bn mellon issg economic outlook q3 2015

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Economic & Capital Markets Outlook BNY MELLON INVESTMENT STRATEGY & SOLUTIONS GROUP THIRD QUARTER 2015 PREPARED FOR INSTITUTIONAL INVESTORS, PROFESSIONAL CLIENTS, OR OTHER QUALIFIED, SOPHISTICATED INDIVIDUALS ONLY.

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Mellon Economic Outlook 2015

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  • Economic& Capital MarketsOutlookBNY MELLON INVESTMENT STRATEGY & SOLUTIONS GROUP

    THIRD QUARTER 2015

    PREPARED FOR INSTITUTIONAL INVESTORS, PROFESSIONAL CLIENTS, OR OTHER QUALIFIED, SOPHISTICATED INDIVIDUALS ONLY.

  • 2

    Executive SummaryISSG CMC SUMMARY ASSET ALLOCATION

    Current BenchmarkGlobal Equities 59.3% 50%Global Bonds 40.7% 50%Cash 0% 0%

    Slight reduction in equity overweight ahead of US rate hikes. Remain overweight Europe Ex-UK as Greek contagion risk appears low.

    FIVE THINGS TO WATCH IN Q3 20151) Greek contagion in relation to improving European fundamentals.2) Impact of a slowing Chinese economy in relation to PBOC stimulus.3) Continued improvement in US economic data ahead of rate hikes.4) Emerging market corporate debt defaults and bankruptcies.5) Upside inflation surprises.

    ABOUT THE INVESTMENT & STRATEGY SOLUTIONS GROUPThe BNY Mellon Investment Strategy and Solutions Group (ISSG) partners with clients to develop thoughtful and actionable solutions to broad investment policy issues. We engage in an ongoing dialogue with our institutional clients to achieve a deep understanding of their concerns and needs. Harnessing the full depth and breadth of our global network of specialized investment boutiques across all asset classes and return/risk objectives, we help craft comprehensive strategies relevant for our clients specific investment objectives and policies.

    The ISSG Capital Markets Committee (CMC) governs asset allocation policy and assesses the market outlook for the global multi-asset strategies and solutions managed by ISSG.

    FIG. 1: GLOBAL ASSET PERFORMANCE % change over 3 months to 30 Jun 15

    -14 -10 -6 -2 2 6 10 14

    Developed REITS

    Europe ex UK Equities

    Global Corporate Bonds

    UK Equities

    Global Sovereign Bonds

    Gold

    Global High Yield Bonds

    Global Equities

    US Dollar

    Global EM Debt (USD)

    US Cash

    Global Natural Resource Equities

    US Equities

    Global EM Debt (Local Curr.)

    EM Equities

    Commodities

    Japan Equities

    Oil

    Percentage

    Source: Thomson Reuters Datastream & ISSG

  • 3

    What we are watching Theme ISSG View Asset Class Impact Risks to View Recent Considerations For

    ISSG View

    Global Growth

    With growth prospects increasingly synchronised across developed markets, the pace of growth has remained sluggish against a backdrop of tepid business confidence. EM growth remains soft and will continue to face headwinds from the rise in capital costs as policymakers look to start fiscal tightening in H2 2015.

    Valuations and expectations are increasingly sensitive to economic fundamentals, driving an increase in asset price volatility that we expect will continue into 2016.

    Developed market policy mistakes may derail the fragile growth trajectory, as rapidly shifting market sentiment raises the probability of sharper asset price corrections.

    The developed market employment landscape continues to show signs of improvement. We expect this will continue and provide a tailwind to consumer sentiment and ultimately spending. This trend will continue to be supported by the weakness in oil and other commodities.

    Global Inflation

    Softness in headline inflation should continue through H2 2015 as commodity price and core DM currency weakness (driven by QE programs) continue to feed disinflationary pressures. However, midterm inflation expectations in both the US and Europe have moved towards policymaker targets, while risks of outright deflation have diminished.

    Subdued inflation should continue to feed through to real wage increases in H2 2015, providing a tailwind to consumer sentiment in DMs. Commodities prices appear to be nearing a bottom, a positive development for commodity-dependent economies.

    Wages may start to rise in some DM economies as labor market slack diminishes, driving a pickup in the core inflation and ultimately accelerating the path of data-driven policy.

    Oil prices will continue to struggle to make significant gains as battles for market share and US shale producers (increasingly viewed as the supplier of last resort) ensure strong supply. Irans return to oil markets would be a further headwind.

    Monetary Policy

    DM monetary policy is continuing to drive a divergence in central bank balance sheets as monetary conditions should remain easy into 2016. Policymakers continue to struggle to respond to diverging global monetary conditions against the context of local economy activity levels, particularly in EM.

    QE in Europe has improved bank lending conditions and provided some additional buffer for events playing out in Greece. Currency moves played a heightened role in the low return environment experienced in H1 2015.

    With the Fed and markets increasingly focused on US policy tightening, herding risks will remain elevated into 2016 and FX volatility spikes are likely. Policy communication will be key to a smooth exit for the Fed.

    Markets continue to view policymakers globally as the ultimate put option on a tail risk event, expecting policy to be calibrated (and communicated) to preserve the recovery and stability in markets.

    Fiscal Policy

    Scope for incremental fiscal policy in DMs remains limited, with ongoing budget deficits and elevated debt/GDP levels already a concern with investors and the prospect of a rising rate environment only increasing the debt servicing burdens. Renewed focus on trade agreements could provide longer term growth opportunities in the event that negotiations are successfully concluded.

