Investment Directions Monthly Market Outlook June 2012
INVESTMENT DIRECTIONS [ 2 ] Macroeconomic OverviewTABLE OF CONTENTS The state of the global economy is pretty much back to where it was in late 2011—an anemic recovery threatened by Europe. Amid renewed concerns about a worsening European crisis and a stalling recovery, stocks have erased most of their early 2012 gains.Global Regions...................................4 Global equity markets finished May down 9%,* with European and emerging marketGlobal Sectors...................................6 stocks particularly suffering, and as investor sentiment turned more cautious, the yield on the 10-year Treasury retreated in May to 1.56%. While stocks gained somewhat in theFixed Income Sectors.......................7 first half of June, rising 2.7% through June 15 on hopes policy makers will continue to step in to save the day and revive slowing economies, many investors are still wondering whether we’re on the verge of another global recession.What’s New: In our opinion, the most likely outcome for the global economy for the remainder• Upgrade of Indonesia of the year continues to be slow, but positive, growth. The US economy is on firmer footing, we expect emerging market growth to stabilize and there are some signs of to Overweight a soft landing in China.• Downgrade of Mexico hat T said, two big risks remain, either of which could send the global economy into to Underweight a double-dip recession. First, the possibility of a full-blown eurozone crisis remains the major threat to the global recovery and, in particular, we’re concerned about a• Downgrade of Mortgage- Spanish banking system crisis and the long-term risk of a Greek exit from the euro. Second, if US policy makers don’t avert the United States’ pending fiscal drag, the Backed Securities to odds of a double dip rise. Neutral n light of the uncertainty regarding the fate of the eurozone and of the United States’ I fiscal policy, we believe markets are likely to remain highly volatile in the second half of the year. While we continue to hold an overweight long-term view of global equities, especially Risk Appetite Dial relative to bonds, and we expect that stocks can move higher in the remainder of the year, their ascent is likely to be anything but smooth. s such, we continue to advocate a defensive portfolio positioning. We like high-quality, A dividend-paying stocks, including those in emerging markets; defensive sectors such as global telecommunications; global mega capitalization (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 fewerLow High debt and banking sector problems. Within fixed income, we like US spread products such as investment grade and municipal bonds.Our new global market risk appetitemeasure accounts for ongoing shifts in *Global equity market performance data is based on the performance of the MSCI ACWI (All Country World Index).investor sentiment around the macrofundamentals that form the basis for ournear-term investment views. Please see Figure 1: Longer-Term Global Asset Allocationthe appendix for an explanation of ourrisk appetite measure methodology. Underweight Neutral OverweightOur risk appetite measure is currently Global Equities nmildly negative, signalling a continued Treasury Bonds ncautious mood in the markets, thanks Corporate Bonds nto both widening US corporate creditspreads and the drop in equity markets Municipals nfrom their March high amid renewed Treasury Inflation-Protected Securities nconcerns about Europe. 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 RegionsWith the exception of a downgrade of Mexico and an upgrade of watching events in Greece, we’re also watching for three otherIndonesia, we have maintained all our country outlooks this month. developments. First, further Greek banking system outflows wouldDeveloped Markets: In the developed world, we still expect certain mean a worsening crisis. Second, we’re awaiting more clarity onsmaller developed countries—Canada, Australia, Singapore, the rescue plan for Spain and on how Spain plans to recapitalizeSwitzerland and Hong Kong (the CASSH countries)—to outper- its banking system. Finally, we’re watching for more evidence of aform other developed markets over the long term given their softening German position toward eurobonds, which would be agenerally lower debt levels and more robust growth prospects. In positive for markets. We believe a worsening eurozone crisis canthe near term, among developed markets, we especially like Hong be avoided if European politicians get more aggressive in address-Kong and Singapore and certain countries in northern Europe. ing their region’s problems. But as there’s little likelihood of an imminent solution, the region is likely to be a source of near-term Despite the outcome of the recent Greek election, Europe is not market volatility. While we do like some countries in more econom- out of the woods. While, at the time of writing, we expect a likely ically stable northern Europe, we continue to advocate under- New Democracy-led government to try to keep Greece in the euro, weighting Italy and Spain, which look cheap for a reason. further Greek defaults and an eventual Grexit are still significant continue to hold a neutral view of US equities, which no longer We long-term risks. Meanwhile, the Spanish banking system is now a bigger threat than a Grexit. Looking forward, in addition to look cheap on a relative valuation basis. While US growth remainsFigure 3: Global Region Near-Term Outlooks 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 previous month (if not shown—same as current) current month* Please see appendix for an explanation of our factor methodology. **Norway is not included in this table due to its size. This material represents an assessment of the market environment ata 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 arecommendation 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 notrepresent the actual current, past or future holdings or portfolio of any BlackRock client.
