global strategic framework

8/3/2019 Global Strategic Framework

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For institutional and retail adviser use only


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Contents

4

Stance Summary 5

Section One Review of Markets 6

Equity Markets 6

Equity Sectors 8

Fixed Income 9

Commodities 10

Currencies 10

Section Two Review of Global Economics 11

Inflation 11

Economic Data 12

Section Three Views and Outlook 14

Economics 14

Equities 16

Bonds 17

Currencies 18

Commodities 18

Section Four Special Features 19

Spotlight on Thailand 19

Summary of the 2012 Outlook from the BlackRock Investment Institute 23

Section Five Charts 26

Section Six Appendix 41

All data source BlackRock DataStream January 2012 unless otherwise stated


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Stance Summary

5

Negative Neutral Positive

Equities

US

Europe

Japan

UK

Asia ex-Japan

Latin America

Emerging Europe

Materials

Energy

Healthcare

Technology

Financials

Industrials

Cons. Discr.

Cons. Stap.

Telecoms

Utilities

Bonds

Government bonds

US

Euro

UK

Japan

IG Credit

High Yield

EM Debt Local Currency

Cash

US$

Euro

Yen

Sterling

Australian$

Canadian$

Swiss franc

Table reflects views of the Global BMACS Investment Strategy Group as of 17 January 2012


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Section One Review of Markets

6

December was a generally positive month for risk assets, in a reversal of their performance in November. Most

equity markets ended both the month and the quarter higher, in local currency terms, while the performance of

fixed income assets was also generally positive. The eurozone sovereign debt crisis remained centre stage.

Economic data releases were mixed. The US continued to see some improved data, including consumer

confidence, the manufacturing Purchasing Managers Index (PMI) and labour market data. Inflation fell in theeurozone and the UK but, overall, European economic data remained weak. The European Central Bank (ECB)

reduced its target refinancing rate by 25bp on 8 December to 1.0%.

Equity Markets

World equity markets returned 0.6% in local currency terms in December. Continuing the trend from November,

developed markets outperformed emerging markets overall. Stock market volatility decreased in December, with

the VIX falling from an average of 34 in November for the month to around 21 in December.

In USD terms, the S&P 500 Composite Index returned 0.9% in December. The Dow Jones and the Russell 2000

index of small cap stocks also made positive returns, of 1.4% and 0.5% respectively. In contrast, the NASDAQcomposite significantly underperformed, declining by 2.4% over the month. The US manufacturing PMI increased

to 53.9 in December, up from 52.7 in November, according to the Institute for Supply Management (ISM). In the

US labour market, the unemployment rate improved in December, falling to 8.5% from 8.7% in November.

Average weekly hours increased slightly, to 34.4.

The performance of European stock markets was mixed in December, but overall Europe ex-UK returned 0.8% in

local currency terms. By country, the German DAX made a negative return of 3.1% in December, underperforming

the French CAC40 which returned 0.2%, both in EUR terms. The eurozone macroeconomic backdrop continued

to deteriorate in December. The preliminary estimate for German GDP growth in 2011 showed that the economy

grew by 3.0% over the year. The eurozone manufacturing PMI registered 46.9 in December, with contractions in

new orders and new export orders for all of the countries covered. The services PMI increased from 47.5 to 48.8.

The ECB reduced its target refinancing rate by 25bp in December to 1.0%.

The UK FTSE 100 returned 1.2% in December, in GBP terms. Meanwhile, the FTSE All-Share returned 0.8% over

the month. The Monetary Policy Committee (MPC) opted to leave base rates unchanged at 0.5% and to maintain

its Asset Purchase Programme (quantitative easing) at 275 billion in December. Both the manufacturing and

services purchasing managers indices (PMI) rose in December, although the manufacturing PMI remained below

the important 50 level.

In Japan, the Nikkei 225 Stock Average returned 0.2% in December, while the Topix underperformed most other

major developed stock markets with a negative return of 0.3% in JPY terms. Among economic data releases, real

Q3 GDP growth was revised down from the initial estimate of 1.5% q/q to 1.4%. The services PMI rose in

December to 50.4, although it remains below the reading of 52.3 in October. According to the labour force survey

measure, the unemployment rate remained 4.5% in November. The Economy Watchers survey improved in

December, with the dispersion index rising to 47.0 from 45.0 in November.

Across the Pacific, the Australian stock market made a negative return of -1.3% in December in AUD terms. On 6

December, the Reserve Bank of Australia Board decided to reduce the cash rate by 25 basis points to 4.25%. In

local currency terms, the Pacific ex-Japan region declined by 0.6% in December. By country, Taiwan returned

2.8%, and Hong Kong also made a positive return, of 1.8%. In contrast, Korea declined by 0.9%, all in local


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currency terms. The MSCI China was one of the better performing indices in December, with an increase of 2.4%

in local currency terms.

Overall, emerging market stock markets underperformed developed markets in December. However, performance

varied considerably by country and region. Emerging Europe was the worst performing regions, producing anegative return of 6.2% in local currency terms. Russia was one of weakest stock markets in December, declining

by 7.1% in RUB terms. However, Turkey and Poland also made significant declines, of 5.7% and 5.8%

respectively, both in local currency terms. In contrast, also in local currency terms, Latin America increased by

1.3%, with Brazil and Mexico returning 1.5% and 0.7% respectively. Meanwhile, Argentina declined by 3.9%.


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Equity Sectors

Most major equity sectors in the US made modest gains in December, with the exception of the IT, materials andenergy sectors. Utilities performed best, returning 4.3% over the month (and 15.2% over twelve months).

