the ric report - international.ml.com€¦ · 2 the ric report | 11 october 2016 financial markets...

BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 36 to 37. 11669125

The RIC Report

Harvesting inflation

11 October 2016

Inflation to creep higher We believe that improving economic growth and a broadening of the policy mix to include fiscal stimulus will lead inflation to creep higher in the coming months, surpassing market expectations.

Lean toward inflation beneficiaries Investors should tilt their portfolios toward assets that would fare well in a period of higher inflation. Examples include Treasury Inflation Protection Securities (TIPS), emerging market stocks and bonds, and US stocks in the Health Care, Energy, and Materials sectors, as well as Banks.

Opportunities from coming money market reforms The SEC-imposed regulations on money markets take effect on October 14. Most individual investors own government funds and will not be affected. But the changes applied to prime funds and municipal funds may open up opportunities for investors willing to sacrifice some liquidity for better yields. We suggest CDs, VRDOs, prime and muni money funds and senior loans.

It’s not just about Millennials: the rise of the Centennials Gen Y (Millennials, ages 19-35) and Gen Z (Centennials, ages 0-18) are the world’s most important demographics, collectively accounting for 59% of the global population. There are 2 billion Millennials worldwide, and they have overtaken Boomers to become the largest living generation in US history. But we need to prepare for the rise of the 2.4 billion Centennials – born at the turn of the century and set to live to over 100 years. We highlight five entry points for investors wishing to play the theme: 1) Technology, Media & Entertainment; 2) Consumer; 3) Household Formation; 4) Education; and 5) Financials.

Next month’s RIC will be published November 10 We will be altering our normal publishing schedule for the RIC next month because of the US presidential election – the RIC will be published on Thursday, November 10.

Investment Strategy Global

Table of Contents

Financial markets recap 2

Harvesting inflation 3

The coming money market reforms 8

It’s not just about Millennials 11

RIC asset class views 18

Fixed Income, Economics, Commodities,

Currencies: views and risks 19

Global equity markets: views and risks 20

Asset allocation for individual investors 21

US Equity Strategy Sector Views 26

Portfolio of the month 27

Stock lists 28

US economic forecast summary 31

Global economic forecast summary 32

Interest rate forecast summary 32

FX rate forecast summary 32

Research Analysts 55

Research Investment Committee MLPF&S Martin Mauro Fixed Income Strategist MLPF&S +1 646 855 2998 [email protected] Cheryl Rowan Portfolio Strategist MLPF&S +1 646 855 3105 [email protected] Matthew Trapp, CFA Investment Strategist MLPF&S +1 646 855 3084 [email protected] See Team Page for Full List of Contributors

Timestamp: 11 October 2016 05:21AM EDT

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2 The RIC Report | 11 October 2016

Financial markets recap Third quarter 2016 review • Markets shifted away from safety in the third quarter. The Hang Seng index jumped

12.9% in the third quarter, followed by the tech-laden NASDAQ at 10.0%. EM and Japanese stocks also had strong performance, with both up at least 9%. The laggards were the high quality Dow Jones Industrials and the S&P 500, up less than 4%.

• This trend continued in size-segments and sectors. Small caps continued to outperform, gaining 9% in the quarter compared to 4.5% for mid caps and 4% for large caps. Technology was the best performed by far, gaining 12.9%. In contrast, the yield-related sectors of Staples, Telecom, and Utilities were all in negative territory.

• Safety underperformed in fixed income as well. Treasuries were flat to down in the quarter from the 2-year to the 30-year. Meanwhile, the riskier parts of fixed income had the best performance, led by high yield and EM bonds.

• Commodities were muted, with gold and oil close to flat in the third quarter.

Table 1: Equity indexes – total return (%) As of 30 September 2016 Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 Equity Indices (%, US dollar terms) S&P 500 0.0 3.9 15.4 7.8 11.2 16.4 7.2 Dow Jones Industrial Avg. -0.4 2.8 15.5 7.2 9.2 13.8 7.4 NASDAQ Comp 2.0 10.0 16.4 7.1 13.5 18.5 10.1 MSCI All Country World 0.7 5.4 12.6 7.1 5.7 11.2 4.9 FTSE 100 0.5 4.7 1.5 0.5 -1.5 6.1 1.5 DJ Euro Stoxx 50 0.0 6.5 0.1 -2.5 -2.2 6.0 -0.7 MSCI EAFE 1.3 6.5 7.1 2.2 0.9 7.9 2.3 TOPIX 2.2 9.0 13.1 3.8 4.5 8.0 1.5 Hang Seng 1.8 12.9 16.0 10.0 4.5 9.8 6.5 MSCI Emerging Markets 1.3 9.2 17.2 16.4 -0.2 3.4 4.3 Size & Style (%, US dollar terms) Russell 1000 0.1 4.0 14.9 7.9 10.8 16.4 7.4 Russell 1000 Growth 0.4 4.6 13.8 6.0 11.8 16.6 8.8 Russell 1000 Value -0.2 3.5 16.2 10.0 9.7 16.2 5.9 Russell Midcap 0.2 4.5 14.2 10.3 9.7 16.7 8.3 Russell Midcap Growth 0.0 4.6 11.2 6.8 8.9 15.8 8.5 Russell Midcap Value 0.4 4.4 17.3 13.7 10.5 17.4 7.9 Russell 2000 1.1 9.0 15.5 11.5 6.7 15.8 7.1 Russell 2000 Growth 1.4 9.2 12.1 7.5 6.6 16.1 8.3 Russell 2000 Value 0.8 8.9 18.8 15.5 6.8 15.4 5.8 S&P 500 Sectors (%, US dollar terms) Consumer Discretionary -0.3 2.9 9.6 3.6 11.5 20.1 10.5 Consumer Staples -1.5 -2.6 15.8 7.6 13.1 15.4 10.7 Energy 3.1 2.3 19.0 18.7 -2.2 6.0 4.7 Financials -2.7 4.6 7.4 1.4 8.3 17.4 -1.6 Health Care -0.5 0.9 10.7 1.4 14.4 20.0 10.2 Industrials -0.1 4.1 19.7 10.9 10.4 17.5 7.7 Information Technology 2.4 12.9 22.8 12.5 17.5 18.1 10.5 Materials -1.3 3.7 22.3 11.4 6.5 12.7 6.7 Telecom Services -0.9 -5.6 26.8 17.9 9.8 12.3 6.8 Utilities 0.4 -5.9 17.4 16.1 13.6 12.1 7.9 Notes: * Performance is gross of foreign dividend withholding taxes, 2 3yr, 5yr, and 10yr returns are annualized Source: BofA Merrill Lynch Global Research, S&P, MSCI, Bloomberg

