Investment Directions Monthly Market Outlook July 15, 2012
INVESTMENT DIRECTIONS [ 2 ] Macroeconomic Overview TABLE OF CONTENTS As policy makers took steps last month to avert a worsening eurozone crisis and to revive slowing economies, global equity markets finished June up 4.9%, credit spreads tight- ened and the 10-year Treasury rate rose slightly to 1.64%. Global Regions...................................4 However, with global economic data continuing to soften, the US economy slowing for a Global Sectors...................................6 third summer in a row and Europe still teetering on the brink of an abyss, investor optimism was short-lived despite additional steps by policy makers in early July. Global Fixed Income Sectors.......................7 equity markets fell 0.8% in July through July 9,* with many investors continuing to question whether a global double-dip recession is on the horizon. In our opinion, the most likely outcome for the global economy for the remainder of the year continues to be slow, but positive, growth. While Europe is struggling, it’s What’s New: stumbling toward a solution. Meanwhile, though growth appears to be slowing in the United States, we still believe the country will avoid a recession in 2012. • e have maintained all W our outlooks this month. That said, if US policy makers don’t avert the United States’ pending fiscal drag, reces- sion fears will become justified. And while we’ve seen some tentative signs of progress in Europe lately, policy makers still need to address their region’s structural issues, meaning a worsening eurozone crisis still could pose a threat to the global recovery. In light of uncertainty surrounding the United States’ fiscal policy and Europe, we expect current heightened market volatility to continue for the remainder of the year. While we expect that stocks can move higher in 2012 and we continue to hold an overweight long-term view of global equities, especially relative to bonds, the road ahead for equities is still likely to be rocky. Risk Appetite Dial s A such, we continue to favor investments that potentially offer some downside protection while still potentially producing a reasonable yield and allowing for partici- pation in market gains. We like high-quality, international dividend-paying stocks; –0.6 defensive sectors such as global telecommunications; global mega capitalization last month (mega cap) stocks; and US and international minimum volatility funds. We also prefer to get equity exposure through select developed and emerging markets that have robust growth prospects and fewer debt and banking sector problems. Within fixed income, we like US spread products such as investment grade and municipal bonds. Low High–3 +3 *Global equity market performance data is based on the performance of the MSCI ACWI (All Country World Index).Our global market risk appetite measureaccounts for ongoing shifts in investorsentiment around the macro fundamen- Figure 1: Longer-Term Global Asset Allocationtals that form the basis for our near-term investment views. Please see theappendix for an explanation of our risk Underweight Neutral Overweightappetite measure methodology. Global Equities n Treasury Bonds nOur risk appetite measure has turnedslightly more negative, signaling a more Corporate Bonds ncautious mood in the markets, thanks Municipals nto further widening US corporate creditspreads and falling Chicago Fed Treasury Inflation-Protected Securities nNational Activity Index data. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative and educational purposes and is subject to change.
INVESTMENT DIRECTIONS [ 3 ]Figure 2: iShares Investment Strategy Group Near-Term Outlooks Global Region Underweight Neutral Overweight Related iShares ETF Tickers Developed Markets Global Equities x ACWI, HDV, IOO, OEF, IDV, URTH, ACWV Developed Markets x EFA, IDV, ACWX, EFAV, SCZ Australia x EWA, EPP, EWAS, DVYA Canada x EWC, EWCS France x EWQ Germany x EWG, EWGS Hong Kong x EWH, EWHS Italy x EWI Japan x EWJ, SCJ Netherlands x EWN Norway x ENOR Singapore x EWS, EWSS Spain x EWP Sweden x EWD Switzerland x EWL United Kingdom x EWU, EWUS United States x EUSA, IWV, IVV, USMV Emerging Markets Emerging Markets x EEM, EEMV, DVYE, EEMS Brazil x EWZ, EWZS China x MCHI, ECNS India x INDY, INDA, SMIN Indonesia x EIDO Mexico x EWW Russia x ERUS South Africa x EZA South Korea x EWY Taiwan x EWT Global Sector Underweight Neutral Overweight Related iShares ETF Tickers Consumer Discretionary x Consumer Staples x