INVESTMENT DIRECTIONS [ 5 ] a bright spot in the world outlook and most measures continue to Figure 4: Valuations and Market Returns–Price/Book suggest that the United States will avoid another recession, the 2.5 US recovery is still stuck in first gear thanks to the debt overhang 2.2 2.3 2.1 of the last decade. Based on our estimates, US growth is likely to 2.0 2.0 2.0 1.8 be around 2% this year and with job creation and wage growth at 1.8 current slow paces, consumer spending is very likely going to slow 1.5 1.5 1.5 1.4 1.4 down. US politicians have yet to address the pending tax hikes 1.2 and spending cuts scheduled to take effect in January 2013 that 1.0 could pose a headwind to the US market later this year and significantly lower US growth in 2013. Finally, Europe remains a 0.5 major risk to the US economy due to the impact a worsening eurozone crisis would have on US exports and banks. 0.0 Within developed Asia, we are retaining our neutral view of Japan Current month 3 months ago 1 year ago 3 years ago although the market has once again started to look more MSCI US MSCI Emerging interesting thanks to compressed valuations on the back of Equity Index MSCI EAFE Index Markets Index foreign investor selling in May’s risk-off environment. But while Japan’s growth in the first quarter of 2012 was impressive, it was Sources: MSCI, FactSet, as of 5/31/12. largely supported by post-earthquake government spending. In addition, the strengthening of the yen as a traditional safe haven is likely to provide headwinds for the country’s exporters. Still, Figure 5: Valuations and Market Returns–Price/Earnings market sentiment could benefit in coming months from further quantitative easing by the Bank of Japan. Also, resolution of the 20 18.5 uncertainty surrounding a pending sales tax hike could help restore market confidence in the country’s fiscal position 14.9 15.6 15 14.0Emerging Markets: Despite emerging markets’ weak performance in 13.8 13.8 13.3 13.5 13.9 12.7 12.1May, we continue to advocate overweighting select emerging market 11.1countries relative to their respective weights in the MSCI ACWI 10benchmark and overweighting emerging markets relative to developedmarkets. Emerging markets are generally experiencing a longer-termtrend toward less volatility and offer stronger growth prospects than 5many developed markets. In addition, falling inflation in mostemerging market countries has yet to translate into multiple expan-sions, and valuations remain compelling. In general, we prefer Brazil in 0Latin America, and China and Taiwan in emerging Asia at the expense Current month 3 months ago 1 year ago 3 years agoof emerging Europe, the Middle East and Africa (EMEA). We also prefergaining emerging market exposure through high-dividend funds. MSCI US MSCI Emerging Equity Index MSCI EAFE Index Markets Index Within Latin America, we have downgraded our view of Mexico to underweight from neutral as the market’s valuations currently Sources: MSCI, FactSet, as of 5/31/12. look comparatively rich. While the country’s economic outlook is robust, Mexico’s inflation actually ticked up in May. In addition, with Mexico’s banking sector dominated by Spanish banks, Elsewhere in Asia, we continue to hold an overweight view of Mexico is directly exposed to the Spanish banking crisis. China. Based on leading economic indicators, we expect China to like emerging Asian countries thanks to their robust growth We be able to engineer a soft landing in the back half of the year, with prospects and relatively attractive valuations. Within emerging growth settling at around 8%. In our view, China has both the Asia, we have upgraded our view of Indonesia to overweight from motivation and ability to maintain growth at a respectable rate as neutral. The Indonesian market currently looks like a good value the country readies itself for a leadership transition later this year. relative its own trading history, and as the country’s near-term Government officials still have room for both fiscal and monetary growth prospects remain robust, Indonesia represents a rare stimulus measures such as the surprise early June rate cut. growth play in a slow-growth environment. In addition, Indonesian companies are very profitable with a high aggregate return on Given India’s slowing growth, stubbornly high inflation, large assets (ROA). Risks to our view include a government-controlled current account deficit and chronic budget deficit, we continue to fuel price hike, though the hike could improve the country’s hold an underweight view of the market. financial position in the longer term.