Table 2: Bond/currency/commodity/hedge fund indexes–total return (%) As of 30 September 2016 Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) 2-Year Treasury 0.1 -0.1 0.8 1.2 0.8 0.6 2.3 5-Year Treasury 0.3 -0.3 2.6 4.0 2.5 1.9 4.6 10-Year Treasury -0.2 -0.8 5.6 7.1 5.3 3.1 5.7 30-Year Treasury -2.0 0.0 14.5 16.9 12.2 5.4 8.1 US Broad Market Index -0.1 0.4 5.3 5.9 4.1 3.2 4.8 TIPS 0.5 1.0 7.1 7.7 2.7 2.0 4.6 Municipals* -0.5 -0.3 5.9 4.1 5.9 4.7 4.9 US Corporate Bonds -0.3 1.4 8.5 9.1 5.6 5.2 5.9 US High Yield Bonds 0.6 5.5 12.8 15.3 5.3 8.2 7.6 Emerging Mkt Corp Bonds 0.3 3.1 12.2 11.5 5.2 6.4 6.5 Emerging Mkt Sov Bonds 0.5 3.8 14.3 13.7 6.4 6.7 7.1 Preferreds -1.0 0.7 9.9 5.8 10.0 8.1 3.4 Foreign exchange** (%, in local currencies) US dollar -0.9 -0.2 -4.4 -6.2 5.4 4.5 0.6 British pound -1.6 -4.0 -15.1 -14.5 -2.5 -0.6 -2.8 Euro 0.6 1.8 2.8 4.0 -2.1 -0.7 -0.4 Yen 1.9 1.2 18.9 18.6 2.0 -3.7 2.2 Commodities** (%, US dollar terms) CRB Index 3.4 -3.2 -3.8 5.8 -13.3 -9.0 -4.8 Gold 0.7 0.1 18.2 24.1 -0.4 -4.1 8.2 WTI Crude Oil 7.9 -0.2 7.0 30.2 -22.2 -9.4 -2.6 Brent Crude Oil 4.3 -1.2 1.4 31.6 -23.2 -13.7 -2.4 Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ 0.5 1.5 -1.6 0.0 2.9 3.6 4.2 Hedge Fund - HFRI Fund of Funds¹ 0.5 1.5 -1.8 -0.7 2.5 2.5 1.7 Notes: *Not tax adjusted. **BoE calculated effective FX indices. ¹Data lagged by one month; 2 3yr, 5yr,

and 10yr returns are annualized; CS AUM-weighted, HFRI equal-weighted; †AI data not comparable to other asset classes because of reporting delays, lack of standardized reporting, and survivorship and

self-selection biases. Crude oil prices are spot USD. Source: S&P, MSCI, Bloomberg, FactSet, BofAML

Bond Indices (US Treasury Current 10yr, Current 2yr, Inflation-Linked; Muni Master, US Corp Master, US HY Master II, EM Corp Plus Index; EM External Debt Sovereign Index; US Preferred Stock Index).

The RIC Report | 11 October 2016 3

Harvesting inflation Martin Mauro Fixed Income Strategist MLPF&S [email protected]

Cheryl Rowan Portfolio Strategist MLPF&S [email protected]

Matthew Trapp, CFA Investment Strategist MLPF&S [email protected]

Global policymakers have been focused on combatting deflation with unprecedented monetary stimulus and liquidity for the past several years. In turn “deflationary” assets such as long-term Treasuries have outperformed. But we are seeing signs that deflationary forces are abating and the global economic outlook is improving. Our economists believe that global economic growth will rise to 3.5% in 2017 from 3.0% in 2016.

We believe that improving economic growth and a broadening of the policy mix to include fiscal stimulus will lead inflation to creep higher in the coming months, surpassing market expectations. That doesn’t change our long-term view that inflation will remain well below its pace of prior decades, but it does suggest that investors should tilt their portfolios toward assets that would fare well in a period of higher inflation. Examples include Treasury Inflation Protection Securities (TIPS), emerging market stocks and bonds, and US stocks in the Health Care, Energy, Materials sectors, as well as Banks.

Policy shift Investment Strategist Michael Hartnett and Global Economist Ethan Harris have both argued that macroeconomic policy is shifting from monetary to fiscal stimulus in a number of countries. Harris says that after the excessive doses of monetary stimulus of the past few years, fiscal policy may now be a more effective tool for stirring economic growth. Hartnett points out that fiscal stimulus is already under way in Europe, Japan and Canada. In the US, both presidential candidates propose infrastructure spending programs. To the extent that fiscal policy is now more successful than monetary policy in stirring economic growth and demand for resources, the policy shift should help to nudge inflation higher.