Healthcare and telecoms also performed well, returning 3.9% and 3.8% respectively in December (10.1% and -

0.4% year to date). The financial sector recovered some of the losses from November, with a return of 1.4%, but

the sector ended the entire year down 17.9%. IT was the months worst performer, declining by 1.4% (year to date

it has returned 1.4%), and materials were down by 1.2% in December and by 11.3% over the year.

European equity sectors delivered mixed returns in December. The best performers were healthcare, which

returned 7.9%, and food and beverages (up 6.6%). The oil and gas sector returned 3.8%, while media returned

3.6%. In contrast, the autos, financials and technology sectors made negative returns over the month. Autos

declined by 1.8% in December, while financials fell by 1.4% and technology slipped by 1.8%. Over the entire year,

healthcare returned 12.3% and food and beverages returned 6.2%. The autos sector declined by 21.5% over

2011 and, not surprisingly, the financial sector fell by 20.9%. Basic resources made a loss of 29.6%.

In Japan, the performance of equity sectors varied in December and over 2011. Healthcare performed best over

the month, returning 5.6%, but over the year it has declined by 10.9%. Consumer staples returned 1.3% in

December and 0.7% in 2011. In contrast, the energy sector declined by 5.5% over the month and 8.9% over the

year. The IT sector fell by 5.0% in December and ended the year down 26.6%. The utilities sector declined by

44.0% over the year.

Globally, the financial sector fell by 1.1% in December and declined by 20.4% over the year. Within the sector, the

banking industry made some significant losses in December as the sovereign debt crisis in peripheral Europe and

inadequate system-wide levels of capital, despite some capital raising, remained key themes. Eurozone banks fell

by 1.4% in December in EUR terms (down 33.0% over the year), while the UK declined by 3.9% in GBP terms

(and ended the year down 29.7%). US banks performed comparatively well, returning 5.1% in December andending the year down by 12.7%.


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9

Fixed Income

The eurozone sovereign debt crisis remained the dominant theme in December, ending a turbulent year for fixed

income markets. It was also a busy year for some of the major central banks. In December, the ECB cut thebenchmark repo rate by 25bp to 1.0% (taking it back to the level at which it started the year). However, during

2011 interest rates were increased to 1.5% before they were reduced again. The ECB also introduced a raft of

special measures throughout the year. The US Federal Reserve and the Bank of England kept their benchmark

interest rates at their respective very low levels in 2011, although both central banks made changes to their

monetary policies via quantitative easing measures. The Bank of Japan also kept interest rates on hold, and

extremely low, throughout the year.

At the end of this extraordinary year, many ten-year government bond yields ended at significantly different levels

to where they started. The yield on the US ten-year fell to 1.88%, down from 2.07% at the start of the month and

3.31% at the beginning of the year. The ten-year UK gilt yield ended 2011 at 1.98%, down from 2.3% over the

month and 3.51% at the start of the year. The ten-year bund yield fell to 1.83% at the end of December, from 2.2%

one month before and 2.89% at the start of 2011. The was less movement in the ten-year JGB yield, which started

the year at 1.18% and closed it at 0.99%. At the start of December the ten-year JGB yield was 1.07%. In contrast,

the yields of many eurozone sovereign bonds increased over 2011. The Italian and Spanish ten-year yields ended

the year significantly wider than Bunds, at 6.89% and 5.43% respectively.

The total return on the US ten-year Treasury was 1.7% in December, with the yield falling to end the month at

1.88%. Over the year, ten-year treasuries have returned 14.7%, while over the fourth quarter they returned 1.2%.

US credit made a positive return of 1.0% in December. CPI inflation ran at 3.4% y/y in November and the PCE

price index for November was 2.5% y/y. The Federal Open Market Committee (FOMC) kept its monetary policy

unchanged.

In German bunds, the yield on the ten-year fell in December to end the year at 1.83%, generating a positive total

return for the month of 2.7%. Ten-year German government bonds have returned 13.5% over the year and 1.1%

over the quarter. Ten-year French government bonds returned 0.3% in December, made a negative return of

4.3% over the fourth quarter, and made a positive return of 5.2% over twelve months. This means that they

underperformed most other major sovereign ten-years over the month, the quarter and the year. The Italian ten-

year made negative returns of 7.5% and 6.3% over the year and the quarter, but made a positive return of 1.0% in

December.

In the UK gilts market, the ten-year returned 2.5% in December, with the yield falling 32 basis points to end the

month at 1.98, outperforming bunds and treasuries. At the December Monetary Policy Committee meeting, the

Bank of England maintained Bank Rate at 0.5% and also kept the Asset Purchase Programme unchanged (at a

total of 275bn), despite the latest CPI data at the time showing inflation of 4.8% y/y (which has subsequently

fallen to 4.2%).

The yield on ten-year Japanese government bonds (JGBs) ended the month at 0.99%, and their total return over

December was 0.9%. Ten-year JGBs have underperformed other major sovereign bonds over three months and

over one year, returning 0.9% and 3.4% respectively.

For emerging market debt, the return on the Emerging Market Bond Index (EMBI) was 1.4% in December. Over

the fourth quarter the EMBI returned 1.4% and over the year 11.7%.


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Commodities

Commodities returns were mixed in December, although most sectors posted negative returns. The agriculture

sector performed best, returning 4.2% over the month. In contrast, precious metals returned -11.1%, industrialmetals declined by 4.3% and energy fell by 2.7%. The CRB commodity index decreased by 2.7% over the month.

Commodity performance over 2011 was extremely diverse, with strong gains in gold, oil and gasoline prices

contrasting with significant declines in industrial metals, wheat and natural gas. Over the second half of the year

the slowdown in global economic growth had a negative impact on the demand for commodities. However, supply-

side constraints provided some support for commodities such as oil.