    DM fiscal policy responses remain limited in most cases, with Japan the exception in maintaining a steady fiscal policy in the near term, whilst most other DMs considering or implementing fiscal tightening programs. Fiscal policy more likely to provide headwinds to asset prices in H2 2015.

    Monetary policy continues to drive a covert currency war in which export market share is transferred between economies and limited new growth is generated in the process. Excessive fiscal tightening in a short period may derail the growth trajectory in DMs.

    China increasing use of monetary and fiscal policy tools to offset concerns around slowing growth, disinflationary pressures, and asset prices, a trend likely to continue in H2 2015. US now in position to pursue trade agreements (Trans Pacific Partnership) which could significantly impact international trade in 2016 and beyond.

    Emerging Markets

    Tightening monetary policy in the US has largely been a negative for EM assets, and while some respite has been provided through EU and Japan QE programs, the stronger USD and rising cost of capital will continue to weigh on EM sentiment; recent disinflationary pressures have provided some scope of accommodative policy in selected EMs.

    Though attractive on a relative valuation basis vs DM assets, several markets remain vulnerable to an acceleration in capital outflows and would be further affected in the event of monetary tightening if central banks are required to step in to support local currencies.

    Attractive valuations and prudent policy drive an acceleration in growth and EM asset outperformance in certain parts of the EM investment universe.

    The EM universe will remain highly differentiated into 2016 as growth, inflation and policy dynamics continue to diverge. Watch for signs of an uptick in commodity prices, which may provide a growth catalyst for EMs.

    "Tail Risk Monitor"

    Grexit a distinct possibility in H2 2015, with growing concerns around the second order effects in in both Europe and more widely across global markets. Rapidly rising European rates, driven by rising inflation expectations, may further complicate the reconciliation of the ECBs QE program against its price stability mandate. Russia-Ukraine conflict continues to simmer and could re-emerge in H2 2015.

    Low yield, rising rate environment complicating the choice of flight to safety assets, with potential capital losses on bonds likely to erode yield pickup; USD the most likely candidate for the risk off trade in H2 2015 as investors increasingly de-risk through cash allocations.

    Grexit drives a period of heightened volatility across European assets, with other small economies still recovering from the global financial crisis facing increased financing costs and even weakening political support for fiscal adjustment programs.

    Liquidity in fixed income markets, whilst widely cited as a known issue, has yet to be tested through a prolonged sell-off period. EM refinancing of dollar based corporate and sovereign debt could start to reveal pressure points in H2 2015.

  • 4

    Key Charts: Economics And Markets Entering 2015, deflation was a significant concern for investors, especially in Europe. With the steps taken by the ECB early in the year and resulting impact on the euro, inflation expectations seem to be on the rise. While this is a welcome sign, continued improvement in economic data, especially youth unemployment, will be more critical to the Euro region. The move thus far in European markets has been more a reduction in the probability of deflationary worst case scenario rather than an acknowledgement of better than expected outcomes still to come.

    The run on Greek banks illustrates as well as any chart, in our opinion, the challenge the Greeks face in getting their economic house in order. We continue to believe that the direct financial impact of Greece is limited given its small relative size to both the eurozone and global economies. The contagion risk takes the form of an erosion in the political confidence in the euro should Greece leave the currency bloc and as a result inspire other countries to do the same. We are also concerned with the general level of uncertainty around whether a Greek exit from the euro would prove to be disorderly.

    With US equity markets at all time highs and squarely in fair valuation territory, many investors are looking for the catalyst that keeps the economic cycle going. Put another way, the question is are we mid-cycle or late-cycle? They key to the sustainability of the US economic cycle, to us, comes in the form of capital spending by the private sector to drive the next phase of the current market. If liquidity and cost cutting have driven the first half, investment and economic productivity will need to drive the second.

    Currency trends have been significant forces moving markets in 2015 and will remain so in the future. Asia sits at the epicenter of global currency trends and should be watched very carefully in the near future. The recent depreciation in the yen challenges the classic export-led stimulus playbook for China, especially given its soft peg to a basket of currencies including a strengthening dollar. At the same time, China wants the RMB to become a reserve currency which will require stabilization of value. How these opposing forces play out will be extremely important to both Asian and global markets.

    Figure 2 Source: Bloomberg, December 2014 June 2015

    Fig. 2: Inflation finally coming to the eurozone?

    Fig. 3: Depletion of Greek bank deposits

    Fig. 4: US cost cuts crowding out capital expenditures?

    Fig. 5: Regional currency headwinds for Chinese economy

    Figure 3 Source: Bloomberg; May2009 May 2015

    Figure 4 Source: Bloomberg; December 1980 March 2015

    Figure 5 Source: Bloomberg; January 2006 June 2015

    1.4

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    EUR

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    5Y In

    flatio

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    ap R

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    10%12%14%16%18%

    % o

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    Corporate Profits Capex

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  • 5

    Fig. 6: ISSG Global Macroeconomic Heat Map

    This heat map is designed to display a wide spectrum of macroeconomic trends across the major global regions over the past three years. Green and red shading indicate what we believe to be positive and negative levels, respectively, of the indicated variables; while green and red borders indicate positive and negative changes over the last quarter. Yellow shading indicates neutral readings. The time series lines are shown merely for ease of comparing trends, and are not meant to convey any particular values or levels. See appendix for series definitions and sources.