The path of monetary policies differs among major central banks, but in our view the common thread is that the peak in liquidity injections has passed and rate cuts have ended.

• The Fed will probably raise rates before the end of the year. US Economist Michelle Meyer expects a 25 basis point rate increase in December and only two hikes in 2017 and two in 2018. An aggressive fiscal spending program would likely speed up the pace of Fed rate hikes.

• The European Central Bank (ECB) did not commit to extending quantitative easing at its September 8 meeting. And the markets were rattled after a press report suggested that ECB is considering tapering its asset purchases. But Giles Moec, European economist, believes the ECB will extend the present pace of purchases for six months at its December meeting.

• The Bank of Japan (BoJ) has expanded from quantitative easing to targeting both short- and long-term rates. The BoJ also committed to having inflation exceed its price stability target of 2%.




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Chart 1: Personal consumption expenditures deflator (% change vs year ago) Inflation below target

Source: Commerce Department, BofA Merrill Lynch Global Research

Inflation may be heading higher Inflation has been inching higher, although it is still appreciably below the Fed’s 2% target. The personal consumption expenditures deflator (PCE), the Fed’s preferred price measure, is running at about a 1.0% year-over-year pace. The PCE excluding food and energy (core inflation), which many Fed officials view as more indicative of future overall inflation, is running at 1.4%.

Much of the difference between total and core inflation stems from the decline in oil prices. If we are right that oil prices will rise through the end of 2017, then total inflation should rise, and the gap between the total and core measures should narrow. The increase in wage pressures that we expect and the stability in the dollar’s exchange rate following its long rise should be additional upward influences on inflation. Michelle Meyer expects the PCE price index to rise by 1.9% from Q3 ’16-Q3 ’17, up from the present pace of 1.1%.

Our economists believe that the Fed will allow inflation to slightly exceed its 2% target for an extended period. We show our forecasts for both the PCE deflator and the Consumer Price Index (CPI) in the table below. CPI growth typically runs faster than the growth in the PCE deflator.

Table 3: Long-term inflation forecasts

2015 2016f 2017f 2018f 2019f 2020-25f CPI, Consumer Prices 0.1 1.3 2.3 2.6 2.8 2.3 CPI ex Food & Energy 1.8 2.3 2.4 2.6 2.8 2.3 PCE Chain Prices 0.3 1.1 1.8 2.1 2.3 2.0 Core PCE Chain Prices 1.4 1.7 1.7 2.1 2.3 2.0 Source: BofA Merrill Lynch Global Research , f = forecast

Bond market choices: TIPS and emerging markets Investors seem to doubt the ability of central banks to push inflation higher. One measure of the market’s expectation for inflation is the breakeven inflation rate on 10-year TIPS. The breakeven inflation rate indicates the inflation rate needed for TIPS to provide a better return than nominal (fixed-rate) Treasuries. That metric declined on balance from the end of 2012 through the summer, but recently has begun to poke higher, suggesting that the market is beginning to sense a turnaround. Still, the present rate is 1.64%, which is below both the Fed’s 2% target and our forecast.

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Chart 2: 10-year TIPS breakeven inflation rate (%) Are the markets underestimating inflation?

Source: Bloomberg

A sustained period when the Fed contains its rate hikes in order to allow inflation to remain above target, as our economists expect, would be favorable for TIPS. For TIPS held to maturity, the annual return will approximate the stated yield plus average annual inflation. Returns in the meantime will fluctuate with both the pace of inflation and the course of real yields. Our forecasts for inflation and interest rates imply that real rates will remain about flat. Because of their tax treatment, we recommend that investors hold TIPS either in tax preferenced accounts or through funds.

Emerging market (EM) countries would likely benefit from the rise in prices for oil and other commodities that we expect. Typically, returns on EM bonds and stocks are positively correlated, so we favor both sectors. Among bonds, we lean toward local currency sovereigns because of their yield advantage. Keep in mind that these bonds have greater currency risk for US investors: a weakening in EM currencies versus the dollar would subtract from returns.

Inflation outlook beneficial for equities Our outlook for gradually higher inflation should benefit equities. Historically, moderate levels of inflation between have been the best environment for equities.

EM equities should outperform in an environment where GDP growth is improving and commodities prices are moving higher. We looked at the difference in GDP growth between EM and developed markets (DM) and found that when the difference was rising, EM equities outperformed DM equities, and vice versa (Chart 3). Our economists are forecasting EM GDP growth to increase to 4.8% in 2017 from 4.0% in 2016, while our DM GDP estimate is set to improve by 0.1% to 1.6%.

The relationship between EM and commodities has been strong historically. The relative performance of EM vs. DM and the CRB Commodity Index has a correlation of 0.88% since 1997 (Chart 4). Our commodity strategists expect oil to move higher next year, and they recently raised their price targets for a number of base metals. We believe higher commodity prices will help lead to EM outperformance next year.

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Chart 3: EM/DM GDP growth difference and relative performance EM equities outperform when EM GDP growth is rising faster than DM GDP growth

Source: BofA Merrill Lynch Global Research, Haver Analytics, MSCI

Chart 4: EM relative performance and CRB Commodity Index Relative performance of EM equities is closely tied to commodity prices

Source: BofA Merrill Lynch Global Research, Bloomberg

US equities perform best when inflation is between 1-3% US Equity Strategist Savita Subramanian has found that the when the consumer price index (CPI) averaged between 1% and 3%, which is what we expect for the next few years, the S&P 500 had average 12-month returns of around 12% and the probability of negative returns was low (Table 4). However, when inflation moved to extreme levels, either above 5% or below 1%, S&P 500 returns were significantly below average and the probability of a loss was high.