The price of oil fell in December. West Texas Crude Oil (WTI) declined by 1.5% in over the month, while Brent

crude prices fell by 2.5%. The value of natural gas dropped significantly, by 16.6%. The price of coal also declined

in December, with a 1.8% decrease. In contrast, gasoline increased by 1.6%.

Within precious metals, gold declined by 9.8% in December while the price of silver dropped by 15.9%. Platinummade a negative return of 13.1%. Among the industrial metals, copper (-3.6%) and aluminium (-5.8%) both

declined, while nickel increased by 5.4%.

In a positive month for the price of agricultural commodities, corn increased by 8.6% and wheat rose by 4.4% in

December. The sector returned 4.2% in December but ended 2011 as a whole significantly lower.

Currencies

The US dollar generally strengthened in December, appreciating against most major currencies. On a trade-

weighted basis, the US dollar increased by 1.6% in December. The greenback also ended the year slightly higher

on a trade-weighted basis.

As the crisis in the eurozone rumbled on, the euro depreciated by 3.6% against the US dollar and by 2.7% on a

trade-weighted basis over the month. The euro also fell by 2.4% against sterling in December. Meanwhile, the

value of sterling rose by 1.2% on a trade-weighted basis, but fell by 1.2% against the US dollar.

The Japanese yen continued to strengthen in December, as reconstruction efforts following Marchs earthquake

continued and amid the ongoing search for safe havens. As such, the yen climbed 0.8% versus the US dollar. The

US dollar, sterling and the euro all depreciated against the yen, by 0.9%, 2.1% and 4.4% respectively. The US

dollar appreciated against the Singapore dollar, by 1.2%.


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Section Two Review of Global Economics

11

Inflation

In the eurozone, HICP inflation fell to 2.8% in December (according to the flash estimate), down from 3.0% in

November. However, it has remained persistently above the ECBs target of close to, but below 2%, despitesigns of slowing economic growth across the region, with economies operating below full capacity and with little

pressure from wage demands. The ECB reduced its target refinancing rate by 25bp on 8 December, taking it

down to 1.0%, along with a commensurate reduction in the interest rate on the ECBs deposit facility from 0.50%

to 0.25% and the marginal lending facility from 2.00% to 1.75%. ECB President Mario Draghi also announced

some additional extraordinary measures during the press conference In December, aimed at addressing the

bank funding pressures in Europe. These measures include a loosening of the rules on accepted collateral and

offering, for the first time, three-year liquidity tenders to banks with full allotment (with the option of early

repayment after one year). This three-year funding will replace the planned 12-month tenders. Furthermore, the

ECB reduced the reserve requirement ratio that lenders must hold with their national central banks to 1% (down

from 2%). Draghi also announced inflation is now expected to be 1.5% to 2.5% in 2012. For the first time, the ECB

provided a forecast of 2013 inflation, which they predict will range between 0.8% and 2.2%. The ECB kept interest

rates unchanged in January.

In the UK, CPI inflation fell to 4.2% y/y in December, down from 4.8% in November. However, it remains

significantly above the BoEs 2% target. The Citi/YouGov poll conducted in December showed that inflation

expectations for the year ahead remained stable at 3.1%. The Monetary Policy Committee (MPC) opted to leave

base rates unchanged at 0.5% and to maintain its Asset Purchase Programme (quantitative easing) at 275 billion

at both the December and January meetings.

In the United States, CPI inflation ran at 3.4% y/y in November. The PCE price index for November was 2.5% y/y.

Inflation expectations in the University of Michigans December survey were unchanged for both the short term

and the long term, at 3.1% and 2.7% respectively. In December the FOMC kept its monetary policy unchanged. In

the accompanying statement, they noted: The Committee continues to expect a moderate pace of economic

growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually

toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets

continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation

will settle, over coming quarters, at levels at or below those consistent with the Committees dual mandate.

In Japan, nationwide core CPI deflation continued in November, with a rate of -0.2% y/y (after -0.1% in October).

For Tokyo, CPI inflation declined by 0.4% in December, after falling by 0.9% in November. The Bank of Japan

also kept monetary policy unchanged in December, noting in the statement: The Bank of Japan will encourage

the uncollateralized overnight call rate to remain at around 0 to 0.1 percent.

The Chinese CPI inflation rate fell slightly in December to 4.1% y/y, down from 4.2% in November (and 5.5% in

October).

The Reserve Bank of Australia Board reduced the cash rate by 25bp in December, down to 4.25%. Governor

Glenn Stevens noted in his statement: CPI inflation on a year-ended basis remained above the target at the latest

reading, due to the effects of weather events last summer, but is now starting to decline as production of key

crops recovers. Moreover, with labour market conditions now softer, the likelihood of a significant acceleration in

labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank's

current judgement is that inflation is likely to be consistent with the 23 per cent target in 2012 and 2013,

abstracting from the impact of the carbon pricing scheme.


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12

Economic Data

Economic data releases in December continued to suggest, overall, that a slower global growth trajectory is in

place. However, while data from the Europe was generally weaker, there were further improvements in some ofthe economic data released in the US.

The US manufacturing PMI increased to 53.9 in December, up from 52.7 in November, according to the Institute

for Supply Management (ISM). A figure above 50 generally indicates economic expansion. Among the

components, production rose to 59.9 and new orders increased from 56.7 to 57.6, while the employment index

improved significantly, from 51.8 to 55.1. The ISMs non-manufacturing index also improved, rising to 52.6 for

December from 52.0 in November. The Conference Board consumer confidence index continued to improve in

December, rising to 64.5 from a revised 55.2 in November. Among the components, there were modest

improvements in new orders and employment. In the US labour market, the unemployment rate improved in

December, falling to 8.5% from 8.7% in November. Average weekly hours increased slightly, to 34.4.