    ISSG Global Heatmaps

    The ISSG Heatmaps (Fig 6) show several new trends since last quarter. Economic surprises in the US, combined with positive trends in company earnings suggest the first quarter slowdown was weather-related as opposed to something more secular. The rise in US company earnings indicates an easing of currency pressure on global companies thanks to the recent pause in dollar strength. Inflation in Europe has started to surprise to the upside and indicates that the QE program launched by the ECB earlier in the year is beginning to create inflationary pressure in the eurozone. Finally, a key trend we believe bears watching is in China where monetary policy has become loose given recent actions by the PBOC and yet there are still negative economic surprises compared with last quarters indicator.

    Fig. 7: ISSG Global Correlation Heat Map

    This quarters Global Correlation Heatmap (Fig 7 shows a continuing decline in correlations between commodities and equity markets, especially EM equity markets. This supports the thesis that excess supply is present across many commodity markets as a result of the recent end of the commodity super-cycle. We believe the downward trend in correlations will remain in place due to the combination of excess capacity, and an approaching rate hike cycle in the US that will provide continued strength to the dollar, while changing demand trends in global markets. Dollar volatility has increased since last quarter, reflecting both general currency volatility in global markets as well as some degree of uncertainty around both the start and pace of approaching US rate hikes.

    The Global Correlation Heatmap is designed to convey levels and changes in correlation and volatility numbers across major asset classes. Numbers in the unshaded cells represent the current exponentially weighted volatility level, with green and red fonts representing low and high levels relative to a time-weighted 3 year mean. The lower left half of the Heatmap, displaying exponentially-weighted weekly correlation pair data for the last 3 years, is included to allow users to compare trends and is not meant to convey any particular values or levels. The upper right half of the Heatmap reflects the current observation for the same data series. Green and red shading indicate what we believe to be low and high levels, respectively, of the current observation relative to a time weighted 3 year mean, while green and red borders indicate a significant decrease or increase over the last quarter.

  • 6

    Needless to say, 2015 has been quite an interesting year thus far. The announcement and implementation of quantitative easing from the European Central Bank early in the year has helped to alleviate the fear of deflation that hung over the region coming into 2015. Beyond the actions of the ECB, the surprising Greek election gave the Syriza party additional influence based on their anti-austerity platform. The impact of the election is still being felt throughout European and global markets as Greece deals with rising debt. Meanwhile, currency has remained a significant factor for global investors with the impact probably best shown by the unexpected de-pegging of the Swiss franc from the euro. Finally, China has also been a focus for investors in the first part of the year and we expect it to remain so for the foreseeable future as Beijing addresses an economic slowdown and severe market turbulence.

    The fireworks from the first part of this year have created some interesting trends in the global growth outlook (Fig 8). The impact of severe weather in the US in the early part of the year coupled with Chinas continued economic slowdown have prompted continued negative revisions to global growth expectations. Despite those revisions, concerns over a more severe slowdown in the US appear to be easing and expectations of a second half acceleration are increasing. Economic indicators continue to improve from the first part of the year which was depressed due to severe weather.

    Our chart of expected inflation (Fig. 9) reveals a stabilization in the recent steep decline in both expected levels of inflation and revisions to inflation expectations. Indeed, expected inflation is actually turning upwards. The stabilization in energy prices has helped to support the positive turn in inflation expectations as have wage pressures in the US. But the recent increase in European inflation expectations has been more surprising, despite concerns over the impact of a Greek default and possible exit from the euro, or Grexit. Looking forward, the continued increase in inflation expectations and improvement in underlying economic fundamentals throughout the region, beyond Greece, will be critical for determining the path of both European and global markets.

    As mentioned previously, there has been an increase in inflation expectations in the Eurozone (Fig 10) that indicates economic traction of the ECBs stimulus program. While the positive revisions to expectations in the BRICs is a welcome sign, significant concerns remain in relation to Brazil, China, and Russia. Brazil and Russia both rely heavily on external funding and commodity based flows, while China continues to slow despite recent actions by the PBOC. Japan continues to benefit from Abenomics with recent economic data being better than expected despite the negative revisions to both growth and inflation. The recent depreciation in the yen is providing support to inflation expectations as are positive wage increases in the country.

    Economic Outlook

    Source for Fig. 8,9,10: Consensus Economics, ISSG

    -6%

    -4%

    -2%

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    Fig. 8: Expected Global Growth and Growth Revisions

    Global 12M GDP Revisions Global 12M Expected GDP Growth

    -4%

    -2%

    0%

    2%

    4%

    6%

    Fig. 9: Expected Global Inflation and Inflation Revisions

    Global 12M Inflation Revisions

    Global 12M Expected Inflation

    -0.3%

    -0.2%

    -0.1%

    0.0%

    0.1%

    0.2%

    0.3%

    0.4%

    0.5%

    BRICs Eurozone US Japan

    3M C

    hang

    e in

    GD

    P &

    CP

    I Rev

    isio

    sn In

    dex

    Fig. 10: Quarterly Regional Revisions For Growth and Inflation

    GDP CPI

  • 7

    Fig. 11: Global Headline Hotlist

    The above graphic shows the top ten most mentioned themes that are relevant to financial markets in order of their ranking on July 2, 2015. The bar height shows the frequency of the coverage of each theme in the news for each of the last 13 weeks, with the furthest right bar representing the most recent ranking. The color of the background denotes the average intensity over the past quarter. Using financial media and influential blogs identified by multiple teams at BNY Mellon, those stories are used to highlight the hottest topics each week across over 3,000-6,000 news items. Story summaries are classified using a Bayesian classifier which is trained on stories from the last six months. Training stories are manually tagged and classified by a senior strategist.

