much has been made of rock-bottom equity volatility. Yet low volatility at

the equity index level masks a lot of action below the surface. Worries

about widespread technological disruption are causing major valuation

swings within sectors — as disruptors chip away at traditional business

models saddled with high fixed costs and real estate footprints.

The retail sector is a prime example. A boom in online shopping and shifting

consumer preferences (toward experiences versus things) are challenging

legacy retail business models. Returns for Internet retailers once trailed their

traditional counterparts but have skyrocketed since 2016. The casualty:

every other retail subsector. See the Disruption fear bubble chart. We

believe some of these moves are overdone. This can mean opportunity for

stock pickers. We like innovative retailers that can differentiate themselves,

and look for opportunities in other sectors hit by disruption.

Low volatility at the market’s surface can conceal great dispersion — and

opportunities — in individual stocks beneath.

Disruption fear bubbleU.S. retail equity performance, 2014–2017

Tota

l ret

urn

-25

0

50

100

150%

20152014 20172016

Internet

Multiline

Speciality

Food & staples

Internet retailers have sprinted ahead of traditional players

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 to invest directly in an index.

Earning their keepAnalyst forecasts of 2017 corporate earnings growth

Ann

ual c

hang

e

Emerging markets

Japan

Europe

U.S.

EM and Japanese earnings expectations have jumped this year

10

15

20%

Sept.JulyApril Jan.

Sources: BlackRock Investment Institute, with data from Thomson Reuters, September 2017.Note: The lines show the path of aggregate analyst expectations of 2017 earnings growth for companies in various regions.

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10 M A R K E T S E Q U I T Y S T Y L E FA C T O R S

“ Most indexes are effectively exposed to just

two or three factors. Adding factors that are

missing or muted can bring better balance —

and significant diversification benefits.”

Andrew Ang — Head of BlackRock Factor-Based Strategies

Equity style factors

The momentum style factor has been on a tear this year. Many U.S. and

global stocks with strong price momentum have posted double-digit gains.

Is the outperformance overdone? We don’t think so. Our outlook for a

steady, sustained expansion suggests momentum should remain in the

lead. It has historically outperformed the broader market except in cases of

recession or financial crisis, our work suggests.

Our analysis finds the momentum factor is not too popular for its own good.

In fact, none of the major equity style factors is flashing warning signs from

overly hot positioning. See the Hot, but not too hot chart. We also like the

value factor, home to the cheapest companies across sectors. Caution has

kept investors away from discounted segments of the market. A sentiment

shift, underpinned by confidence in the sustained global expansion, could

help value add to strong third-quarter returns, we believe.

Momentum in developed markets has more upside potential, we believe.

Value could benefit amid a solid macro backdrop and improved sentiment.

Style factors can’t be ignored. Any investment in an equity index has an

embedded style exposure. In fact, most market-cap-weighted equity

indexes are heavily slanted toward just a handful of style factors, dominated

by momentum and value, the BlackRock Factor-Based Strategies Group

finds. For example, momentum and value made up nearly 60% of the MSCI

ACWI Index by market cap as of March 2017. See the Unintended exposures

chart. Conclusion: Many investors may not be as diversified as they think.

Adding exposure to underrepresented factors can help diversify portfolios.

Hot, but not too hotPositioning across equity factors, 2016–2017

Posi

tion

sco

re

July

Minimum volatility

-3

-2

-1

0

1

2

3

Jan. 2017 Aug.Jan. 2016

QualityValueMomentum

Popular underweight

Popular overweight

Sources: BlackRock Investment Institute and BlackRock Risk and Quantitative Analysis, with data from Bloomberg, EPFR and State Street, 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.

Unintended exposuresFactor decomposition for MSCI All-Country World Index, 2002–2017

Shar

e o

f eac

h fa

cto

r

2002

Momentum

0

25

50

75

100%

2004 2006 2008 2010 2012 2014 2017

Minimum volatility

Value

Size

Quality

Sources: BlackRock Investment Institute, with data from MSCI, September 2017. Notes: The analysis breaks down the style factor 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 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 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.

Click to view interactive data

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11

▲ Overweight — Neutral ▼ Underweight

Assets in briefViews on assets from a U.S.-dollar perspective, September 2017

M A R K E T S A S S E T S I N B R I E F

Asset class View Comments

Equities

U.S. — 2017 earnings momentum is strong. Policy progress, particularly related to tax reform, would provide additional support to

earnings in 2018. We like value, momentum, financials, technology and dividend growers.

Europe ▲We see sustained above-trend economic expansion and a steady earnings outlook supporting cyclicals. Companies with much

of their cost base overseas should have some cover against a strong euro in the short term, we believe.

Japan ▲Positives are improving global growth, more shareholder-friendly corporate behavior and solid earnings amid a stable yen

outlook. We see BoJ policy and domestic investor buying as supportive. Yen strength is a risk.

EM ▲Economic reforms, improving corporate fundamentals and reasonable valuations support EM stocks. Sustained above-trend

expansion in the developed world are other positives. Risks include sharp changes in currency, trade or other policies.

Asia ex-Japan ▲The region’s economic backdrop is encouraging. China’s economic growth and corporate earnings outlook look solid in the

near term. We like India, China and selected Southeast Asian markets.

Fixed income

U.S. government

bonds ▼Sustained economic expansion challenges nominal bonds. We favor TIPS for the long run after valuations cheapened amid

weaker inflation readings. We are neutral on agency mortgages due to current valuations and potential future impacts of the

Fed’s balance sheet run-off.

U.S. municipal

bonds — Demand for income and diversification are likely to drive further demand for munis despite tightening spreads. We see

seasonally weak supply supporting the sector in coming months and favor intermediate to 20+ year maturities.

U.S. credit ▲Stronger growth favors credit over Treasuries. We generally prefer up-in-quality exposures and investment grade bonds due to

elevated credit market valuations. Floating rate bank loans appear to offer insulation from rising rates, but we find them pricey.

European

sovereigns ▼High valuations and the market’s focus on improving economic data make us cautious. Waning political risks should cause core

eurozone yields to rise and spreads of semi-core and selected peripheral government bonds to narrow.

European credit ▼Risks are tilted to the downside amid heady valuations and the possibility of shifting market expectations for central bank

support. We are defensive and prefer selected subordinated financial debt.

EM 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 rates. We focus on income as high valuations make further capital gains less likely.

Asia fixed income — We like U.S. dollar Asian credit given a benign economic backdrop and supportive corporate fundamentals. We favor

investment grade credits in China and India due to improving credit trends and have a selective stance overall on high yield.

OtherCommodities and

currenciesNA

Oil prices are underpinned by supply-and-demand rebalancing. The U.S. dollar has scope to strengthen, with the Fed normalizing

ahead of its DM peers and potential for U.S. economic upside. The British pound is supported by a more hawkish central bank.

Note: Views are as of Sept. 30, 2017.

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Lit. No. BII-OUTLOOK-Q4-2017 37750-0917

BlackRock Investment InstituteThe BlackRock Investment Institute (BII) provides connectivity between BlackRock’s portfolio managers, originates market research and publishes insights. Our goals are to help our fund managers become better investors and to produce thought-provoking content for clients and policymakers.

BLACKROCK VICE CHAIRMANPhilipp Hildebrand

GLOBAL CHIEF INVESTMENT STRATEGIST Richard Turnill

HEAD OF ECONOMIC AND MARKETS RESEARCHJean Boivin

EXECUTIVE EDITORJack Reerink

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