Table 4: Inflation (YoY change in CPI) vs. S&P 500 YoY price returns, 1928-6/2016

Inflation Range (Quintiles) S&P 500 Average Return S&P 500 Median Return Probability of Negative Returns -11% to 1% 3.6% 5.60% 45% 1% to 2% 12.10% 13.50% 23% 2% to 3% 12.00% 11.80% 17% 3% to 5% 8.40% 8.20% 26% 5% to 20% 1.60% -1.00% 51% Note: Inflation ranges based on segmenting YoY CPI changes into quintiles Source: BofA Merrill Lynch US Equity & US Quant Strategy, BLS, S&P

Some sectors are better positioned to benefit from higher inflation than others. Rising inflation can provide improved pricing power for some industries, which can translate into higher revenues. That is true for many Health Care-related companies that can usually pass along higher costs to the consumer. Energy and Materials stocks that sell commodities to others are direct beneficiaries of higher inflation. Michael Hartnett writes that banks may be indirect beneficiaries if a faster pace of inflation causes the Fed to accelerate increases in short-term interest rates. Higher inflation can be detrimental to many consumer-oriented industries, as companies there are less likely to be able to pass along higher costs to already price-conscious shoppers.

Screen for stocks with positive correlation to inflation US Strategist Savita Subramanian has created a screen of S&P 500 stocks whose historical relative performance is positively correlated with inflation. S&P 500 stocks with an inflation beta greater than one and are rated Buy or Neutral by BofA Merrill Lynch Global Research are included in the screen.

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Table 5: Pro-Inflation Screen of the S&P 500

Ticker Company Sector Inflation Beta (Slope) Price Market

Cap Rating GGP General Growth Properties, Inc. Financials 10.2 25.97 22,977 BUY PXD Pioneer Natural Resources Company Energy 2.8 186.39 31,613 BUY AMAT Applied Materials, Inc. Information Technology 2.8 29.75 32,157 BUY HP Helmerich & Payne, Inc. Energy 2.6 68.58 7,411 BUY HAL Halliburton Company Energy 2.6 46.26 39,835 BUY NBL Noble Energy, Inc. Energy 2.6 35.34 15,185 NEUTRAL RRC Range Resources Corporation Energy 2.3 39.26 9,703 BUY SWN Southwestern Energy Company Energy 2.3 13.82 6,820 NEUTRAL RIG Transocean Ltd. Energy 2.2 10.12 3,698 BUY HES Hess Corporation Energy 2.1 53.07 16,806 BUY SLB Schlumberger NV Energy 2.1 81.31 113,077 NEUTRAL NFX Newfield Exploration Company Energy 2.0 43.16 8,572 BUY CMI Cummins Inc. Industrials 2.0 128.44 21,660 NEUTRAL DE Deere & Company Industrials 2.0 86.30 27,135 NEUTRAL AAPL Apple Inc. Information Technology 1.9 114.06 614,606 BUY TSO Tesoro Corporation Energy 1.8 79.98 9,501 BUY MAC Macerich Company Financials 1.8 76.11 10,931 NEUTRAL ORCL Oracle Corporation Information Technology 1.8 38.71 158,930 BUY ADI Analog Devices, Inc. Information Technology 1.7 64.42 19,807 NEUTRAL FLS Flowserve Corporation Industrials 1.7 46.75 6,095 NEUTRAL EOG EOG Resources, Inc. Energy 1.7 96.44 53,104 NEUTRAL NEM Newmont Mining Corporation Materials 1.7 33.97 18,024 NEUTRAL NUE Nucor Corporation Materials 1.7 47.39 15,087 NEUTRAL COG Cabot Oil & Gas Corporation Energy 1.7 24.77 11,522 BUY LRCX Lam Research Corporation Information Technology 1.7 100.35 16,183 BUY APH Amphenol Corporation Class A Information Technology 1.6 65.37 20,181 NEUTRAL URBN Urban Outfitters, Inc. Consumer Discretionary 1.6 36.61 4,292 BUY KSU Kansas City Southern Industrials 1.6 92.02 9,937 BUY SWKS Skyworks Solutions, Inc. Information Technology 1.5 79.37 14,882 BUY DVN Devon Energy Corporation Energy 1.5 42.81 22,415 BUY CAT Caterpillar Inc. Industrials 1.5 88.47 51,687 NEUTRAL ADBE Adobe Systems Incorporated Information Technology 1.4 108.64 54,019 BUY COP ConocoPhillips Energy 1.3 44.22 54,767 BUY BWA BorgWarner Inc. Consumer Discretionary 1.3 35.69 7,647 NEUTRAL APC Anadarko Petroleum Corporation Energy 1.3 63.46 35,133 BUY THC Tenet Healthcare Corporation Health Care 1.3 20.70 2,060 BUY AES AES Corporation Utilities 1.3 11.59 7,639 NEUTRAL OXY Occidental Petroleum Corporation Energy 1.2 73.54 56,179 BUY AA Alcoa Inc. Materials 1.2 31.37 13,754 BUY PKI PerkinElmer, Inc. Health Care 1.2 55.70 6,094 NEUTRAL MRO Marathon Oil Corporation Energy 1.1 15.56 13,183 BUY DOV Dover Corporation Industrials 1.1 72.24 11,213 BUY VLO Valero Energy Corporation Energy 1.1 54.27 25,037 NEUTRAL PH Parker-Hannifin Corporation Industrials 1.1 124.66 16,676 NEUTRAL AIV Apartment Investment and Mgmtt Co Cl A Financials 1.0 41.96 6,572 BUY OI Owens-Illinois, Inc. Materials 1.0 17.70 2,869 BUY INTC Intel Corporation Information Technology 1.0 38.10 180,251 BUY Source: BofA Merrill Lynch Global Research


The coming money market reforms Martin Mauro Fixed Income Strategist MLPF&S [email protected]

Mark Cabana, CFA Rates Strategist MLPF&S [email protected]

The new money market regulations imposed by the Securities and Exchange Commission take effect of October 14. The funds that most individual investors own will not be affected, but the market reaction to the coming changes might offer some opportunities for investors.