    Fig. 12: RBAA* Regime Probabilities

    *Regime Based Asset Allocation (RBAA) is a proprietary asset allocation model created by the ISSG which considers asset returns in the context of regimes created by underlyingchanges in growth and inflation expectations. Contact the ISSG for detailed information on this research. Please see appendix for information regarding regime categories.

    This quarters Global Headline Hotlist (Fig. 11) reveals an interesting change as the Q2 list did not include a single headline related to Europe or European markets. What a difference three months can make with this quarters list being dominated by European headlines given recent issues with Greece and its ability to service debt obligations to the Troika made up of the IMF, ECB, and European Commission (EC). Much attention has been given to the threat of a debt default by Greece and its possible expulsion from the euro currency bloc. Our view on Greece is that political contagion in the region is the bigger concern rather than direct financial or economic contagion.

    With Greeces contribution to the overall GDP of the EU coming in at just over 1% in 2014, the direct financial impact of a Greek default and exit from the euro currency would be limited. The intangible reverberations are the bigger concern in our opinion. With several nationalist movements gaining traction throughout the region, such as Scottish independence in the UK and Podemos in Spain to name just two, a Greek exit from the euro could add further positive momentum to these movements by showing that exit from the euro is not only plausible but also possible. As a result, political confidence in the euros sustainability becomes a much bigger risk to global markets due to the amount of uncertainty created in global currency markets. As events in Greece continue to play out in the coming weeks and months, key indicators to watch for will be any signs of contagion in the form of non-Greek sovereign yields, especially in peripheral countries, implied volatility indicators globally, and global credit spreads with a focus on lower quality spreads.

    As noted earlier, inflation expectations in many parts of the world have started to stabilize and even turn higher. This trend is further confirmed by the recent increase in the probability of a warming regime, not to mention an increase in the probability of a too hot regime from 0% to 5% (Fig. 12). The stabilization in energy prices has provided a floor to inflation expectations. In addition, increasing wage pressures in the US from a tighter labor market provides further upward pressure. At the same time, implied volatilities continue to be sanguine on a relative basis and the yield curve remains steep and supportive of continued lending. All this comes while rates are at all time lows and the Fed has indicated future rate hike but has yet to act. Ironically, and in contrast to the beginning of the year, the threat appears to have shifted from deflation to inflation whereby inflation begins to be reported ahead of expectations.

    As we have noted in past commentaries, we continue to watch the credit complex carefully for signs of distress given the recent volatility in yields. With regulatory changes in Europe driving lending from bank to non-bank sources combined with the emergence of emerging market corporate debt in recent years, any disturbance in the flow of credit to non-US companies could present significant headwinds to markets. Substantial amounts of refinancing will need to take place in the near to medium term and the cost of debt financing relative to company fundamentals in both European and EM corporate sectors will be one of the most important interplays to support a continued global economic expansion.

    Source ISSG as of 30 June 2015.

    0%10%20%30%40%50%60%70%80%90%

    100%

  • 8

    Asset Class Outlook ASSET CLASS ISSG VIEW

    Global Equities +9.3%

    U.S. O/W

    Europe Ex U.K. O/W

    Pacific Ex-Japan Neutral

    Japan O/W

    U.K. Neutral

    EM Neutral

    REITS Neutral

    Global Natural Res. Neutral

    Global Bonds -9.3%

    U.S. Sovereign Debt U/W

    U.K. Sovereign Debt U/W

    Japanese Sovereign Debt U/W

    German Sovereign Debt U/W

    High Yield Neutral

    U.S. IG Corp. Bonds Neutral

    EM Local Cur. Debt O/W

    EM USD Sovereign Debt Neutral

    Cash +0.0%

    Fig. 13: ISSG CMC Global Asset Class Views Global Equity Markets:

    ISSG CMC View

    Valuation Model

    Momentum Model

    RBAA Model

    US Equity

    Overweight Favorable Favorable Favorable We remain overweight to the US but continue to reduce the size of the overweight position as valuation moves squarely into fair territory. Underlying economic data continues to be positive. Uncertainty around both the start and pace of rate hikes in the US remains the major question and justifies a reduction in overweight.

    Europe ex-UK Equity

    Overweight Favorable Favorable Favorable We remain overweight to Europe Ex-UK despite increasing concerns over a Greek default and possible Grexit. The depreciation in the euro has served as a positive catalyst and the ECB maintains its accommodative stance to the region. Inflation expectations are moving higher and fundamentals are improving.

    Pacific ex- Japan Equity

    Neutral Favorable Favorable Favorable The region remains highly sensitive to expectations for Chinese economic growth as well as further policy stimulus from the PBOC. Uncertainty around Chinese economic growth and its impact keep us neutral.

    Japan Equity

    Overweight Neutral Neutral Unfavorable Japan remains one of the best performing markets year to date, even considering the recent yen depreciation. Wage negotiations have started to lead to wage increases and consumer spending is beginning to increase as the prior fiscal tightening moves further into the past. Yen depreciation is supporting export competitiveness as well.

    UK Equity

    Neutral Favorable Neutral Favorable The decisive results of the May elections have removed an underlying uncertainty from the UK markets but created another with David Camerons call for a referendum on EU inclusion coming as soon as 2016.

    EM Equity

    Neutral Favorable Favorable Favorable We have moved to a neutral position in emerging markets. The combination of a slowing China, despite policy stimulus, with the risk of capital flows out of the asset class due to increasing interest rates in the US create significant headwinds. Beyond China, the threat that Brazil poses to global markets is significant.