US real GDP growth for the third quarter was revised to a 1.8% y/y rate. The University of Michigan consumer

sentiment index registered 69.9, up from 64.1 in November. The current conditions component was 79.6 while

expectations were at 63.6. Durable goods orders increased by 3.8% in November (they were flat in October).

Within the durable goods data, shipments declined by 0.4% while inventories grew by 0.6%. In the housing

market, the Case-Shiller 20-city house price index fell by 3.4% y/y in October, after declining by a revised 3.5% in

September (y/y). In the new homes sales report, sales grew by 1.6% m/m in November.

The eurozone macroeconomic backdrop continued to deteriorate in December, with economic data releases that

suggested moderation in economic growth across the region. The preliminary estimate for German GDP growth in

2011 showed that the economy grew by 3.0% over the year, down from 3.6% in 2010. The economy is estimated

to have contracted by 0.25% q/q in the fourth quarter. In the PMI data releases, both the manufacturing and

services PMIs remained below the important 50-level in December. The manufacturing PMI registered 46.9 in

December, with contractions in new orders and new export orders for all of the countries covered. The services

PMI increased from 47.5 to 48.8. The composite index recorded 48.3 in December, with output stabilising in

France, rising in Germany and declining sharply in Italy and Spain. According to the accompanying report by

Markit: Not surprisingly, the weakness is centred on Italy and Spain, which are both likely to already be in

recession as domestic austerity measures exacerbate weak export sales. France has also contracted over the

fourth quarter while Germany appears to have stagnated, although an upturn in December raises some hope that

a resilient consumer sector is at least helping prevent the regions largest economy from falling back into

recession.

The eurozone regions unemployment rate remained stable at 10.3%. Spain continued to have the highest

unemployment rate, which rose slightly to 22.9%, followed by Greece (at 18.8% in September). Austria remained

the lowest, where it fell marginally to 4.0%. Eurozone youth unemployment (under 25 years old) increased to

21.7% in November. The youth unemployment rates in Spain and Greece are now 49.6% and 46.6% respectively.

After the December meeting of the Governing Council of the ECB, President Mario Draghi announced significant

downgrades to the ECBs forecasts for GDP growth, suggesting a range of -0.4% to 1.0% for 2012 and 0.3% to

2.0% for 2013. Meanwhile, inflation is now expected to be 1.5% to 2.5% in 2012. For the first time, the ECB

provided a forecast of 2013 inflation, which they project will range between 0.8% and 2.2%. Draghi also

announced some additional extraordinary measures, aimed at addressing the bank funding pressures in Europe.

These include a loosening of the rules on accepted collateral and offering, for the first time, three-year liquidity

tenders to banks with full allotment (with the option of early repayment after one year). This three-year funding will

replace the planned 12-month tenders. Furthermore, the ECB reduced the reserve requirement ratio that lenders


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must hold with their national central banks to 1% (down from 2%). Regarding collateral, the ECB reduced the

rating threshold for certain asset-backed securities (ABS) and will temporarily allow national central banks to

accept additional bank loans that satisfy certain criteria as collateral.

Recent UK economic data releases have shown some improvements but overall remained generally weak. Boththe manufacturing and services purchasing managers indices (PMI) rose in December. The services PMI rose

from 52.1 in November to 54.0 in December, and the construction PMI also increased in December, to 53.2.

However, the manufacturing PMI remained below the important 50 level, with an increase to 49.6 in December

from 47.7 in November. Industrial production contracted in November, by 0.6% month on month (m/m), largely

due to declines in oil and gas extraction and electricity production. The manufacturing component contracted by

0.2% m/m, in line with market expectations.

In the UK housing market, the Nationwide house price index declined by 0.2% m/m in December, after a rise of

0.4% in November. However, the index rose by 1.8% when viewed as three months over the prior months at a

seasonally adjusted annual rate. The Rightmove house price index fell by 2.7% m/m in December. In the labour

market, the unemployment rate for the three months to October remained at 8.3% before rising to 8.4% in

November. This is the highest rate of unemployment since 1995, while the total number (2.68 million) is thehighest since 1994. In contrast, youth unemployment (ages 16-24) has rose to 23.2% in October before falling

back to 23.1% in November.

For Japan, real GDP growth for the third quarter was revised down from the initial estimate of 1.5% q/q to 1.4%.

Q3 capital expenditure was also revised down, from growth of 1.1% q/q to a contraction of 0.4%. Meanwhile, the

Tankan survey of large manufacturing firms was -4 in Q4, down from 2. Machinery orders significantly overshot

consensus expectations for November, expanding by 12.5% y/y and 14.8% m/m. The services PMI rose in

December to 50.4, up from 49.5, although it remains below the reading of 52.3 in October. According to the labour

force survey measure, the unemployment rate remained 4.5% in November. The Economy Watchers survey

improved in December, with the dispersion index rising to 47.0 from 45.0 in November.

Recent Chinese economic data releases have been mixed. Real GDP growth for the fourth quarter was 8.9% y/y,

above consensus expectations but, nevertheless, the weakest rate for two and a half years. The NBS

manufacturing PMI rose back above the important 50-level in December, to 50.3 (from 49.0). This was largely

driven by improvements in new orders, new exports and output (which were the same components that caused

the index to decline in November). In contrast, the HSBC manufacturing PMI declined slightly to 48.7, while the

HSBC services PMI remained stable at 52.5, before improving slightly in December to 49.0. Industrial production

rose by 12.8% y/y in December and retail sales increased by 18.1% y/y.