The coming changes The regulations do not directly affect government funds, which account for the large majority of holdings among individual investors. Government funds have at least 99.5% of assets in US Treasuries, agency securities, or repurchase agreements that are collateralized by government-related securities.

The changes apply to prime funds (funds that hold commercial paper and corporate debt) and municipal funds. For those funds, if weekly liquid assets fall below 30% of total assets, the fund’s board of directors could impose a halt (“gate”) on redemptions. If weekly assets fall below 10% of total assets, prime or municipal funds must impose a 1% liquidity fee, unless the fund’s board determines that such a fee is not in the fund’s best interest.

Also, the Net Asset Value (NAV) of prime funds and municipal funds that are targeted to institutional investors will be allowed to float. The NAVs of retail-targeted funds will remain fixed at $1 per share.

Chart 5: 3-month LIBOR (%)

Source: Bloomberg, BofA Merrill Lynch Global Research

Chart 6: Money fund assets, $ billions Big shift from prime funds to government funds

Source: Investment Company Institute, BofA Merrill Lynch Global Research

Chart 7: Yields money market funds Rising yields on prime funds

Source: iMoneyNet, BofA Merrill Lynch Global Research

Government funds will not be required to impose restrictions or fees on redemptions, although the fund board could elect to do so after giving shareholders 60 days advance notice.

The market has reacted The market has been responding to the coming reforms since the middle of the summer. Three-month LIBOR rates have risen by 20 basis points since the middle of June, reflecting the higher funding costs for banks (Chart 5).

Also, there has been a large shift from prime funds to government funds, reflecting concerns about the potential for NAVs to decline on institutional funds, and the potential liquidity restrictions for all funds (Chart 6). Those changes in flows have pushed up yields on prime funds and limited the rise in yields on government funds (Chart 7).

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Consequences for investors The yields on money funds that hold government securities have not changed much in the face of the impending changes (Chart 7). Over time, these yields should move roughly in line with Federal Reserve policy. But the near-term movements might be influenced by Treasury issuance. Yields could actually decline if the Treasury does not increase issuance of short-term bills. But the Treasury might be forced to reduce issuance as it runs into debt limit constraints early next year.

Investment choices There are no perfect substitutes for the liquidity of money market funds, but we can suggest alternatives for investors who are willing to sacrifice some liquidity for better yields.

Bank CDs Bank certificates of deposits (CDs) involve some sacrifice of liquidity compared to money market funds since they have fixed maturities. Three-month CDs yield 0.5%-0.6%. The interest income on CDs is subject to both federal and state taxation, while the interest income on Treasury securities is not taxed by states. For amounts up to $250,000 per account, CDs have the safety of FDIC insurance.

VRDOs Investors could also consider municipal Variable Rate Demand Obligations (VRDOs), whose yields are exempt from federal taxation. Rates on these securities have risen from near zero to above 80 basis points in recent months (Chart 8). That rise stems from the surge in outflows from municipal money market funds in anticipation of the new regulations (Chart 9,). These funds are the largest holders of VRDOs.

VRDOs are long-term bonds whose rates are usually reset daily or weekly. The bondholder has the ability to tender the bonds at par, usually with a five-day settlement period. The bondholders’ liquidity is contractually supported by a liquidity provider, such as a bank or the issuer of the bond. That liquidity comes in the form of a letter of credit or a standby bond purchase agreement. In a transaction supported by a letter of credit, an investor is assured of a final payment prior to the expiration or termination of the support facility, whereas a standby bond purchase agreement can be terminated prior to such final payment under certain conditions that are spelled out in the agreement and the Official Statement. We suggest that investors emphasize VRDOs whose liquidity is supported by a strong bank.

Prime or municipal money market funds Yields on prime and municipal money market funds have risen in anticipation of the coming regulatory changes and as LIBOR has increased (Charts 8 and 9). Investors who are in government funds and are willing to accept the risk of accepting gates (limitations or fees for withdrawals) are presently able to get appreciably better yields in retail prime funds, and better tax-exempt yields in municipal funds. Investors who make this switch should continue to monitor the spreads with government yields. Although those spreads may widen further in the coming weeks, they could narrow again at some point.


Chart 8: Yields on VRDOs (SIFMA municipal swap index yield) (%)

Source: Bloomberg

Chart 9: Municipal; money market funds

Source: Investment Company Institute

Senior loans Senior loans are by no means a close substitute for money market funds, since they involve considerably greater credit risk and less liquidity. But investors who are willing to accept those risks can take advantage of the rise in LIBOR, shown in Chart 5, to buy funds that purchase senior loans. The average yield is about 4.75%,

Loans are usually issued by below-investment-grade companies. The coupon rates on loans are typically a markup over the higher of the actual LIBOR, or a LIBOR “floor” rate, which is usually either 75 or 100 basis points. Three-month LIBOR is now 0.86%. That means that the coupon rates on many loans have begun to adjust higher, and more will adjust higher if the Fed raises rates by 25 basis points in December, as we expect.