    REIT Equity

    Neutral Favorable Unfavorable Favorable With momentum in the asset class turning negative given the move higher in global yields, previous valuation excesses of REITs have been alleviated and we move to a neutral weighting in the asset class. We are watching the momentum component closely given the threat of rising rates.

    Global Natural Resource Equity

    Neutral Favorable Neutral Unfavorable We continue to believe that secular forces in the form of a stronger dollar and excess capacity will create a ceiling to the overall commodity complex. A transition away from fixed capital formation in China will also serve to alter future supply demand dynamics as will the outright slowdown in the country. We believe a fundamental and active approach in the natural resource equity complex will provide opportunities through alpha capture given increased commodity dispersion and weather related volatility.

    -0.5 0 0.5 1 1.5

    World Value

    World

    World Large Cap

    World Growth

    World Small Cap

    EM

    %

    Fig. 14: Global Equity Index Performance % change over 3 months to

    30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -10 -8 -6 -4 -2 0 2 4 6 8

    Germany Equity

    Australia Equity

    UK Equity

    France Equity

    India Equity

    US Equity

    Brazil Equity

    Japan Equity

    China Equity

    %

    Fig. 15: Country Index Performance % change over 3 months to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

  • 9

    Global Bond Markets: ISSG CMC

    View Valuation

    Model Momentum

    Model RBAA Model

    Developed Sovereign Bonds

    Underweight Unfavorable Unfavorable Unfavorable Volatility in yields has started to increase given their recent rise as inflation expectations in both the US and Europe start to move higher. The market consensus for a start to rate hikes in the US appears to have moved out to September.

    High Yield Bonds

    Neutral Favorable Favorable Unfavorable The back up in high yield spreads has made the valuation worthy of moving from our previous underweight position to neutral. Looking at historical behavior of the asset class, times of recession are most dangerous for high yield bonds and we do not believe there is a recession on the horizon for the near to medium term time horizon. Relative valuation compared with equities merits a neutral stance.

    Investment Grade Corporate Bonds

    Neutral Unfavorable Unfavorable Unfavorable We remain neutral weight in investment grade bonds based on a small back up in spreads in this sector. The spread component of the asset class combined with the high credit quality keep us neutral. Investors appear to favor this asset over sovereign bonds for similar reasons adding to positive momentum and performance in the sector.

    Emerging Markets Local Currency Bonds

    Overweight Favorable Neutral Neutral We remain overweight in EM local currency bonds based on attractive valuations from the movement lower in EM currencies, especially Asian currencies, relative to recent dollar strength. Corporate bond defaults bear watching closely.

    Emerging Markets USD Bonds

    Neutral Neutral Favorable Neutral We remain neutral on EM dollar based debt where the valuations are not as attractive from currency movement as in the local currency bonds. While absolute yields on both forms of EM debt are attractive, we believe investors need to monitor developments in the asset class given pending Greek events and the depth of Brazilian and Russian recessions relative to expectations.

    Cash

    Neutral N/A N/A N/A We remain neutral to cash which is a zero weight in our base portfolio given our favorable view of risk assets. Cash continues to carry option value in order to de-risk the portfolio should volatility increase with interest rates still at historic lows.

    Commodities: Neutral

    Commodities have made a recovery in the most recent quarter lead by the energy complex, in particular crude oil. Prices appear to have stabilized with the oil curve still in contango and a potential nuclear deal with Iran threatening increased supply, we remain neutral on the overall commodity complex.

    Currency:

    EUR/USD

    Underweight Pending Greek events may add volatility to the currency should there be an erosion in confidence of the monetary union and as a result we remain underweight.

    JPY/USD

    Neutral Additional yen depreciation has served as a further catalyst for the Japanese equity markets. Yen depreciation is creating uncertainty in regional currency dynamics, particularly with the KRW and CNY that bear watching in the future with a slowing Chinese economy and export dependent Korea as a backdrop.

    EM: Asia/USD

    Neutral As mentioned above, a weaker yen has changed some of the longer held currency relationships in the region between exporters and importers. The CNY continues its pattern of internationalization, a trend that should be closely followed especially given its soft peg.

    EM: LATAM/USD

    Neutral While we are neutral to the regional currencies, Brazil remains a threat should their economy fall further into recession and external funding sources begin to disappear.

    -4 -3 -2 -1 0 1

    Global Corporate Bonds

    Global Sovereign Bonds

    Global High Yield Bonds

    Global EM Debt (USD)

    Global Inflation Linked Bonds

    Global EM Debt (Local Curr.)

    Leveraged Loans

    %

    Fig. 16: Fixed Income Performance % change over 3 months to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -6 -4 -2 0 2 4 6 8 10 12

    Industrial Metals

    Precious Metals

    Gold

    Agriculture

    Oil

    Energy

    %

    Fig.17: Commodities Performance % change 3 months to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -6 -5 -4 -3 -2 -1 0 1 2 3

    GBP/USD

    RUS/USD

    SEK/USD

    EUR/USD

    BRL/USD

    CAD/USD

    AUD/USD

    CHN/USD

    IND/USD

    JPY/USD

    %

    Fig. 18: FX Currency Pairs % change 3 months to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

  • 10

    Performance Monitor

    0 5 10 15 20 25 30

    UK Equity

    Brazil Equity

    Australia Equity

    US Equity

    India Equity

    Germany Equity

    France Equity

    China Equity

    Japan Equity

    %

    Fig. 20 : Equity Country Performance Lcl. Crncy. % change over 1 year to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -50 -40 -30 -20 -10 0 10 20 30

    OilCommodities

    Global Natural Resource EquitiesGold

    Global Sovereign BondsGlobal High Yield BondsGlobal Corporate Bonds

    Global EM Debt (USD)UK Equities

    US CashGlobal EM Debt (Local Curr.)