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Section Three Views and Outlook

14

The global economy has slowed in recent months and the eurozone crisis has had a negative impact on markets

and investor sentiment. However, although economic data releases from the eurozone suggest a recession in that

region and UK economic growth is bordering on stagnant, in recent months we have seen better data releases

from the US. Furthermore, while Chinese economic growth may be decelerating, the absolute growth rate remainsrobust. The exceptionally low level of real interest rates in many developed economies suggests that monetary

conditions still remain supportive. Some of the emerging markets are now commencing looser monetary policy

strategies, as well as possibly looser fiscal policy, as growth and inflation slows. Therefore, although global

economic and financial markets are starting the year against a very challenging backdrop, a global recession is

not our central case, even if Europe continues to struggle.

Economics

We expect headline inflation rates in many developed economies to stabilise and trend modestly lower in

2012. They have already started to fall in many developed markets, including the eurozone and the UK.

Unemployment rates are generally high and unlikely to fall quickly, there is little or no sign of accelerating wagegrowth and in many cases longer-term inflation expectations in financial markets are close to central bank targets.

In addition, inflation in many countries over the past year has been at least partly commodity related, and in the

next few months the impact of this input should decline, both in developed economies and a number of key

emerging economies. We continue to envisage an extended period of exceptionally low short-term rates in

the developed economies.

While there may be some headwinds in this first quarter, moderate growth looks set to persist in the US. The

most recent payrolls data (at the time of writing) beat market expectations with a 200k increase in employment,

supported by increases in aggregate hours and average hourly earnings. This has added to evidence of an

improving labour market, although seasonal influences such as a spike in courier employment were partly

responsible. Housing activity data has also been positive in recent weeks, with housing starts, building permits

and homebuilder sentiment all posting gains. In credit, commercial bank lending to consumers has increasedrecently, marginally reducing immediate concerns about European contagion to the US via the financial channel.

It now seems unlikely that anything can stave off at least a shallow recession in the eurozone, with all the

indicators suggesting that the region may already be in one. While the deterioration in economic growth may

be mild at the moment, the outlook painted by forward-looking indicators from across the region, the likely

implementation of fiscal austerity measures, very tight financial conditions and the lack of a clear resolution to the

eurozone sovereign debt crisis point towards a challenging environment in the near term. The PMI data stayed in

contraction territory in December, with the composite registering 48.3, while unemployment remains 10.3%. With

the most recent data showing a slowdown in private sector credit growth and declining industrial production, there

is a risk that lending to governments is replacing lending to private sector firms, negatively affecting growth.

However, comments from Mario Draghi placing emphasis on monetary analysis indicate potential for further

easing if the situation deteriorates. We have a negative view on the euro due to the structural challenges faced

by the eurozone.

In the UK, industrial production was down 0.6% m/m. Manufacturing is set to subtract from Q4 2011 GDP and the

weakness of the service sector data suggests that a Q4 contraction remains possible. However, UK retail sales

were stronger than expected, increasing 2.2% year-on-year supported by pre-Christmas spending. The current

weakness of real income growth means consumer activity may remain weak through 2012, although moderating

inflation may add some support. We continue to take a negative view on sterling.


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In Asia, Chinese inflation has continued to moderate. Despite the Chinese New Year introducing some volatility

into the data, the trend continues to create scope for monetary policy easing. Indian industrial production picked

up by 9.4% m/m, indicating that the slowdown in growth may be moderating. In Indonesia and Korea both central

banks held rates steady, with the former expecting domestic consumption to remain firm and the latter suggesting

an intention to cut in the future in an effort to stimulate subdued growth.


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Equities

While growth rates and forecasts will be a central focus for investors, the ongoing eurozone sovereign debt crisis

continues to have an impact on market sentiment and volatility. A significant slump in global growth would lead to

a reduction in tax revenues and acceleration in the fiscal crises across the globe. In a world where sovereign debt

is no longer regarded as risk free, this would make it very difficult to value assets effectively. Meanwhile, in an

environment of pretty feeble macro momentum, it is not clear that markets are going to make a lot of progress in

the near future. However, it does seem to be the case that a fair amount of bad news is already priced in and

there is some valuation support for global risk assets.

We have revised upwards our view on equities to a broadly neutral stance. Current economic data and

valuations mean there are opportunities for tactical upside, and we are more positive on Chinese equities given

the market reaction to lending growth and the potential for further easing. However, with evidence of an economic

contraction in the eurozone and uncertain US and European fiscal situations, we feel that downside risks remain.

We remain neutral overall in US equities. Positive economic data in the US means current valuations arebeginning to look attractive. However, as expectations for earnings and growth are revised upwards in the US,

positive surprises in the first half of 2012 may become less frequent.

We have revised down our overall view of Japanese equities from neutral to a more cautious stance. The

primary reasons for this outlook are the ongoing strength of the yen, the growth momentum from the

reconstruction efforts starting to tail off and the weakening global trade cycle.

We retain a slight bias towards emerging market stock markets. Positive economic data in Asia means that

some current valuations are starting to look attractive. We remain positive on emerging Europe. However,

emerging markets are far from uniform and we are being tactical within our country selections.

We remain negative on financials given the ongoing turmoil within the sector. European banks in particularare struggling to recapitalise and many of their balance sheets are substantially exposed to potentially distressed

sovereign debt. There is also uncertainty over regulatory changes.

We have an overall positive view of the healthcare sector and, in particular, we see medical device

manufacturers and biotechnology companies performing well. We remain neutral on industrials, but have a slight

preference for US industrials while underweighting European industrials. Meanwhile, in light of the continued

lacklustre outlook for global growth, we remain neutral on the consumer discretionary, consumer staples and

telecoms sectors.


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17

Bonds

We retain a neutral view on fixed income at the broad allocation level. While the asset class as a wholeappears fully valued, there remain opportunities in both investment grade and high yield credit. Government bonds

(with the exception of largely the eurozone periphery) appear expensive, particularly given elevated inflation rates.