IYK, KXI, AXSL Energy x IXC, FILL, EMEY, AXEN European Banks x EUFN Financials x IYF, IXG, AXFN, EMFN, EUFN, FEFN, IAT Healthcare x IYH, IXJ, AXHE Industrials x IYJ, EXI, AXID Information Technology x IXN, AXIT, AAIT, IYW, SOXX Materials x IYM, MXI, AXMT, EMMT, RING, PICK, SLVP REITs x ICF, IYR Telecommunications x IXP, AXTE, IYZ US Industrials x IYJ US Regional Banks x IAT US Retail x N/A US Technology x IYW US Utilities x IDU Utilities x IDV, JXI, AXUT Fixed Income Sector Underweight Neutral Overweight Related iShares ETF Tickers Emerging Markets x EMB, LEMB, CEMB, EMHY High Yield Credit x HYG, HYXU, GHYG, QLTB, QLTC LQD, FLOT, QLTA, MONY, ENGN, AMPS, CSJ, Investment Grade Credit x CIU, CFT, CLY, QLTA Mortgage-Backed Securities x MBB, GNMA, CMBS Municipals x SUB, MUB Non-US Developed Markets x ISHG, IGOV TIPS/Global Inflation-Linked x STIP, TIP, GTIP, ITIP US Treasuries x SHY, IEI, IEF, TLH, TLT, GOVT, SHV Global Style Underweight Neutral Overweight Related iShares ETF Tickers Global Mega Caps x OEF, IOO, HDV, DVY, IDV Small Caps x IWMThis material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This informationshould not be relied upon by the reader as research, investment advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly forillustrative and educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
INVESTMENT DIRECTIONS [ 4 ]Global RegionsWe have maintained all our country outlooks this month. issues remain unresolved including who will serve as the singleDeveloped Markets: In the developed world, we still expect certain regulator of the European banking system, how Europeansmaller developed countries—Canada, Australia, Singapore, sovereign debt will be pooled, whether there will be a European-Switzerland and Hong Kong (the CASSH countries)—to outper- wide deposit insurance scheme and how Europe will be lifted outform other developed markets over the long term given their of a recession. That said, we continue to believe a worseninggenerally lower debt levels and more robust growth prospects. In eurozone crisis can be avoided if European politicians aggressive-the near term, among developed markets, we especially like Hong ly address their region’s problems. Still, as there’s little likelihoodKong and Singapore and certain countries in northern Europe. of an imminent complete solution, the region is likely to remain a chronic source of stress for the global economy and we remain There have been some tentative signs of progress in Europe lately. underweight Italy and Spain, which look cheap for a reason. We do The results of the second Greek election mitigated the risk of a like some countries in more economically stable northern Europe near-term Greek default or exit. Then, at a late June European and we especially like Germany, which has stronger economic summit, policy makers provided more clarity on how Spanish fundamentals than its eurozone counterparts. In addition, banks will be recapitalized, mitigating the risk of a full-blown European equities have been hit hard by the eurozone crisis and Spanish banking crisis. However, despite the progress, Europe is could experience a sharp rally if sentiment shifts. still not out of the woods. After the summit, several structuralFigure 3: Global Region Near-Term Outlooks and the Factors Behind Them* Global Region Valuations Growth Profitability Risk/ Our View Related iShares Developed Markets (P/B) Sentiment Underweight Neutral Overweight ETF Tickers EWA, EPP, Australia + + EWAS, DVYA Canada – – + EWC, EWCS France + – – – EWQ Germany + – + EWG, EWGS Hong Kong + + EWH, EWHS Italy + – – – EWI Japan + + – EWJ, SCJ Netherlands + – EWN Singapore – – EWS, EWSS Spain + – – – EWP Sweden – + + EWD Switzerland – + EWL United Kingdom – – + EWU, EWUS EUSA, IWV, IVV, United States – + + + USMV Emerging Markets Brazil + – + – EWZ, EWZS China + + MCHI, ECNS INDY, INDA, India – + SMIN Indonesia – + + EIDO Mexico – + – EWW Russia + + + – ERUS South Africa – + + – EZA South Korea EWY Taiwan – + EWT – unattractive + attractive neutral current underweight outlook current overweight outlook current neutral outlook previous month (if not shown – same as current)* Please see appendix for an explanation of our factor methodology. ** Due to a confluence of factors, country views may be in the same spot on the chart though the countries’ outlooks aredifferent. Please see Figure 2 for official outlooks. ***Norway is not included in this table due to its size.This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This informationshould not be relied upon by the reader as research, investment advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrativeand educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
