BLACKROCK INVESTMENT INSTITUTE

Global Investment Outlook

Q2 2016

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

Fears of global recession hit markets hard at the start of the year. Yet the anxiety has waned. Stabilising growth, a slower pace of rate increases by the US Federal Reserve (Fed) and a pause in the US 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 US 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 signalled a slower pace of rate increases. This bodes well for markets.

� Theme 3: we expect more volatility as the Fed normalises 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 UK 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 favour 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

MARKETS

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

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

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

Assets in brief .................. 11

THEMES

Low returns ahead .............4

Divergence is slowing ........5

Volatility and dispersion ....6

Setting the scene ...............3

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

For professional clients and qualified investors only.

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. US manufacturing

activity has been slowing since mid-2014, yet there are signs of a bottoming out.

US corporate executives show little concern about recession risk, our analysis

of earnings call transcripts shows. China’s manufacturing sector looks to be

stabilising. 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 US and Europe are healing. In the longer

term, however, we see sluggish growth due to structural reasons such as ageing

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 US 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 stabilisation 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

US

Eurozone55

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 US core inflation and inflation expectations, 2005–2016

INFL

ATIO

N

3%

Core CPI

Inflationexpectations Core PCE

1

02005 2013 201520112007

2

2009

Sources: BlackRock Investment Institute, US Federal Reserve and US 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 US 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.

For professional clients and qualified investors only.

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 US, 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.

For professional clients and qualified investors 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 US 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 US 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 US 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 US inflation expectations. It hit EM assets hard. And it weighed on

the earnings of US companies with overseas revenues. Conclusion: the US 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

US

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 US 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 1 January 2014.

For professional clients and qualified investors only.

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 characterised 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 US 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 normalisation 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 US dollar’s rise and signs of stabilisation 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 favours an active approach to investing, we believe. Market-

neutral strategies may benefit. We see volatility and dispersion rising to

normalised 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

US 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 US Federal Reserve’s quantitative easing programmes.

For professional clients and qualified investors only.

7T H E M E S 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 stabilisation.”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 US 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 stabilisation 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 US dollar during the Asia crisis (1996-2000), compared with the decline from the peak value since the start of 2013 to today.

For professional clients and qualified investors only.

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 US 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 favour 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.

Asset purchases by the ECB underpin European sovereign debt. Net bond issuance

in the eurozone turned negative in 2015 after accounting for ECB purchases – and

the bond market is set to shrink even further this year (along with Japan). See the

Big Buyers chart.

European peripherals offer the greatest scope for spread compression, we

believe. Yet they do not come without risks. A potential downgrade by rating

agency DBRS may rob Portugal of its last remaining investment grade rating,

and could threaten its eligibility for ECB asset purchases. Spain’s inconclusive

election result poses the risk that the country may go to the polls again in June.

“ We like longer-dated inflation-linked bonds, both in Europe and the US. Meagre breakevens are pricing in very low inflation – especially in light of central bank inflation targets.”Scott Thiel – Deputy Chief Investment Officer BlackRock Fundamental Fixed Income

COMPRESSION COMING10-Year government bond yields, 2015–2016

YIE

LD

4%

US

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.

BIG BUYERS Developed market net government bond issuance after central bank purchases, 1996-2016

-1

0

1

2

$3

20162014201220102008200620042002200019981996

TRIL

LIO

NS UK

US

Japan

Eurozone

Total

Sources: BlackRock Investment Institute and Morgan Stanley, March 2016.Notes: the chart shows gross issuance of government bonds, minus central bank purchases and redemptions. 2016 is a Morgan Stanley forecast.

For professional clients and qualified investors only.

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.

Credit fundamentals look pretty solid in the eurozone. Investment-grade

corporate bond issuance has surged as many companies – including US

multinationals – take advantage of low yields. Yet corporate leverage still looks

subdued in the eurozone compared with the crisis peak – contrasting with a

steady rise seen in the US. See the Leverage Rising chart.

Signs of green shoots in the economy should help keep default risk low. Credit

spreads look reasonably attractive again after ballooning to their widest levels

since 2013. And the addition of corporate debt to the ECB’s asset purchase

programme underpins demand.

Sector and security selection are key. We like hybrid debt in the industrial sector,

which offers yields of 5-6% and appears oversold on worries about exposure to

China’s slowdown. We also see selected opportunities in subordinated insurance

debt and lower Tier 2 bank debt ranked just below senior in the capital structure.

Eurozone corporate debt looks attractive after the recent sell-off. ECB buying provides a strong backstop for the sector.

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

US

Eur

ozon

e

UK

Japa

n

US

Eurozone UK

Japa

n

US

Eurozone UK US

Eurozone

US

D

US

Eurozone UK

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; US 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 US and eurozone equities, 2006–2016

NE

T D

EB

T TO

EB

ITD

A

200

150

100

2006 2008 2010 20162014

Eurozone

US

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 US and Eurozone Datastream Total Market Index excluding financials. The ratios are rebased to 100 at the start of 2006.

For professional clients and qualified investors only.

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

-1

0

2

4

6%

Equity dividend yield 10-year government bond yield

USJapanGermanyCanadaFranceSwitzerlandUKAustralia

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

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

US

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.”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 US 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 favour 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 US) – and we consider EM equities to be cheap.

Value stocks have underperformed since the financial crisis. We are seeing

signs of a rebound. See the Rediscovering Value chart. A value renaissance may

just be getting started. First, value equities still traded at a 35% discount to the

broader market globally as of March 2016, compared with an average 20%

discount over the last decade, our analysis based on forward earnings shows.

Second, economic fundamentals are improving. Third, there is room for flows to

come into the asset class as underweight investors raise allocations. We favour

sectors with attractive yields such as telecoms, but avoid European financials

due to the challenges of low rates, more regulation and a need to raise capital.

For professional clients and qualified investors only.

11M A R K E T S

Asset Class View Notes

EQUITIESOVERWEIGHT

United StatesThe US consumer and housing sectors are strong, and growth appears to be stabilising. 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 UK 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.

Asia ex-Japan China’s rebalancing weighs on growth, and a yuan devaluation is a risk. We like India on reform momentum.

FIXED INCOME

UNDERWEIGHT

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

diversifiers, yet they are vulnerable to upticks in inflation in the short run.

Eurozone sovereignsWe are avoiding core eurozone sovereigns except as portfolio diversifiers. We like European peripherals on

the back of ECB purchases and strong demand for income, but an actual Brexit is a risk.

UK gilts Gilts look vulnerable to Brexit fears in the near term, but we see value in the very long end.

US creditWe generally prefer US high yield over investment grade. Higher yields offer better compensation for risks

such as rising corporate leverage.

European credit ECB asset purchases underpin demand. We see value in subordinated financials and high yield. Yet we are

becoming more cautious overall due to rising valuations and increasing investment-grade issuance.

EM debtWe lean toward local-currency EM debt. Currencies have adjusted, yields have risen to attractive levels, and

the US dollar has slowed its appreciation trend.

Asia fixed incomeWe like local-currency debt in countries such as Indonesia, Malaysia and India, where we see potential for

easier monetary policy. We are cautious on high yield in the region due to rising valuations.

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

For professional clients and qualified investors only.

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 006338a-BII APR16 / BII-0129