However, slow growth, low interest rates and a high volatility environment may provide some support in 2012.

Within the asset class, we are most constructive on high yield and US investment grade credit.

By suggesting that short-term interest rates would be held near zero through mid-2013, the Fed demonstrated its

still-considerable power over the shape of the yield curve by pulling down two-year interest rates even further. We

remain neutral on US government bonds.

Political news flow on the eurozone crisis remains the major determinant of short-term asset price direction and

continues to affect valuations in peripheral countries. Furthermore, stress in European fixed income markets has

spread beyond the peripheral nations to core nations such as France. As a result, our stance remains broadlynegative on eurozone government bonds.

For Japan, we expect the demands of reconstruction will lead to further government borrowing and loose

monetary policy. Our stance remains broadly neutral on Japanese government bonds.

Within corporate bonds, we are positive on both high yield credit and investment grade credit. Default

activity has been minimal and, we expect, is likely to remain low. In addition, the Fed's (lack of) action will push

fixed income investors into longer maturities, high-quality credit and eventually, high-yield bonds. Investors need

for income coupled with strong corporate balance sheets continues to support our positive case for high yield.


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18

Currencies

We retain our negative view towards both the euro and sterling, particularly against the US dollar, due to the

structural challenges faced by the eurozone. In our view, the euro will be driven lower by increased supply from

the ECB and interest rate differentials between Europe and the US will weigh on both sterling and the euro as the

economies continue to diverge. We retain our positive view of the US dollar.

We prefer the Canadian dollar to the Australian dollar due to better US growth prospects.

We are positive on the Mexican peso, which we believe will be supported through 2012 by economic resilience

in the US, controlled inflation and a strong trade position.

Commodities

We maintain our overall positive view on commodities and remain of the opinion that China will experience asoft landing.

We remain positive on precious metals and believe that commodity exposure through related equities offers

upside potential given the current depressed valuations.


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Section Four Special Features

19

Spotlight on Thailand

Thailand has performed well in recent years, both in local currency and in dollar terms. Similar to Indonesia, the

country is to a large extent a domestic story (which is reflected in the composition of the index and also in the

contributions of various components to GDP growth). Low domestic debt, a young population, rising consumptionand current account surpluses have attracted investors. International businesses located in the country to take

advantage of low taxes and cheap labour, which turned it into a manufacturing hub for the auto and electronics

industry. Unlike Indonesia, however, Thailand has been plagued by political instability which, from time to time,

has led to underperformance.

Figure 1: MSCI Thailand vs MSCI World

Figure 2: MSCI Thailand Sector Performance

X X

MSCI THAILAND vs. MSCI WORLD (LOCAL CURRENCY) MSCI THAILAND vs. MSCI WORLD ($)

0

5

10

15

20

25

30

35

40

45

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

0

5

10

15

20

25

30

35

40

45

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

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The recent floods in Thailand have disrupted the positive economic trend by ravaging the industrial base and

hurting its exports, which has also put pressure on the currency via the short-term switch to a current account

deficit. The impact of the floods was estimated to push 2011 GDP growth down from above 4% to 1.1%.

However, after a relatively short period of underperformance led by industrials and financials, the market saw

some foreign flows and recovered in expectation of reconstruction spending, which would result in a boost togrowth from Q2 onwards.

We believe this is not justified and, while the domestic story in Thailand remains strong over the long term, we

maintain a neutral rating on the equity market for a number of reasons. First, while reconstruction spending will

indeed provide a boost to growth, in the short term the picture is still challenged. Industrial production has fallen

45% compared to the previous year and exports are down 13%. This is likely to continue in the short term as

capacity is rebuilt and factories come back online. Meanwhile, the fiscal picture has deteriorated although the

government still has room to manoeuvre. Inflation has fallen as a result of the floods, but will likely rise as the

central bank has cut rates (partly as a result of government pressure) into an environment which will already

benefit from significant demand pressures in the future.

Further contributing to inflationary pressures next year is a planned 40% rise in the minimum wage in the spring

and potential administered price rises as subsidies are cut and populist measures are taken to support rice and

rubber prices. Generally, most of Thai inflation has come in the form of food price rises, given their high weight in

CPI. Second, the government has transferred the debt remaining from the Asian crisis bail-outs ($34bn) to the

central bank and authorised it to levy the banking sector to pay off that debt. On top of the hit to earnings this

implies, the fact that the levy does not apply to state-owned banks can potentially put commercial banks at a

competitive disadvantage. Given the large weight of banks in the index, this move is negative for the market.

In addition, political risk is rising, with the current government looking for ways to change the constitution in order

to allow the former ousted prime-minister Thaksin Shinawatra to return without facing charges for corruption. If this

does occur (current plans have been briefly put on hold), it would inflame the political situation and possibly bring

about the kind of destabilising red shirt versus yellow shirt protests that occurred in 2010. Fourthly, on a valuationbasis Thailand looks around fair value versus history and overvalued in terms of normalised price-to-earnings (PE)

ratio. Consequently, we believe there are better and also cheaper ways to play Asia consumption stories.

Finally, the question always hanging over Thailand relates to the health of the king. Although the palace is very

secretive about his health and lese-majestelaws prohibit most media from talking about it, we know the king is old

and ill and has suffered a number of health complications as recently as January 2012. Given his popularity and

the unpopularity of his son (the most likely successor), a transition would be destabilising.

Investment Conclusions

While over the long term Thailand still offers a compelling economic story, we remain neutral on the equity market.

The recently deteriorating macroeconomic background, while likely to improve as a result of reconstruction

spending will also probably lead to an increase in inflation given rate cuts and administrative measures. We

believe there are better ways to play domestic stories in Asia (such as Indonesia, for example) and, given that the

market is not cheap, recommend staying out until we get more clarity.