    EM EquitiesUS Equities

    Global EquitiesEurope ex UK Equities

    US DollarDeveloped REITS

    Japan Equities

    %

    Fig. 19 : Capital Markets % change over 1 year to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -5 -4 -3 -2 -1 0 1 2 3 4 5

    World Value

    EM

    World Small Cap

    World Large Cap

    World

    World Growth

    %

    Fig. 21: Global Equity Performance Lcl. Crncy. % change over 1 year to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -8 -6 -4 -2 0 2 4 6

    Global Sovereign Bonds

    Global High Yield Bonds

    Global Corporate Bonds

    Global EM Debt (USD)

    Global Inflation Linked Bonds

    Leveraged Loans

    Global EM Debt (Local Curr.)

    %

    Fig. 22: Fixed Income Performance % change over 1 year 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -50 -40 -30 -20 -10 0

    Oil

    Energy

    Industrial Metals

    Precious Metals

    Agriculture

    Gold

    %

    Fig. 23: Commodities Performance % change 1 year to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

    -2 4 10 16 22 28 34 40 46 52 58 64

    CHN/USD

    IND/USD

    GBP/USD

    CAD/USD

    JPY/USD

    AUD/USD

    EUR/USD

    SEK/USD

    BRL/USD

    RUS/USD

    %

    Fig. 24: FX Currency Pairs % change 1 year to 30 Jun 15

    Source: Thomson Reuters Datastream & ISSG

  • 11

    Appendix & DisclosuresASSET INDEX DEFINITIONCommodities Bloomberg Commodities Index Total The Bloomberg Commodities index is an index that tracks the performance of

    Return (USD Index) broad based commodities.

    Gold Gold Bullion LBM USD/ozt Tracks the performance of gold bullion spot prices.

    Oil Brent Crude Month FOB USD/BBL Tracks the performance of Brent Crude Oil spot prices.

    Global Sovereign Bonds JPM Global GBI (USD Index) Tracks the performance of global sovereign bonds.

    Developed Sovereigns US, UK, Japan, and German Sovereign Debt securities

    US Equity S&P 500 (USD Index) Tracks the performance of 500 of largest market capitalization equities in the United States.

    US Cash JPM US Cash Index (3M) (USD Index) Tracks the performance of US 3 month treasury bills.

    US Dollar JPM USD Index Real Broad Tracks the performance of the US Dollar against a basket of broad currencies.

    Global Corporate Bonds Barclays Global Agg Corp (USD Index) Tracks the performance of aggregate corporate bonds.

    Developed REITS FTSE E/N Dev REITS (Local Currency) Tracks the performance of global real estate investment trusts in developed markets.

    Global Natural Resource Equities S&P Gbl Nat Resource Equities (USD Index) Tracks the performance of global equities linked to natural resources.

    Global Investment Grade Bonds Barclays Inv Grade Corporates (USD Index) Tracks the performance of aggregate investment grade corporate bonds.

    Global Inflation Linked Bonds Barclays Global Agg Infl-Lkd (USD Index) Tracks the performance of global inflation linked bonds.

    Global High Yield Bonds Barclays Global High Yield (USD Index) Tracks the performance of global high yield bonds rates below investment grade.

    Global Equities MSCI World (LC Index) Tracks the performance of developed market global equities.

    MSCI AC World MSCI AC World Index Tracks the performance of developed market global equities

    Global EM Debt (USD) JPM EMBI Global Composite (USD Index) Tracks the performance of dollar based emerging market sovereign bonds.

    EM Equities MSCI Emerging Markets (LC Index) Tracks the performance of emerging market equities.

    UK Equities FTSE 100 (LC Index) Tracks the performance of equities domiciled within the United Kingdom.

    Europe Ex UK Equities MSCI Europe ex UK (LC Index) Tracks the performance of equities domiciled in Europe and not including the UK.

    Japan Equity MSCI Japan (LC Index) Tracks the performance of equities domiciled in Japan.

    Pacific Ex Japan Equity MSCI Pacific ex Japan (LC Index) Tracks the performance of equities domiciled in the Asia - Pacific region but not including Japan.

    Germany Equity DAX 30 (LC Index) Tracks the performance of 30 of largest equity market capitalization companies in Germany.

    Eurozone Equity EuroStoxx 50 (LC Index) Tracks the performance of 50 of largest equity market capitalizations in the Eurozone.

    France Equity CAC 40 (LC Index) Tracks the performance of 40 of the largest equity market capitalizations of France.

    Australia Equity ASX All Ordinaries (LC Index) Tracks the performance of the largest equity market capitalizations of Australia.

    Brazil Equity MSCI Brazil (LC Index) Tracks the performance of the equities domiciled in Brazil.

    India Equity MSCI India (LC Index) Tracks the performance of equities domiciled in India.

    China Equity MSCI China (LC Index) Tracks the performance of equities domiciled in China.

    World Growth MSCI World Growth (LC Index) Tracks the performance of growth oriented equities as defined by MSCI.

    World Large Cap MSCI World Large Cap (LC Index) Tracks the performance of large equity market capitalization companies.

    World Value MSCI World Value (LC Index) Tracks the performance of value oriented equities as defined by MSCI.

    World Small Cap MSCI World Small Cap (LC Index) Tracks the performance of small equity market capitalization companies.