INVESTMENT DIRECTIONS [ 5 ] continue to hold a neutral view of US equities, which no longer We Figure 4: Valuations and Market Returns–Price/Book look cheap on a relative valuation basis. Despite a string of weak 2.5 2.3 payroll reports, we believe that the United States will not see a 2.2 2.2 recession in 2012 and instead will remain stuck in a slow growth 2.0 1.9 2.0 1.8 mode of around 2% for the foreseeable future. Still, US politicians 1.7 1.6 have yet to address the pending tax hikes and spending cuts 1.5 1.4 1.5 1.4 1.3 scheduled to take effect in January 2013 that could pose a headwind to the US market later this year, as well as significantly 1.0 lower US growth in 2013 and push the US economy back into a recession. That said, the most likely outcome is a last-minute 0.5 compromise to avert most or all of the tax hikes, assuming we don’t see a bitter and divisive election in November that would 0.0 make it more difficult to avoid the pending fiscal drag. Current month 3 months ago 1 year ago 3 years ago continue to hold an underweight view of UK equities. UK We MSCI US MSCI Emerging valuations appear a bit rich for an environment characterized by Equity Index MSCI EAFE Index Markets Index disappointing growth and persistent inflation, and the impact of Sources: MSCI, FactSet, as of 6/29/12. the central bank’s aggressive quantitative easing program still remains to be seen. Within developed Asia, we continue to hold a neutral view of Japan. While Japanese equities still appear cheap, corporate profitability Figure 5: Valuations and Market Returns–Price/Earnings in the country is very low in an international context and has been 20 18.1 on a downward trend since early 2011. In addition, Japan’s 16.6 relatively robust growth has been supported by the government’s 15.3 15.3 reconstruction spending and will need a pickup in exports to 15 14.4 14.2 14.0 14.3 12.9 12.8 continue, and the country faces important long-term structural 11.8 11.3 issues including high debt levels and deteriorating demographics. 10Emerging Markets: We continue to advocate overweighting selectemerging market countries relative to their respective weights in theMSCI ACWI benchmark and overweighting emerging markets relative 5to developed markets. Emerging markets are generally experiencinga longer-term trend toward less volatility and have the potential tooffer stronger growth prospects than many developed markets. In 0addition, falling inflation in most emerging market countries has yet Current month 3 months ago 1 year ago 3 years agoto translate into multiple expansions, and valuations remain compel-ling. In general, we prefer Brazil in Latin America, and China, Taiwan MSCI US MSCI Emerging Equity Index MSCI EAFE Index Markets Indexand Indonesia in emerging Asia at the expense of emerging Europe,the Middle East and Africa (EMEA). We also prefer gaining emergingmarket exposure through high-dividend funds. Sources: MSCI, FactSet, as of 6/29/12. Within Latin America, we continue to hold an underweight view of Mexico as the market’s valuations still look comparatively rich. remain robust. In addition, Indonesian companies are currently In addition, the outcome of the recent presidential election was very profitable with a high aggregate return on assets (ROA). expected and isn’t likely to change economic policies going Elsewhere in Asia, we continue to hold an overweight view of forward. At the same time, we continue to like Brazil, where we China. While data about the Chinese economy has been mixed, think slowing growth has already been priced in and valuations more forward-looking economic indicators still suggest that remain compelling. China can engineer a soft landing. In our view, China has both the like emerging Asian countries thanks to their robust growth We motivation and ability to maintain growth at a respectable rate, as prospects and relatively attractive valuations. Within emerging illustrated by recent rate cuts, as the country readies itself for a Asia, we continue to hold an overweight view of Indonesia. While leadership transition later this year. As such, we expect that the Indonesian market currently looks a bit expensive relative to China’s growth will settle at around 8%, in which case China’s its own trading history, the country’s near-term growth prospects stock market looks cheap.