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Figure 3: Thai economic indicators

Figure 4: MSCI Revenue Breakdown


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Figure 5: PE MSCI Thailand


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23

The Year of Living Divergently: Summary of the 2012 Outlook from the BlackRock Investment Institute

What lies ahead in 2012 for financial markets? A time when emerging economies and asset prices finally come

into their own? A descent into an investment nuclear winter? A re-run of 2011, with rudderless, risk-on/ risk-off

market forces side-lining many investors? Or a sunny upland where policymakers pull the right levers and growthabounds?

We believe we are at an inflection point for economics, asset prices and risk appetite. Signs are everywhere: The

euro debt crisis looks to come to a head, China and other emerging markets are easing monetary policy to regain

growth momentum and the US economy is showing tentative signs of improvement. We are likely to see a 2012

investing landscape that is very different from last years environment of assets moving in lockstep. We have

sketched out scenarios of how things could pan out this year, providing a framework for investors to take

advantage of new opportunities and to guard against risks.

Main Takeaways

1) Divergence and Nemesis

We see an increasing divergence between faster-growing emerging markets and the debt-ridden developed world.

The real economies and asset prices will likely decouple, helped by emerging markets having the room and cash

to stimulate growth. In this Divergence scenario, Europe is expected to have a recession followed by a snail-like

recovery in 2013. The US economy and Japan muddle through.

The biggest risk is that the European debt crisis spins out of control and plunges Europe into a deep recession

that spreads to the rest of the world. This Nemesis scenario named after the Greek goddess who punishes the

proud would be quite a negative outcome, especially given that the developed world has little firepower left to

fight another crisis.

2) Probabilities and Signposts

We see Divergence as our main, most probable scenario. The odds for Nemesis are much lower, but still

uncomfortably high. Markets have not factored in either scenario, creating opportunities for smart investors. Other

possible, though less likely, scenarios include a continuation of the current stagnation, a surge in inflation or a

resumption of global growth.

There are big questions on the table this year. Can policymakers pull the eurozone back from the brink? Will

China be able to reaccelerate growth? Will smart monetary and fiscal policies offset the deleterious effects of

global banks shedding their assets? Is the US economys recent strength sustainable? As these questions are

answered, they will act as signposts for investors, and we want to see them clearly before we fully commit

ourselves to taking a particular route.

3) Investment Strategy

In Divergence, we would like equities, investment-grade and high-yield bonds, and metals including gold. We

would expect poor returns for safe-haven government bonds, the US dollar and the euro. Within equities, we

would focus on emerging markets, and the energy and resources sectors. We would also favour most alternative

investments. The usual suspects - cash and US, German and Japanese government bonds - would dominate in


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24

Nemesis. Gold may also work. We would hold US dollars and prefer the yen to the euro. Alternative investments

may offer protection if they can stomach a short-term funding crunch. Within equities, we would like Asia and US

defensive stocks while avoiding Europe.

4) Inflation and a New World

We believe inflation is unlikely in 2012. One caveat: Pretty much everybody backs this idea, and conventional

wisdom is often upended. Global monetary easing or another run-up in commodities prices could conceivably spur

inflation. Market prices reflect the consensus view, so there are risks.

Eventually, we expect a move to sustainable global economic growth at just above historical trends. The question

is how we will get there and how fast. In the meantime, markets will be volatile, magnified by elections in key

countries. Investors will hunt for safe income in a risky world with low interest rates. And cash will be an important

tool to hedge against Nemesis and exploit short-term opportunities.


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Source: Thomson Datastream, BlackRock


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Section Six - Appendix

40

Statistical Appendix


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Market Performance to 17th January 2012

41

INDEX PERFORMANCE TO CLOSE OF BUSINESS 17th January 2012

CATEGORY

Local Dollar Euro Local Dollar Euro Local Dollar

EQUITIES

World 6.7 6.8 8.7 5.5 4.4 11.4 -4.5 -4.5 -0.2

North America 7.5 7.7 9.6 7.0 7.0 14.2 2.1 1.8 6.4

S&P 500 7.4 7.4 9.4 7.4 7.4 14.6 3.2 3.2 7.8

Nasdaq 1 8.4 8.4 10.3 4.2 4.2 11.3 0.1 0.1 4.6

Canada 6.2 8.6 10.5 3.0 3.5 10.5 -6.7 -8.7 -4.6

Japan 1.7 2.9 4.7 -2.1 -2.1 4.6 -19.2 -13.0 -9.1

Jasdaq 0.2 1.6 2.1 -1.7 -1.6 4.3 -11.3 -4.6 -2.0Europe - MSCI 7.7 6.4 8.3 5.8 1.4 8.3 -9.1 -11.9 -8.0

UK 6.3 5.5 7.4 5.9 4.4 11.4 -3.3 -6.8 -2.6

Europe ex UK 8.7 7.2 9.1 5.7 -0.3 6.5 -12.3 -15.1 -11.3

Asia Pacific 3.0 5.9 7.9 2.6 3.0 10.9 -11.1 -12.1 -4.3

Emerging Markets 6.3 8.6 10.5 6.5 6.3 13.5 -8.9 -13.0 -9.1

Asia 6.0 7.4 9.3 5.4 5.2 12.3 -10.5 -12.8 -8.9

Latin America 7.2 11.6 13.6 10.3 10.5 18.0 -6.1 -11.4 -7.4Europe 7.8 9.0 11.0 4.2 2.2 9.1 -13.9 -21.0 -17.5

