2. 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 measure
accounts for ongoing shifts in investor
sentiment around the macro fundamen- Figure 1: Longer-Term Global Asset Allocation
tals that form the basis for our near-
term investment views. Please see the
appendix for an explanation of our risk Underweight Neutral Overweight
appetite measure methodology.
Global Equities n
Treasury Bonds n
Our risk appetite measure has turned
slightly more negative, signaling a more Corporate Bonds n
cautious mood in the markets, thanks Municipals n
to further widening US corporate credit
spreads and falling Chicago Fed Treasury Inflation-Protected Securities n
National 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.
3. 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 IWM
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. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
4. INVESTMENT DIRECTIONS [ 4 ]
Global Regions
We have maintained all our country outlooks this month. issues remain unresolved including who will serve as the single
Developed Markets: In the developed world, we still expect certain regulator of the European banking system, how European
smaller 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 out
form other developed markets over the long term given their of a recession. That said, we continue to believe a worsening
generally 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 likelihood
Kong 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 structural
Figure 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 are
different. 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 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. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
5. 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.
10
Emerging Markets: We continue to advocate overweighting select
emerging market countries relative to their respective weights in the
MSCI ACWI benchmark and overweighting emerging markets relative
5
to developed markets. Emerging markets are generally experiencing
a longer-term trend toward less volatility and have the potential to
offer stronger growth prospects than many developed markets. In
0
addition, falling inflation in most emerging market countries has yet Current month 3 months ago 1 year ago 3 years ago
to 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 Index
and Indonesia in emerging Asia at the expense of emerging Europe,
the Middle East and Africa (EMEA). We also prefer gaining emerging
market 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.
6. INVESTMENT DIRECTIONS [ 6 ]
Global Sectors
While the market finished higher in June, cyclical and defensive We expect crude prices to benefit in the long term as marginal
sector performance was mixed. Telecommunications was the supply is increasingly coming from unconventional higher cost
top performing sector, followed by financials and healthcare. sources, many large oil producing countries require a high crude
Consumer 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 developments
maintained 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 SP 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 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. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
7. INVESTMENT DIRECTIONS [ 7 ]
Fixed Income Sectors
Figure 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, 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
SHY, IEI, IEF, TLH, TLT,
US Treasuries x
GOVT, SHV
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. This information does not represent the actual current, past or future
holdings 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 income
rate 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 neutral
policy makers took steps to stabilize markets, the EU summit near-term view of Treasuries, which currently offer little more
went better than expected and downgrades were less severe than than cash in the way of yield and record-low coupons mean that
anticipated, investors became more comfortable with taking on duration risk is at a record high. In addition, even a small backup
risk 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 negative
forward, 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:
8. INVESTMENT DIRECTIONS [ 8 ]
Contributors
Russ Koesterich, CFA, is the Global Chief Investment Strategist for BlackRock’s iShares ETF business. He is a founding member
of the BlackRock Investment Institute, delivering BlackRock’s insights on global investment issues. During his 20+ year career
as an investment researcher and strategist, Mr. Koesterich has served as the Global Head of Investment Strategy for scientific
active equities and as a senior portfolio manager in the US Market Neutral Group at BlackRock. Mr. Koesterich is a frequent
contributor to financial news media and can regularly be seen on CNBC, Fox Business News and Bloomberg TV. He is the author
of two books, including his most recent, The Ten Trillion Dollar Gamble, which details how to position portfolios for the impact of
the 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 an
MBA in capital markets from Columbia University.
Nelli Oster, PhD, is an Investment Strategist in BlackRock’s iShares business, where her responsibilities include developing
tactical country, sector, commodity and asset allocation models implementable with iShares ETFs. Dr. Oster’s service with the
firm dates back to 2008, including her time with Barclays Global Investors (BGI), which merged with BlackRock in 2009. Before
joining 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 Goldman
Sachs, 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 Graduate
School of Business, where her Behavioral Finance dissertation focused on expectations formation and learning in the
financial 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 product
development, client support, and thought leadership. He previously worked with Barclays Global Investors before it merged
with BlackRock, and he led the US Fixed Income Investment Solutions team responsible for overseeing product strategy for
active, index, enhanced index, iShares and long/short products. Mr. Tucker was also a portfolio manager and a trader in fixed
income focused on U.S. government securities. He began his career at Barra, where he supported clients using the company’s
fixed income analytics. He holds a bachelor of business administration degree from the University of California, Berkeley, and
is a Chartered Financial Analyst charterholder.