INVESTMENT DIRECTIONS [ 6 ]Global SectorsWhile the market finished higher in June, cyclical and defensive We expect crude prices to benefit in the long term as marginalsector performance was mixed. Telecommunications was the supply is increasingly coming from unconventional higher costtop performing sector, followed by financials and healthcare. sources, many large oil producing countries require a high crudeConsumer discretionary performed the worst, followed by price to balance their budgets, OPEC has very little spare capacity,information technology and industrials. This month we have and global oil demand is likely to greatly outstrip supply by 2030. Any supply disruptions related to Iran or other geopolitical developmentsmaintained all our sector outlooks.* could further support the energy sector. As we expect markets to remain volatile in 2012, we continue to We continue to hold a neutral view of global and US technology generally prefer more defensive global sectors to cyclical ones, stocks. While the technology sector still looks interesting over the and we like sectors with more mega cap exposure or an attractive longer term, current valuations appear rich relative to other cyclical income stream. sectors. It’s hard to justify this premium considering recent slippage Our favorite defensive sector remains global telecommunications. in fundamentals, in particular in capacity utilization, which In addition to the sector’s compelling valuations, telecommunica- suggests that technology companies—Apple aside—may have tions’ low beta (a measure of the tendency of securities to move modestly less pricing power going forward. In addition, technology with the market at large) and relatively high yield should provide stocks generally tend to be more sensitive to market volatility than some cushion during market volatility and sell-offs. stocks in more defensive sectors. We continue to hold a neutral view of the healthcare sector after Our least preferred sectors are still global consumer discretionary, the US Supreme Court ruled that most of the US healthcare financials and US retail. We continue to hold an underweight view of overhaul is constitutional. While the new law will likely mean the global financials sector as it’s likely to remain under pressure due millions of new customers for healthcare companies, it will also to uncertainty regarding the eurozone crisis, regulatory changes and likely lead to new downward pricing pressure on the industry earnings. That said, if investor appetite for risk rebounds, beaten down through new government best practice guidelines. European financials are likely to benefit. And in our view, US consumer Within cyclicals, we continue to advocate an overweight allocation to discretionary stocks continue to look very expensive in an economy global energy stocks, which currently offer healthy dividend yields. characterized by no real wage growth and slow job creation.* Sector performance information is based on the performance of the S&P Global 1200 indices.Figure 6: Global Sector Near-Term Outlooks and the Factors Behind Them* Valuations Profitability Risk/ Our View Global Sector (P/B) Sentiment underweight neutral overweight Related iShares ETF Tickers Consumer Discretionary – Consumer Staples – + IYK, KXI, AXSL Energy + IXC, FILL, EMEY, AXEN IYF, IXG, AXFN, EMFN, EUFN, Financials** + – – FEFN, IAT Healthcare – + + IYH, IXJ, AXHE Industrials** IYJ, EXI, AXID Information Technology – + + IXN, AXIT, AAIT, IYW, SOXX IYM, MXI, AXMT, EMMT, RING, Materials + – PICK, SLVP Telecommunications + – IXP, AXTE, IYZ Utilities** + – IDV, JXI, AXUT – unattractive + attractive neutral current underweight outlook current overweight outlook current neutral outlook previous month (if not shown – same as current)* Please see appendix for an explanation of our factor methodology. ** This chart focuses on global sector views only. For US sector views, please see Figure 2.This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information shouldnot be relied upon by the reader as research, investment advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative andeducational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
INVESTMENT DIRECTIONS [ 7 ]Fixed Income SectorsFigure 7: Fixed Income Sector Near-Term Outlooks Fixed Income Sector Underweight Neutral Overweight Related iShares ETF Tickers EMB, LEMB, CEMB,Emerging Markets x EMHY HYG, HYXU, GHYG,High Yield Credit x QLTB, QLTC LQD, FLOT, QLTA, MONY,Investment Grade Credit x ENGN, AMPS, CSJ, CIU, CFT, CLY, QLTAMortgage-Backed Securities x MBB, GNMA, CMBSMunicipals x SUB, MUBNon-US Developed Markets x ISHG, IGOVTIPS/Global Inflation-Linked x STIP, TIP, GTIP, ITIP SHY, IEI, IEF, TLH, TLT,US Treasuries x GOVT, SHVThis material represents an assessment of the market environment at a specific time and is not intended to be a forecast offuture events or a guarantee of future results. This information should not be relied upon by the reader as research, investmentadvice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrativeand educational purposes and is subject to change. This information does not represent the actual current, past or futureholdings or portfolio of any