    Leveraged Loans S&P Leveraged Loan Index (USD Index) Tracks the performance of leveraged loans.

    Global EM Debt (Local Curr.) JPM GBI Emerging Markets (LC Index) Tracks the performance of local currency denominated emerging market bonds.

    Agriculture S&P GSCI Agriculture Total Return (USD Index) Tracks the total return performance of agricultural commodity futures.

    Precious Metals S&P GSCI Precious Metals Total Retn Tracks the total return performance of futures for precious metals related futures.

    Industrial Metals S&P GSCI Industrial Metals Total Retn Tracks the total return performance of futures for industrial metals related commodities. (USD Index)

    Energy S&P GSCI Energy Total Return (USD Index) Tracks the total return performance of futures for energy related commodities.

    EUR/USD EUR/USD Tracks the performance of the Euro / US Dollar exchange rate.

    RUS/USD RUS/USD Tracks the performance of the Russian Ruble / US Dollar exchange rate.

    CHN/USD CHN/USD Tracks the performance of the Chinese Renminbi / US Dollar exchange rate.

    SEK/USD SEK/USD Tracks the performance of the Swedish Krona / US Dollar exchange rate.

    GBP/USD GBP/USD Tracks the performance of the British Pound / US Dollar exchange rate.

    AUD/USD AUD/USD Tracks the performance of the Australian Dollar / US Dollar exchange rate.

  • 12

    ASSET INDEX DEFINITIONBRL/USD BRL/USD Tracks the performance of the Brazilian Real / US Dollar exchange rate.

    CAD/USD CAD/USD Tracks the performance of the Canadian Dollar / US Dollar exchange rate.

    IND/USD IND/USD Tracks the performance of the Indian Rupee / US Dollar exchange rate.

    JPY/USD JPY/USD Tracks the performance of the Japanese Yen / US Dollar exchange rate.

    EM LATAM/USD Considers the aggregate performance direction of a basket of currencies from Latin Americia countries as defined in the JPM GBI Emerging Markets Index

    EM Asia/USD Considers the aggregate performance direction of a basket of currencies from Asian countries as defined in the JPM GBI Emerging Markets Index

    EUR FX Tracks the performance of the Euro / US Dollar exchange rate.

    GBP FX Tracks the performance of the British Pound / US Dollar exchange rate.

    JPY FX Tracks the performance of Japanese Yen / US Dollar exchange rate.

    EM FX Tracks the performance of a basket of Emerging Markets currencies versus the US Dollar.

    US 10Y Yield Tracks the performance of the yield on the 10 year US treasury note.

    Inflation Headline Consumer Price Index Tracks the performance of inflation as reported by respective national economic statistics bureaus.

    Growth (PMI) Tracks the performance of purchasing managers indices in each country to proxy GDP growth.

    EUR Inflation Swap Forward 5Y5Y This is a rate commonly used by central banks and dealers to observe the markets future (Figure 2) inflation expectations.

    Company Earnings A proprietary diffusion index of positive and negative analyst earnings estimate revisions.

    Monetary Policy Derived from the futures curve for short term interest rates as indicative of central bank policy.

    Inflation Revisions A proprietary measure of cumulative economist revisions for future levels of inflation in a country.

    Growth Revisions A proprietary measure of cumulative economist revisions for future real economic growth in a country.

    Greek Bank Deposits (Figure 3) TODETOGR index Tracks the level of total demand deposits in the Greek banking system.

    Corporate Profits (Figure 4) CPFTTOT Tracks income that corporations earn from current production. It is normally measured before income taxes.

    Capex (Figure 4) NFIBFCAP Nonfinancial business capital expenditures fixed investment.

    GDP (Figure 4) GDP CUR$ Measures final market value of all goods and services produced within a country in nominal dollars.

    Renminbi / Yen Cross Rate (Figure 5) Tracks the cross rate between the Chinese Renminbi and the Japanese Yen.

    Dollar (Figure 7) Bloomberg US Dollar Index Tracks the performance of the US dollar against a basket of global currencies. (DXY Index)

    DM Bonds JPMorgan GBI Global Unhedged LC Tracks the performance of non-US developed market investment grade corporate bonds denominated in local currency.

    These benchmarks are broad-based indices which are used for comparative purposes only and have been selected as they are well known and are easily recognizable by investors. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the portfolio. For example, investments made for the portfolio may differ significantly in terms of security holdings, industry weightings and asset allocation from those of the benchmark. Accordingly, investment results and volatility of the portfolio may differ from those of the benchmark. Also, the indices noted in this presentation are unmanaged, are not available for direct investment, and are not subject to management fees, transaction costs or other types of expenses that the portfolio may incur. In addition, the performance of the indices reflects reinvestment of dividends and, where applicable, capital gain distributions. Therefore, investors should carefully consider these limitations and differences when evaluating the comparative benchmark data performance. The foregoing index licensers are not affiliated with The Bank of New York Mellon Corporation, do not endorse, sponsor, sell or promote the investment strategies or products mentioned in this presentation and they make no representation regarding advisability of investing in the products and strategies described herein. Valuation Model The ISSG Valuation Model considers relative valuations across the asset classes that we rank. We consider the current values placed on future cash flows of the securities against their historical longer-term trend levels. Momentum Model The ISSG Momentum Model considers relative price momentum across the asset classes that we rank. Our research shows that this can be an indicator of continued appreciation potential in the future. RBAA Model The ISSG Regime Based Asset Allocation Model defines five macroeconomic regimes based on the interaction of growth and inflation expectations. We believe changes to these expectations drive regime shifts and influence asset returns.