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It’s not just about Millennials Sarbjit Nahal >> Equity Strategist MLI (UK) [email protected]

The rise of the Centennials Gen Y (Millennials, ages 19-35) and Gen Z (Centennials, ages 0-18) are the world’s most important demographics, collectively accounting for 59% of the global population. There are 2 billion Millennials worldwide, and they have overtaken Boomers to become the largest living generation in US history. But we need to prepare for the rise of the 2.4 billion Centennials – born at the turn of the century and set to live to over 100 years. They are embracing diversity, sustainability, globalization, disruptive technology, “peak stuff,” new business models, and entrepreneurialism like no generation before them – and they are economically optimistic to boot.

The world’s 2.4 billion Centennials – born between 1998 and 2016 and aged <1year to 18 years – live in the world’s largest and most dynamic markets. In terms of the size of populations, the most Gen Z-ers live in India, followed by China, Nigeria, the US, and Brazil. The largest Gen Z populations are also found in some of the most economically dynamic markets in terms of the maturity of the overall consumer market – such as the US, China, Indonesia, and India (source: UN WPF, WEF).

Exhibit 1: Global population by generation

Source: UN

Exhibit 2: Where Gen Z and Millennials live around the world Size of bubble denotes combined population of the cohorts (mn)

Source: BofA Merrill Lynch Global Research base d on UN data

This article is an excerpt from the primer from Sarbjit Nahal, Thematic Investing: New Kids On The Block - Millennials & Centennials Primer 30 August 2016.

Gen Y and Z to account for 59% of the global workforce by 2020E In 2015, Millennials surpassed Gen X as the largest generation in the US workforce, and the oldest members of Gen Z will soon be entering the world of work. By 2020E, Gen Y and Z will together make up 59% of a global workforce that will have undergone a fundamental shift, with Boomers falling to 6% of the total vs. 35% Millennials, 35% Gen X, and 24% Gen Z (source: Manpower 2016). The rise of Gen Y and Z will be key to successfully tackling the twin challenges of the age wave and technology-enabled creative disruption, in our view.

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05101520253035404550556065707580859095100

mn

Age Gen Z Millennials

Gen Z ~2.4bn (32%) Millennials

~2bn (27%) Gen X

~1.5bn (20%)

Baby Boomers ~1.1bn (15%)

Silent Generation 0.3bn (5%)

eatest Generation ~24mn (0.3%)


http://research1.ml.com/C?q=9jrCqGK9!sTA72J5C7G7OA




Technology is not disruptive for Gen Y and Z, it’s the new normal Technology is integral to the lives of younger generations, with almost all Millennials online in developed markets, and 92% of US teens going online daily, sending an average of 30 texts/instant messages (IMs) a day (source: Pew Research Center). Millennial smartphone penetration has reached 90% in Developed Markets (DM), and the average age for a US child to get a smartphone is now 10.3 years (source: Pew Research Center, BofA). Social networks are an integral part of their lives, with 90% of Millennials using one or more and 71% of 13-17 year olds using two or more. WhatsApp and Facebook Messenger both hit 1billion users, and 50 billion IMs and 6 billion emojis are sent every day (source: Pew Research, Deloitte, Ofcom, eMarketer). Tech truly lies at the heart of Gen Y and Z’s daily habits including news, media, entertainment, hobbies, and dating.

A world without boundaries and borders

“Citizens of the world” more than nationality, religion or ethnicity (source: WEF) Millennials and Gen Z have come of age in a world characterized by growing tolerance and see equality as non-negotiable, in our view. Gen Z is the most racially diverse generation in US history (only 49-52% are non-Hispanic white). The US under-5-year-old cohort has become “majority minority” for the first time in history, and by 2065E minorities will account for 54% of the US population (source: US Census Bureau, Pew Research Center). Gen Y, and particularly Gen Z, also have the most open and progressive views on women’s and LGBTQ rights.

Millennials see climate change, conflict and war, and poverty as the three biggest issues affecting the world today – with 70% upbeat and seeing the world as full of opportunity (source: WEF 2016). It is also clear that there is a strong desire for change, with 60% of Gen Z-ers wanting to change the world (source: Upfront Analytics). A majority of Millennials are driven by the belief that business should have impacts beyond profits, with 87% believing that success should be measured in terms of more than just financial performance (source: Deloitte). These beliefs extend into the world of investment, with 93% of US Millennials considering “impact investing” to be an important factor when making investment decisions (source: US Trust).

Despite many stereotypes, younger generations continue to express positive views of business. According to a 2016 survey by Deloitte – which polled 7,700 Millennials across 29 countries – three-quarters (73%) maintain that businesses have a positive impact upon wider society (unchanged since 2013). The survey showed that, despite a downturn in certain local and regional economies, Millennials remain upbeat about businesses’ potential to do good (source: Deloitte 2016).

Corporates have woken up to Millennials and need to wake up to Gen Z Gen Y and Z want very different things from brands than previous generations, and also from one another. For example, Gen Y is more tolerant of online advertising than Gen Z, Gen Z prefers products over experiences, which are favored by Gen Y, and Gen Z is 2x more likely to respond to advertising that features “real people” (source: Deep Focus). Companies need to start considering how they connect with Gen Z. Potential strategies include making content “snackable,” visualization, making things sharable, embedding diversity, speeding up communications, and maintaining a human element (source: Havas People).