BlackRock client.June was a volatile month for fixed income. The 10-year Treasury if spreads widen, if they have portfolios with high incomerate hit a low of 1.45% early in the month as investors fled to needs and if they are worried about rising rates.relative safety after a disappointing US payroll report. But as We continue to hold an underweight long-term and a neutralpolicy makers took steps to stabilize markets, the EU summit near-term view of Treasuries, which currently offer little morewent better than expected and downgrades were less severe than than cash in the way of yield and record-low coupons mean thatanticipated, investors became more comfortable with taking on duration risk is at a record high. In addition, even a small backuprisk later in the month. Credit spreads tightened and the rate on in Treasury yields would lead to significant losses.the 10-year Treasury finished June up slightly at 1.64%. Looking We remain cautious on TIPS over the long term in light of negativeforward, we have maintained all of our outlooks this month. real rates, and neutral in the near term. Still, for aggressive We continue to advocate reducing duration risk—for which we investors with a short-term horizon, we are seeing a potential believe investors are not currently being adequately compensat- opportunity in shorter-duration TIPS as long as inflation remains ed—and modestly adding exposure to spread products. at current levels. We continue to prefer municipals and investment grade credit We continue to advocate a benchmark weight to mortgage- over other fixed income sectors. Both of these asset classes have backed securities as they appear to be fairly priced given prepay- outperformed broader fixed income benchmarks lately and offer ment and extension risk. In addition, we believe the potential for attractive yields relative to US Treasuries. In addition, current further upside appreciation is limited by two factors: ambiguity investment grade bond spread levels look extreme unless you over further quantitative easing efforts and prepayment uncer- believe the United States will experience another recession. tainty resulting from lower rates and from the potential for new Meanwhile, credit risks in the high grade muni space are modest, policy tools to finally unfreeze the refinancing market. there are few signs that Washington is seriously contemplating Outside of the United States, we continue to see opportunities any change in the tax-exempt status of municipals and potential increases in investment income tax rates would make municipal in emerging market bonds, which we believe investors should valuations more attractive. consider including at a benchmark weight. Emerging market debt is offering attractive yields relative to the US Treasury market, As we still believe that high yield bonds are close to fair value, and spread widening in this sector may allow for additional we continue to advocate that investors generally maintain a opportunistic positioning. benchmark weight. That said, we believe investors should consider being more aggressive buyers in three instances:
INVESTMENT DIRECTIONS [ 8 ]ContributorsRuss Koesterich, CFA, is the Global Chief Investment Strategist for BlackRock’s iShares ETF business. He is a founding memberof the BlackRock Investment Institute, delivering BlackRock’s insights on global investment issues. During his 20+ year careeras an investment researcher and strategist, Mr. Koesterich has served as the Global Head of Investment Strategy for scientificactive equities and as a senior portfolio manager in the US Market Neutral Group at BlackRock. Mr. Koesterich is a frequentcontributor to financial news media and can regularly be seen on CNBC, Fox Business News and Bloomberg TV. He is the authorof two books, including his most recent, The Ten Trillion Dollar Gamble, which details how to position portfolios for the impact ofthe growing U.S. deficit. Mr. Koesterich is also regularly quoted in print media including the Wall Street Journal, USA Today,MSNBC.com, and MarketWatch. He earned a BA degree in history from Brandeis University, a JD from Boston College and anMBA in capital markets from Columbia University.Nelli Oster, PhD, is an Investment Strategist in BlackRock’s iShares business, where her responsibilities include developingtactical country, sector, commodity and asset allocation models implementable with iShares ETFs. Dr. Oster’s service with thefirm dates back to 2008, including her time with Barclays Global Investors (BGI), which merged with BlackRock in 2009. Beforejoining iShares, Dr. Oster did research and portfolio management in BGI’s quantitative stock selection business, spanning US,Canada, Japan and emerging markets portfolios. Prior to joining BGI, Dr. Oster was an equity research analyst at GoldmanSachs, and she started her career in the mergers and acquisitions group of Salomon Smith Barney. Dr. Oster holds a BSc(Hons) in management sciences from the London School of Economics and a PhD in finance from the Stanford GraduateSchool of Business, where her Behavioral Finance dissertation focused on expectations formation and learning in thefinancial markets.Matthew Tucker, CFA, has spent the past 16 