Stephen Laipply is a member of BlackRock’s Model-Based Fixed Income Portfolio Management Group. Mr. Laipply’s service
with 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 and
delivering fixed income solutions to clients. Mr. Laipply focuses primarily on the iShares (ETF) fixed income product suite. Prior to
joining BGI, he was a senior member in both the Strategic Solutions and Interest Rate Structuring Groups at Bank of America
Merrill 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 the
University 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.
9. INVESTMENT DIRECTIONS [ 9 ]
Appendix
The analysis behind our views: Growth prospects: We focus on leading indicators that are
Our country and sector views are based on a systematic analysis constructed to predict a country’s future economic growth. We
of the extent to which macroeconomic factors have been priced in assign a “+” to countries that are expected to grow fast relative to
at 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 into
for production. The higher the ratio, the more favorably the market account developments in a country’s ROA over time. A country with
views 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 is
positively 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 that
assets. We use factors such as leading economic indicators and a given country will default on its obligations. We mainly compare
retail sales growth as proxies for expected future growth. We use CDS spreads across countries, although we also take into account
return on assets (ROA) as a proxy for future profitability and we use trends in a country’s CDS spreads over time. A country that is
credit default swap (CDS) spreads as a measure of risk and perceived as relatively safe is assigned a “+”; a risky country is
sentiment. 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 / sentiment
In determining the sensitivity of a country’s valuations to these factor readings are discrete, we use continuous measures in our
macroeconomic factors, we look at trends both over time and investment process. In addition, the factors are not equally
across 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 factor
expect, 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 readings
coming 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 in
Here’s an explanation of the methodology of our country our sector factor table. We focus on a mix of cross-sectional and
factor table: time-series comparisons of valuations (P/B), profitability (ROE)
and risk / sentiment (sector spreads). In addition, we consider the
Valuations: 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 time
and across countries. If a country has a low P/B relative to both Risk appetite dial methodology
its 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 credit
market countries to other developed market countries and spreads and expectations for future economic growth. High equity
emerging market countries to other emerging market countries. returns, narrow credit spreads and a good growth outlook tend to
We compare countries that benefit or suffer from their own coincide with positive investor sentiment and stronger appetite for
specific issues, e.g., corporate governance problems in Russia, to risky assets.
their own trading histories.
Glossary
Underweight: Potentially decrease allocation Overweight: Potentially increase allocation Neutral: Consider benchmark allocation
Long Term: Longer than one year Near Term: 12 months or less
10. 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 at
and charges and expenses before investing. This and other information iShares.com.au. You should read the PDS or prospectus and consider whether an iShares ETF
can 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”)). iShares
prospectuses 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 Jones
In addition to the normal risks associated with investing, international investments may involve Trademark Holdings, LLC, JPMorgan Chase Co., MSCI Inc. Markit Indices Limited, or
risk 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 of
accepted 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 capitalization
single country may be subject to higher volatility. index that is designed to measure equity market performance in the global developed and
Bonds 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 comprising
fund’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 indices
Capital 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. The
Mortgage-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 market
the purchasing power of the investment. Because of this inflation adjustment feature, inflation capitalization index that is designed to measure equity market performance in the global
protected 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 ex
decline 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 market
and 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 following
For 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 Commission
under 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 is
Investments, 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 15
In 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 designed
offered 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 of
the 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 to
regulator 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 is
The 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 to
Latin 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 to
reviewed 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 to
Notice 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 that
165 975, AFSL 230523 (“BIMAL”) to institutional investors only. iShares® exchange traded is designed to measure developed market equity performance in the Pacific region, excluding
funds (“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 four
125 632 279 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 to
for 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
![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 measure
accounts for ongoing shifts in investor
sentiment around the macro fundamen- Figure 1: Longer-Term Global Asset Allocation
tals that form the basis for our near-
term investment views. Please see the
appendix for an explanation of our risk Underweight Neutral Overweight
appetite measure methodology.
Global Equities n
Treasury Bonds n
Our risk appetite measure has turned
slightly more negative, signaling a more Corporate Bonds n
cautious mood in the markets, thanks Municipals n
to further widening US corporate credit
spreads and falling Chicago Fed Treasury Inflation-Protected Securities n
National 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.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)