Peak youth: worrying 21st century demographic reality For the first time in history, people aged 65 years and older will outnumber children under 5 years of age before 2020E. Total fertility rates have dropped to near or below replacement rates in all regions except Africa. The downside risk is that both generations may end up poorer than their parents and grandparents, with the demographics having profound long-term effects on the viability of economic growth, housing, pensions, health and long-term care, labor markets, education and public finances.


Exhibit 3: Generations at a glance

Source: iKinetic, McCrindle, Pew Research, Bruce Feirstein – Vanity Fair, various sources, BofA Merrill Lynch Global Research

US$21tn income today: five entry points for investors We estimate the total income of Millennials and Centennials at US$21 trillion in 2015 – 35% of global gross income – based on Euromonitor data of average gross income. The US, China, India, Japan, and Germany are the largest markets. We forecast that this number could grow to US$62 trillion by 2030E, US$32 trillion for Millennials and US$30 trillion for Gen Z. We highlight five entry points for investors wishing to play the theme: 1) Technology, Media & Entertainment; 2) Consumer; 3) Household Formation; 4) Education; and 5) Financials.

Technology, media & entertainment Technology remains integral to the lives of Millennials, with close to 100% internet penetration in DM and 50-90% in Emerging Markets (EM) (source: Pew Research Center). Among Millennials, 74% say technology makes their life easier, and they are 2.5x more likely to adopt tech early compared with other generations (source: Barkley). Tech is even more prevalent among Gen Z, who were born with a smartphone in their hands, social media as a way of life, and do not remember an unconnected world.


Millennial and Gen Z smartphone ownership rates are 85-90%, and the cohorts are a key driver for the US$348 billion smartphone market (source: Pew Research, BofAMLe). Among the things Millennials like most about their smartphones are finding their location (73%), playing games (63%), shopping online (60%), sharing their life with friends and family (55%), and news (50%) (source: Coupofy). Among younger Millennials, 39% interact with their device more than anything or anyone else (source: Bank of America Consumer Mobility Report).

• Social media is central to their daily lives with 90% of Millennials in major DMs and EMs using at least one and 71% of 13-17 year old teens using two or more. While Snapchat is the #1 platform for Gen Z and younger Millennials, Facebook is the ubiquitous social network leader, with 1.5billion monthly active users; the median Millennial user has 250 friends (source: Pew Research, company).

• Apps, including messaging apps, are at the intersection of smartphone and social media use for Millennials and Gen Z by integrating key features into a seamless, intuitive and accessible “omnichannel” experience (ecommerce, payments, ride-hailing, etc). The top 5 mobile apps for Millennials (in terms of time spent on them) are: Facebook, Pandora, YouTube, Instagram and Spotify (source: comScore).

• Music is the #1 spare time activity for 16-34 year olds, a key driver for the US$15 billion global music market.

• Cord cutting by Millennials and Gen Z is increasing from paid TV subscriptions and they are migrating toward over-the-top (OTT)/video-on-demand (VOD) services that can be streamed across multiple devices. Over 90% of US Millennials and Gen Z watch digital video (YouTube is the #1 platform), around 50% watch VOD, and 31% pay for online video globally (source: Nielsen).

• Video games account for some 10-17% of total Millennial and Gen Z leisure time, a key driver of the US$106 billion video games market (source: Nielsen, IDC).

Consumer: rise of the new consumerism Millennials and Gen Z at the forefront of a new consumerism It is centred on thrift, sustainability, technology, authenticity, community, lightweight living and experiences (source: Euromonitor). Millennials and Gen Z are driving the idea of “peak stuff” with over 75% of Millennials preferring to spend money on a desirable experience rather than a material possession (source: Eventbrite).

Apple, Nike, Samsung, Sony and Microsoft lead the top 100 Millennial brands This is according to a November 2015 study by Moonsylvania. Surveys of Gen Z show similar results with Apple, Nike, Samsung and Sony also appearing close to the top of the list. Other brands like Adidas, lulelemon, MAC, and Xbox also feature strongly among Gen Z (source: Zeno‘s The Human Project 2016). What these companies have in common that attracts these cohorts is their fun and entertaining content and products that their customers believe make them feel and look good.

Price has the greatest influence on Millennials' consumer purchasing decisions above all other factors, including availability, brand, convenience, quality, store, sustainability and technology. Millennials are demanding value for money because they have become extremely price sensitive due to financial constraints. Some 31% of US Millennials’ consumer dollars are spent on value deals.

Omnichannel remains key, with 82% of Millennials preferring to shop at bricks and mortar, and 68% looking for an integrated, seamless experience regardless of the channel. This means being able to transition effortlessly from smartphone to PC to bricks-and-mortar physical store in their quest for the best products and services (source: Accenture).


Overview of consumer entry points • Fast fashion successfully combines the latest trends with a strong value-based offering

that appeals to Millennials and Gen Z. The space has seen the fastest growth in retail – achieving estimated US sales of roughly US$7billion in 2014 and 2015 (up 12% vs. 2013).

• Physical activity is highest among Millennials and Gen Z of any demographic cohorts, with 76.3% of US Millennials and 81.8% of US Gen Z participating in physical activity (vs. 74.2% of Gen X and 66.2% of Boomers) (source: US PAC). We believe the US$400 billion athletic and outdoor industry should be a beneficiary. We also see Millennials and Gen Z as key drivers of the US$200 billion+ health and fitness industry.

• Eating right is the #1 definition of what it means to stay healthy for Millennials, and the shift to fresh, natural and organic is being driven by younger consumers. We see these developments as key drivers for the high-growth, high-margin US$727 billion health and wellness food market, which is expected to grow to US$1 trillion by 2020E (source: Euromonitor).