years focused on fixed income portfolio management, analytics and strategy.As Head of North American Fixed Income iShares Strategy within BlackRock’s Fixed Income Portfolio Management team,Mr. Tucker leads the investment strategy for fixed income ETFs in North America and Latin America, focusing on productdevelopment, client support, and thought leadership. He previously worked with Barclays Global Investors before it mergedwith BlackRock, and he led the US Fixed Income Investment Solutions team responsible for overseeing product strategy foractive, index, enhanced index, iShares and long/short products. Mr. Tucker was also a portfolio manager and a trader in fixedincome focused on U.S. government securities. He began his career at Barra, where he supported clients using the company’sfixed income analytics. He holds a bachelor of business administration degree from the University of California, Berkeley, andis a Chartered Financial Analyst charterholder.Stephen Laipply is a member of BlackRock’s Model-Based Fixed Income Portfolio Management Group. Mr. Laipply’s servicewith the firm dates back to 2009, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009.At BGI, he was a senior investment strategist on the US Fixed Income Investment Solutions team, responsible for developing anddelivering fixed income solutions to clients. Mr. Laipply focuses primarily on the iShares (ETF) fixed income product suite. Prior tojoining BGI, he was a senior member in both the Strategic Solutions and Interest Rate Structuring Groups at Bank of AmericaMerrill Lynch, where he structured and marketed fixed income solutions across interest rates, credit and mortgages to institu-tional investors. Mr. Laipply earned a BS degree, with honors, in finance from Miami University, and an MBA in finance from theUniversity of Pennsylvania. How do you use this market commentary and do you find it useful? Please share your feedback and any questions or concerns you have at questions@iShares.com. You also can find the latest market commentary from the iShares Investment Strategy Group at iSharesblog.com and iShares.com.
INVESTMENT DIRECTIONS [ 9 ]AppendixThe analysis behind our views: Growth prospects: We focus on leading indicators that areOur country and sector views are based on a systematic analysis constructed to predict a country’s future economic growth. Weof the extent to which macroeconomic factors have been priced in assign a “+” to countries that are expected to grow fast relative toat the country and sector level. their own past trends and to other countries, and a “-“ to coun- tries that are growing more slowly.In coming up with our country views, we use price-to-book (P/B)ratio as a measure of a country’s value. This ratio captures how the Corporate sector profitability: We focus on return on assets (ROA)market prices a given country relative to the assets it has available and on cross-country comparisons, although we also take intofor production. The higher the ratio, the more favorably the market account developments in a country’s ROA over time. A country withviews the country relative to its own history and to other countries. a highly profitable corporate sector is assigned a “+”; one with low profitability is assigned a “-.”The price the market is willing to pay for the assets of a country ispositively related to its expected future growth and corporate Risk / sentiment: We focus on sovereign credit default swap (CDS)sector profitability, and negatively related to the riskiness of its spreads, which measure investor perception of the likelihood thatassets. We use factors such as leading economic indicators and a given country will default on its obligations. We mainly compareretail sales growth as proxies for expected future growth. We use CDS spreads across countries, although we also take into accountreturn on assets (ROA) as a proxy for future profitability and we use trends in a country’s CDS spreads over time. A country that iscredit default swap (CDS) spreads as a measure of risk and perceived as relatively safe is assigned a “+”; a risky country issentiment. In addition, we consider factors such as commodity assigned a “-.”prices that affect importer and exporter countries in opposite ways. While the valuation, growth, profitability and risk / sentimentIn determining the sensitivity of a country’s valuations to these factor readings are discrete, we use continuous measures in ourmacroeconomic factors, we look at trends both over time and investment process. In addition, the factors are not equallyacross countries. We are overweight (underweight) countries important in driving returns at a given point in time. As a result,where market valuations are low (high) relative to what we would when it comes to formulating our final views, the various factorexpect, with the expectation that the economic factors will be fully readings are not additive. For example, a “+” value factor, indicat-incorporated into prices in the future. We use a similar process for ing that a country looks cheap, may overshadow negative readingscoming up with our sector views. in other factors, leading us to still like the country.Factor table methodology We use a similar methodology