INVESTMENT DIRECTIONS [ 6 ]Global SectorsWhile the market finished down in May, defensive sectors suffered This is because marginal supply is increasingly coming fromless than cyclical ones as investor sentiment remained cautious. unconventional sources where production costs are higher, manyTelecommunications was the top performing sector, followed by of the largest oil producing countries now require a higher crudeconsumer staples and utilities. Materials performed the worst, price to balance their budgets and OPEC currently has very littlefollowed by energy and financials. This month we have maintained spare capacity, meaning any supply disruptions are likely to pushall our sector outlooks. crude prices up sharply. As we expect markets to remain volatile in coming months, we We continue to hold a neutral view of global and US technology continue to generally prefer more defensive global sectors to stocks. While the technology sector still looks interesting over the cyclical ones, and we like sectors with more mega cap exposure or longer term, current valuations appear a bit rich relative to their an attractive income stream. five-year history and to other cyclical sectors. It’s hard to justify this Our favorite defensive sector remains global telecommunications. premium considering recent slippage in fundamentals, in particu- In addition to the sector’s compelling valuations, telecommunica- lar in capacity utilization, which suggests that technology compa- tions’ low beta (a measure of the tendency of securities to move nies—Apple aside—may have modestly less pricing power going with the market at large) and relatively high yield should provide forward. In addition, technology stocks generally tend to be more some cushion during market volatility and sell-offs. sensitive to market volatility than stocks in more defensive sectors. Our least preferred sectors are still global consumer discretion- Within cyclicals, we continue to advocate an overweight allocation to global energy stocks, which are currently cheaper than US large ary, financials and US retail. We continue to hold an underweight cap energy companies and may offer a healthy dividend yield. In view of the global financials sector as we believe it’s likely to addition, while weakness in global growth prospects and fears of remain under pressure due to uncertainty regarding the eurozone a hard landing in China are likely to keep oil prices muted in the crisis, regulatory changes and earnings. In our view, US consumer near term, we expect crude prices to rebound in the longer term. discretionary stocks look very expensive in an economy charac- terized by no real wage growth and slow job creation.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 previous month (if not shown—same as current) current month* Please see appendix for an explanation of our factor methodology.** This chart focuses on global sector views only. For US sector views, please see the chart on pg. 3. The view for US utilities is underweight, the view for US regional banks is neutral, the viewfor European banks is neutral and the view for US industrials is overweight.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.The search for perceived safety trumped the search for returns in 2011 and are delivering again this year. At the same time, creditMay. Investors fled risky assets for the relative safety of the US risks in the high grade muni space are modest and investors canTreasury market, in which yields hit new lows last month along pick up a significant incremental yield through this asset class. Inwith the yields on other safe-haven assets such as German and addition, for now, there are few signs that Washington is seriouslyUK government bonds. The yield on the 10-year Treasury finished contemplating any change in the tax-exempt status of municipals.May at 1.56%. Eurozone peripheral government debt yields, We still hold an underweight long-term and a neutral near-termmeanwhile, hit levels close to November 2011 highs. view of Treasuries and TIPS. We remain cautious on TIPS over theLooking forward, assuming a continued slow, but positive, global long term in light of negative real rates. Still, for aggressiverecovery, we believe that yields will rise modestly in 2012, with the investors with a short-term horizon, we are seeing a potential10-year Treasury yield drifting to around the 2.75% to 3% level. opportunity in shorter-duration TIPS as long as inflation remains atHowever, factors—including price insensitive government current levels. Currently, 2-year TIPS are implying that inflation overbuyers—that have conspired to keep rates abnormally low for the the next year—the breakeven level—is around 1%. At the samepast year are still in place. This month, we have only changed our time, core inflation has been running at well over 2% for the pastview of mortgage-backed securities. eight months. We continue to advocate reducing duration risk—for which we While we continue to