    BNY Mellon ISSG RBAA Regimes:

    WARMINGPERFECTION

    COOLING

    TOO COLD

    TOO HOT

    s

    ss

    s

    GROWTH

    INFLATIO

    N

    CORRELATION HEAT MAP DEFINITIONSASSET CLASS INDEX please see above for definitions World Equity MSCI AC World (LC Index)EM Equity MSCI Emerging Markets (LC Index)DM Bonds JPMorgan GBI Global UnhedgedEM $ Bonds JPMorgan EMBI Global Composite (USD Index)DM IG Corps Hedged Barclays Global Aggregate Corp Index (USD Index)DM HY Corps Hedged Barclays Global High Yield (USD Index)Commodities Dow Jones UBS Commodities Index Total Return (USD Index)Dollar US Dollar Index

  • APAC

    Chris Harris, CFAInvestment Solutions Strategist

    [email protected]

    For more information, please contact:

    GENERAL INQUIRIES & AMERICAS

    Stephen Kolano, CFAInvestment Strategist

    [email protected]

    CFA and Chartered Financial Analyst areregistered trademarks owned by CFA Institute.

    EMEA

    Ivo Batista, CFAPortfolio Strategist

    [email protected]

  • The views in this presentation are provided by the BNY Mellon Investment Strategy & Solutions Group (ISSG). The forecasts contained herein are for illustrative purposes only, not indicative of future results, and are not to be relied upon as advice, interpreted as a recommendation, or be guarantees of performance. In addition, the forecasts are based upon subjective estimates and assumptions about circumstances and events that may not have taken place and may never do so. The models used herein have not been independently verified. In addition, the historical returns used as a basis for the charts are based on information gathered by The Bank of New York Mellon Corporation from third party sources, and have not been independently verified. BNY Mellon Investment Strategy & Solutions Group (ISSG) is part of The Bank of New York Mellon (Bank). In the US, ISSG offers products and services through the Bank, including investment strategies that are developed by affiliated BNY Mellon Investment Management advisory firms and managed by officers of such affiliated firms acting in their capacities as dual officers of the Bank.

    BNY Mellon Investment Management is an investment management organization, encompassing BNY Mellons affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

    The information in this document is not intended to be investment advice, and it may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where this document is used or distributed in any non-U.S. jurisdiction, the information provided is for Professional Clients only. This material is not for onward distribution to, or to be relied upon by Retail Clients.

    Any statements and opinions expressed in this document are correct as at the date of publication, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of BNY Mellon or any of its affiliates. The information contained in this document has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This document is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. To the extent that these materials contain statements about future performance, such statements are forward looking and are subject to a number of risks and uncertainties. Information and opinions presented in this material have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to its accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this material. If nothing is indicated to the contrary, all figures are unaudited.

    Any indication of past performance is not a guide to future performance. The value of investments can fall as well as rise, so you may get back less than you originally invested.

    Not for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This information may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this information comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this information in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank, and may lose value.

    This document should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management.

    This document is approved for Global distribution and is issued in the following jurisdictions by the named local entities or divisions: Europe, Middle East, Africa and Latin America (excluding Germany, Brazil, Dubai): BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. Germany: Meriten Investment Management GmbH which is regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Dubai, United Arab Emirates: Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority. This material is intended for Professional Clients only and no other person should act upon it. Singapore: BNY Mellon Investment Management Singapore Pte. Limited Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore. Hong Kong: BNY Mellon Investment Management Hong Kong Limited / BNY Mellon Managed Investments Limited. Regulated by the Hong Kong Securities and Futures Commission. Japan: BNY Mellon Asset Management Japan Limited. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. Australia: BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865). Authorized and regulated by the Australian Securities & Investments Commission. United States: BNY Mellon Investment Management. Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. Brazil: this document is issued by ARX Investimentos Ltda., Av. Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP 22430-041. Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM).

    The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation.

    BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) is the distributor of the capabilities of its investment managers in Europe (excluding funds in Germany), Middle East, Africa and Latin America. Investment managers are appointed by BNYMIM EMEA or affiliated fund operating companies to undertake portfolio management services in respect of the products and services provided by BNYMIM EMEA or the fund operating companies. These products and services are governed by bilateral contracts entered into by BNYMIM EMEA and its clients or by the Prospectus and associated documents related to the funds.

    BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. Insight Investment Management Limited and Meriten Investment Management GmbH do not offer services in the U.S. This information does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms services or funds to any U.S. investor, or where otherwise unlawful. BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm. The Newton Group (Newton) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), Newton International Investment Management Limited and Newton Fund Managers (C.I.) Limited. NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S. BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC).

  • 2015 The Bank of New York Mellon Corporation. All rights reserved. Issued July I-2015-0791-GU September 30, 2015.

    BNY Mellon Investment ManagementOne Wall StreetNew York, NY 10286 BNY Mellon Center 201 Washington Street Boston, MA 02108 www.bnymellonim.com

    Economic Outlook_Q315 master doc final v2.pdfSlide Number 1Slide Number 2What we are watchingKey Charts: Economics And MarketsISSG Global HeatmapsEconomic OutlookSlide Number 7Asset Class OutlookSlide Number 9Performance MonitorSlide Number 11Slide Number 12Economic Outlook_Q315 master doc final v2.pdfSlide Number 1Slide Number 2What we are watchingKey Charts: Economics And MarketsISSG Global HeatmapsEconomic OutlookSlide Number 7Asset Class OutlookSlide Number 9Performance MonitorSlide Number 11Slide Number 12