Large Cap 6.7 8.6 4.3 11.4 -4.8 -0.6

Small Cap 7.7 9.7 5.3 12.4 -6.8 -2.6

Growth 6.7 8.6 4.2 11.3 -4.3 0.0

Value 7.0 8.9 4.7 11.8 -6.0 -1.8

BONDS

US -0.1 -0.1 1.7 1.8 1.8 8.7 10.1 10.1 15.1

Germany 0.5 -1.3 0.5 2.8 -3.7 2.8 11.2 6.4 11.2UK 1.0 0.2 2.0 4.6 3.0 10.0 18.7 14.4 19.5

UK Index Linked 2.2 1.4 3.2 9.5 7.8 15.1 25.3 20.8 26.2

Japan 0.1 1.3 3.1 0.6 0.5 7.3 3.2 11.1 16.1

Investment Grade 0.8 2.6 0.1 6.9 5.4 10.1High Yield 2.5 4.3 4.3 11.3 2.5 7.1

Emerging Market 0.5 2.3 2.3 9.2 7.6 12.4

CURRENCIES

Euro/$ -1.8 -6.3 -4.3

Euro/ -2.5 -5.4 -3.0

$/Yen -1.2 0.1 -7.1

Notes:1

Price Index

Indices

Equities Bonds

World - MSCI World US - JPM U.S. Govt. Bond Index

North America - MSCI North America Germany - JPM Germ. Govt. Bond IndexCanada - Toronto 300 Gilts - Fta Govt. All Stock

UK - FTSE All Share UK Index Linked - Fta Brit. Govt. Index Linked

Europe Ex. UK- MSCI Europe Ex. UK Japan - JPM Japan Govt. Bond Index

Japan - Topix Investment Grade - Salomon Global Broad Index

Asia Pacific - MSCI Asia Ex. Japan High Yield - Merrill Lynch Global Index

Emerging Markets - MSCI Emerging Mkts Emerging market - JP Morgan EMBI

Large/Small cap - S&P Citigroup World

Growth/Value - S&P Citigroup World

Source: Thomson Datastream

Euro

-1M -3M -12M


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Global Sector % Relative Performance, US$

42

-10 - 5 0 5

MATE RIA LSF INANCIA LS

HEA LTHCA REINDUST RIA LS

UT ILIT IESC ONS UMER- CY LICA LSCONSUMER -ST APL ES

T ELEC OMSER VIC ESENER GY

INF ORMATI ONTEC HNOLOGY

-1mo n th

-1 5 - 1 0 -5 0 5 1 0 1 5

MATE RIAL SFINANCIAL SINDUST RIAL S

ENERGYCONSUMER-C YL ICAL S

HEAL THCAR ETE LECOMSER VICE S

UTIL ITIE SC ONS UMER- STA PLE S

I NFORMATIONTECHNOLOGY

-3mon th s

-20 - 10 0 10

FINA NC IALSMAT ERI ALSUT ILIT IES

INDUS TRI ALS

T ELE COMSE RVI CESHE ALT HC ARE

CONSUMER -CY LIC ALSCONSUMER -S TAP LES

INFOR MAT IONTE CHNOLOGYE NE RGY

-1 2mo nt hs

-2 5 - 20 -1 5 - 10 - 5 0 5

FINANC IAL SMA TER IAL SI NDUSTR IAL S

UTIL ITIE SCONSUMER -C YLI CAL S

ENE RGYTELECOMS ERV ICE S

INFORMA TIONT ECHNOL OGYHEAL THCAR E

CONSUME R-S TA PLE S

YTD


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Valuation Framework as at 30th December 2011

43

Note: (1) Source IBES. (2) Al l averages are 1984- where available. (3) Equity Risk Premium is versus US real interest rates. (4) "Est changes" is number up-down/

earnings level in past 3 months.

PEPrice/ NormEPS

Dividendyield, % Price/Cashflow

Price/Bookvalue

Equity RiskPremium

(3)IBES EPS

%

Market 2010 2011 2012 CurrentAvg(2) Curr

Avg(2) Curr

Avg(2) Curr

Avg(2) Curr

Avg(2) 2009 20

World 13.7 12.5 11.3 14.6 21.0 2.7 2.4 8.2 9.8 1.7 2.4 7.4 2.6 10 1

US 15.4 13.3 12.1 16.1 19.9 2.0 2.5 9.6 10.7 2.2 2.7 6.7 3.1 15 1

Japan 14.4 11.2 10.4 23.6 50.8 2.2 1.0 5.1 10.6 0.9 2.3 3.1 -0.6 29 1

Europe 11.0 10.8 10.0 11.7 20.0 3.9 3.3 7.1 8.2 1.4 2.1 5.0 2.8 2

Europe exUK 10.6 11.0 10.1 11.7 20.0 4.2 3.0 6.6 7.7 1.3 2.0 8.9 3.4 -4

Germany 9.4 10.1 9.4 17.4 20.8 4.5 2.2 5.4 5.4 1.3 2.0 5.0 2.8 -7

France 9.5 9.5 9.1 10.4 22.6 4.7 3.2 5.3 6.2 1.1 1.8 8.8 3.8 0

UK 11.7 10.3 9.7 12.5 15.5 3.4 3.8 8.5 9.4 1.7 2.2 8.3 4.1 13

Australia 11.9 11.1 10.1 15.3 17.0 4.9 4.0 10.8 10.7 1.8 1.9 5.8 3.4 10

Asia exJapan 12.4 11.4 10.4 18.0 16.2 2.6 2.3 7.9 10.1 1.7 1.9 5.4 4.0 8 1

LatinAmerica 11.9 11.1 10.3 21.5 15.4 2.9 2.9 7.9 7.7 1.8 1.8 4.7 5.8 7

Emer in


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Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Services Authority. Registered office: 12Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls areusually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Past performance is not a guide to future

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2012 BlackRock, Inc.

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