believe that investors are being fairly believe investors are not currently being adequately compensat- compensated for both prepayment and extension risk, we are ed—and modestly adding exposure to spread products. now advocating a benchmark weight to mortgage-backed We still hold a neutral view of high yield, which continues to securities rather than an overweight position. We believe the appear close to fair value on a risk-adjusted basis. However, for potential for further upside appreciation is limited by ambiguity investors with a higher risk tolerance, recent spread widening over further quantitative easing efforts as well as by prepayment may provide a near-term opportunity for additional positioning. uncertainty driven by lower rates and the potential for new policy Meanwhile, current investment grade bond spread levels look tools to finally unfreeze the refinancing market. extreme unless you believe the United States is headed back Outside of the United States, we continue to see opportunities in toward another recession. As such, we believe investors should emerging market bonds, which we believe investors should continue to consider a shift into investment grade credit. consider including at a benchmark weight. Emerging market debt We continue to believe that munis offer value relative to Treasur- is offering historically high yields relative to the US Treasury ies, and muni/Treasury ratios remain wide. Munis outperformed in market and recent spread widening in this sector may allow for additional opportunistic positioning.
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.This material does not constitute an offer or solicitation to sell or a solicitation of an offer tobuy any shares of any Fund (nor shall any such shares be offered or sold to any person) in The MSCI Europe ex UK IndexSM is a free float-adjusted market capitalization index that isany jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the designed to measure developed market equity performance in Europe, excluding the Unitedsecurities law of that jurisdiction. Kingdom. As of April 2012, the MSCI Europe ex UK Index consisted of the following 15 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany,The iShares Funds that are registered with the US Securities and Exchange Commission Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.under the Investment Company Act of 1940 (“Funds”) are distributed in the US by BlackRockInvestments, LLC (together with its affiliates, “BlackRock”). The MSCI Germany IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in Germany.In Latin America, for Institutional and Professional Investors Only (Not for Public Distribution): The MSCI Korea IndexSM is a free float-adjusted market capitalization index that is designed toIf any funds are mentioned or inferred to in this material, it is possible that some or all of the measure equity market performance in Korea.funds mentioned or inferred to in this material have not been registered with the securitiesregulator of Brazil, Chile, Colombia, Mexico, Peru, Uruguay or any other securities regulator in The MSCI Switzerland IndexSM is a free float-adjusted market capitalization index that isany Latin American country, and thus, might not be publicly offered within any such country. designed to measure equity market performance in Switzerland.The securities regulators of such countries have not confirmed the accuracy of any information The MSCI France IndexSM is a free float-adjusted market capitalization index that is designed tocontained herein. No information discussed herein can be provided to the general public in measure equity market performance in France.Latin America. The MSCI UK IndexSM is a free float-adjusted market capitalization index that is designed toNotice to residents in Australia: measure equity market performance in the United Kingdom.Issued in Australia by BlackRock Investment Management (Australia) Limited ABN 13 006 The MSCI Japan IndexSM is a free float-adjusted market capitalization index that is designed to165 975, AFSL 230523 (“BIMAL”) to institutional investors only. iShares® exchange traded measure equity market performance in Japan.funds (“ETFs”) that are made available in Australia are issued by BIMAL, iShares, Inc. ARBN The MSCI Pacific Free ex Japan IndexSM is a free float-adjusted market capitalization index that125 632 279 and iShares Trust ARBN 125 632 411. BlackRock Asset Management Australia is designed to measure developed market equity performance in the Pacific region, excludingLimited (“BAMAL”) ABN 33 001 804 566, AFSL 225 398 is the local agent and intermediary Japan. As of April 2012, the MSCI Pacific Free ex Japan Index consisted of the following fourfor iShares ETFs that are issued by iShares, Inc. and iShares Trust. BIMAL and BAMAL are developed market country indices: Australia, Hong Kong, New Zealand and Singapore.wholly-owned subsidiaries of BlackRock, Inc. (collectively “BlackRock”). A Product Disclosure