in coming up with the readings inHere’s an explanation of the methodology of our country our sector factor table. We focus on a mix of cross-sectional andfactor table: time-series comparisons of valuations (P/B), profitability (ROE) and risk / sentiment (sector spreads). In addition, we consider theValuations: In determining whether a country looks cheap or global growth outlook for cyclical and defensive sectors.expensive, we focus on price-to-book ratio (P/B), both over timeand across countries. If a country has a low P/B relative to both Risk appetite dial methodologyits own trading history and to other countries, we assign it a “+”; if Our global risk appetite dial measures current market sentiment.it has a high P/B, we assign it a “-.” We mainly compare developed It is constructed from equity market returns, corporate creditmarket countries to other developed market countries and spreads and expectations for future economic growth. High equityemerging market countries to other emerging market countries. returns, narrow credit spreads and a good growth outlook tend toWe compare countries that benefit or suffer from their own coincide with positive investor sentiment and stronger appetite forspecific issues, e.g., corporate governance problems in Russia, to risky assets.their own trading histories.GlossaryUnderweight: Potentially decrease allocation Overweight: Potentially increase allocation Neutral: Consider benchmark allocationLong Term: Longer than one year Near Term: 12 months or less
INVESTMENT DIRECTIONS [ 10 ]Carefully consider the iShares Funds’ investment objectives, risk factors, Statement (“PDS”) or prospectus for each iShares ETF that is offered in Australia is available atand charges and expenses before investing. This and other information iShares.com.au. You should read the PDS or prospectus and consider whether an iShares ETFcan be found in the Funds’ prospectuses, which may be obtained by calling is appropriate for you before deciding to invest.1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the iShares securities trade on ASX at market price (not, net asset value (“NAV”)). iSharesprospectuses carefully before investing. securities may only be redeemed directly by persons called “Authorised Participants.”Investing involves risk, including possible loss of principal. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Dow JonesIn addition to the normal risks associated with investing, international investments may involve Trademark Holdings, LLC, JPMorgan Chase & Co., MSCI Inc. Markit Indices Limited, orrisk of capital loss from unfavorable fluctuation in currency values, from differences in generally Standard & Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None ofaccepted accounting principles or from economic or political instability in other nations. these companies make any representation regarding the advisability of investing in the Funds.Emerging markets involve heightened risks related to the same factors as well as increased BlackRock is not affiliated with the companies listed above.volatility and lower trading volume. Narrowly focused investments and securities focusing on a The MSCI ACWI (All Country World Index) IndexSM is a free float-adjusted market capitalizationsingle country may be subject to higher volatility. index that is designed to measure equity market performance in the global developed andBonds and bond funds will decrease in value as interest rates rise. A portion of a municipal bond emerging markets. As of April 2012, the MSCI ACWI consisted of 45 country indices comprisingfund’s income may be subject to federal or state income taxes or the alternative minimum tax. 24 developed and 21 emerging market country indices. The developed market country indicesCapital gains, if any, are subject to capital gains tax. High-yield securities may be more volatile, included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,be subject to greater levels of credit or default risk, and may be less liquid and more difficult to Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,sell at an advantageous time or price to value than higher-rated securities of similar maturity. Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. TheMortgage-backed securities are subject to prepayment and extension risk and therefore react emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic,differently to changes in interest rates than other bonds. Small movements in interest rates Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland,may quickly and significantly reduce the value of certain mortgage-backed securities. TIPS can Russia, South Africa, Taiwan, Thailand, and Turkey.provide investors a hedge against inflation, as the inflation adjustment feature helps preserve The MSCI ACWI (All Country World Index) ex USA IndexSM is a free float-adjusted marketthe purchasing power of the investment. Because of this inflation adjustment feature, inflation capitalization index that is designed to measure equity market performance in the globalprotected bonds typically have lower yields than conventional fixed rate bonds and will likely developed and emerging markets, excluding the USA. As of April 2012, the MSCI ACWI exdecline in price during periods of deflation, which could result in losses. Government backing USA consisted of the following 44 developed and emerging market country indices: Australia,applies only to government issued securities, not iShares exchange traded funds. Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt,An investment in the Fund(s) is not insured or guaranteed by the Federal Deposit Insurance Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy,Corporation or any other government agency. Japan, Korea, Malaysia, Mexico, Morocco, the Netherlands, New Zealand, Norway, Peru,Index returns are for illustrative purposes only and do not represent actual Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland,iShares Fund performance. Index performance returns do not reflect any Taiwan, Thailand, Turkey and the United Kingdom.management fees, transaction costs or expenses. Indexes are unmanaged The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted marketand one cannot invest directly in an index. Past performance does not capitalization index that is designed to measure developed market equity performance,guarantee future results. excluding the USA & Canada. As of April 2012, the MSCI EAFE Index consisted of the followingFor actual iShares Fund performance, please visit www.iShares.com or request a prospectus 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France,by calling 1-800-iShares (1-800-474-2737). Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.The iShares Funds that are registered with the US Securities and Exchange Commissionunder the Investment Company Act of 1940 (“Funds”) are distributed in the US by BlackRock The MSCI Europe ex UK IndexSM is a free float-adjusted market capitalization index that isInvestments, LLC (together with its affiliates, “BlackRock”). designed to measure developed market equity performance in Europe, excluding the United Kingdom. As of April 2012, the MSCI Europe ex UK Index consisted of the following 15In Latin America, for Institutional and Professional Investors Only (Not for Public Distribution): developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany,This material is solely for educational purposes and does not constitute an offer or solicitation Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be The MSCI Germany IndexSM is a free float-adjusted market capitalization index that is designedoffered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale to measure equity market performance in Germany.would be unlawful under the securities law of that jurisdiction. It is possible that some or all ofthe funds mentioned or inferred to in this material have not been registered with the securities The MSCI Korea IndexSM is a free float-adjusted market capitalization index that is designed toregulator of Brazil, Chile, Colombia, Mexico, Peru, Uruguay or any other securities regulator in measure equity market performance in Korea.any Latin American country, and thus, might not be publicly offered within any such country. The MSCI Switzerland IndexSM is a free float-adjusted market capitalization index that isThe securities regulators of such countries have not confirmed the accuracy of any information designed to measure equity market performance in Switzerland.contained herein. No information discussed herein can be provided to the general public in The MSCI France IndexSM is a free float-adjusted market capitalization index that is designed toLatin America. measure equity market performance in France.In Hong Kong, this document is issued by BlackRock (Hong Kong) Limited and has not been The MSCI UK IndexSM is a free float-adjusted market capitalization index that is designed toreviewed by the Securities and Futures Commission of Hong Kong. In Singapore, this is issued measure equity market performance in the United Kingdom.by BlackRock (Singapore) Limited (Co. registration no. 200010143N). The MSCI Japan IndexSM is a free float-adjusted market capitalization index that is designed toNotice to residents in Australia: measure equity market performance in Japan.Issued in Australia by BlackRock Investment Management (Australia) Limited ABN 13 006 The MSCI Pacific Free ex Japan IndexSM is a free float-adjusted market capitalization index that165 975, AFSL 230523 (“BIMAL”) to institutional investors only. iShares® exchange traded is designed to measure developed market equity performance in the Pacific region, excludingfunds (“ETFs”) that are made available in Australia are issued by BIMAL, iShares, Inc. ARBN Japan. As of April 2012, the MSCI Pacific Free ex Japan Index consisted of the following four125 632 279 and iShares Trust ARBN 125 632 411. BlackRock Asset Management Australia developed market country indices: Australia, Hong Kong, New Zealand and Singapore.Limited (“BAMAL”) ABN 33 001 804 566, AFSL 225 398 is the local agent and intermediary The MSCI Canada IndexSM is a free float-adjusted market capitalization index that is designed tofor iShares ETFs that are issued by iShares, Inc. and iShares Trust. BIMAL and BAMAL are measure equity market performance in Canada.wholly-owned subsidiaries of BlackRock, Inc. (collectively “BlackRock”). A Product Disclosure