• Travel is the #1 experience and spending priority of Millennials and 75% of them say they wanted to travel abroad as much as possible (source: Euromonitor, Pandora). We see both demographics lifting the US$7 trillion global travel and tourism industry (World Travel and Tourism Council, BofAML) as well as disrupting it, with the likes of Airbnb, which is used regularly by 40% of Millennial travellers (source: Resonance).

Housing Home ownership has plummeted for Millennials compared with their Gen X and Boomer forebears, but we do expect this to change in the coming decades as they drive the next wave of household formation. In the US, home ownership rates fell to 62.9% in 2Q16, the lowest level since 1965, driven largely by a delay in home buying by Millennials (source: US Census Bureau). For the first time since at least 1880, more young adults are living with their parents than with a spouse or significant other (source: Pew Research).

Positively, home ownership is still a strong desire for the Millennial and Gen X generations according to our US Homebuilders, Building Products & REITS team’s 2016 proprietary survey. Sixty-nine percent of respondents said that owning a home someday is either very important (44%) or important (25%) to them. We view this as encouraging for the entry-level and first-time homebuilders.

Affordability concerns appear to be driving the decision to rent for longer with 38% financially constrained. This is fuelling above-average rent growth, which has made it more difficult for renters to save for a down payment. Our REITs team expects this pattern to continue in the near term and is Overweight apartments within REITs.

Gen Z could be a long-term game-changer for housing, with 82% of US teens indicating that homeownership is the most important factor in achieving the American Dream, according to a 2014 Better Homes and Gardens Real Estate survey. Ninety-seven percent believe they will own a home, and they are overwhelmingly willing to make sacrifices now if it means getting their ideal home in the future.

Millennials’ desire to roll up their sleeves is bullish for kitchen/bath remodels and DIY retail according to our US Retailing-Hardlines team’s proprietary 2016 survey of 1,000+ 25-34 year olds.

Financials Millennials are 2-3x more likely to close all accounts with their primary bank than people in any other age group according to an August 2016 FICO survey. 45% of Millennials aged 25-34 years and 36% aged 18-24 years are closing their accounts and taking their money to another provider, with high fees cited as the #1 reason followed by negative experiences after missing a payment, inconvenient branch locations, and too few ATMs.

Millennials are leading the war on cash via mobile banking, payments and wallets Millennials are 3x more likely to bank using their mobile devices than Boomers, and are 30% less likely to visit a physical bank (source: 2016 FIS Consumer Banking PACE Index). Fifty-


three percent of US Gen Z and young Millennials have made a mobile payment in the past six months vs a 27% average (source: GfK). PayPal, Google Wallet and Apply Pay are Millennials’ top three preferred mobile banking/wallet apps (source: CCG Catalyst Consulting).

Credit card usage is lower among Millennials than any other US demographic Even as the economy improves, Millennials have not warmed to using credit cards with only 33% aged 18-29 years owning a card (source: Bankrate 2016).

Robo-advisors could push risk-averse Millennials and Gen Z into the stock market Millennials are mistrustful of the markets, with only 26% under 30 years owning stocks (source: Bankrate, Legg Mason). Ninety-three percent of Millennials consider “impact investing” an important part of investing, and 85% say their investment decisions are a way to express their social, political and environmental values. Robo-advisors are attracting tech-savvy Millennials with low minimum investments and low barriers to entry, smaller fees, automatic rebalancing of investments, and a mobile-device-friendly interface.

Education: the most educated generations in history Millennials continue to believe that access to education is the most important factor to making a difference in the world, more so than protecting the environment (2nd) and eliminating world poverty (3rd) (source: Telefonica). Gen Z also express a desire to go into higher education, with eight out of ten saying college is very/extremely important to having the career they want (source: Northeastern). They currently account for 1.4 billion students globally (source: UNESCO).

Gen Z’s view of education is more nuanced than that of Millennials. For example, Gen Z is driven by finance vs Millennials by personal fulfilment. Gen Z increasingly wants education to be more closely tied to careers (79% think it is important to integrate education with internships) and are demanding the introduction of more practical skills into curriculums (85% think it is important to educate students in personal finances and planning, too) according to Barnes & Noble.

Stock list Our Thematic Strategist Sarbjit Nahal has put together a list of Primer Picks that have exposure to Millennials. To be included as a Primer Pick, the stock must be ranked as having “material” – either High or Medium – exposure to the relevant theme, the stock must also be covered by BofA Merrill Lynch Global Research fundamental analysts and must have a Buy rating as of the date he publishes the report.

Investors should consider the fundamentals of the companies and their own individual circumstances/objectives before making any investment decisions. The full rationale and investment thesis for our fundamental analyst’s recommendation on each stock is contained in the most recent report on the company, which we urge you to read.

Table 6: MILLENNIALS - Primer Picks 3Q16 (Buy-rated with material exposure)

Company BofAML

Location Price Mkt. Cap

Rating Millennials Millennials

Ticker 10/7/2016 US$m Sub-Sector Exposure Tech Apple Inc. AAPL United States 114.06 614,606 BUY Smart Devices Medium Alphabet C GOOG United States 775.08 540,875 BUY Smart Devices Medium Microsoft Corp MSFT United States 57.80 449,919 BUY Smart Devices Medium Facebook FB United States 128.99 370,373 BUY Social Media High IAC IAC United States 61.55 4,898 BUY Social Media High Match Group MTCH United States 17.22 4,335 BUY Social Media High LINE LN Japan 47.68 10,346 BUY Social Media Medium Amazon.com AMZN United States 839.43 397,952 BUY Internet/eCommerce Medium Alibaba BABA China 106.00 264,499 BUY Internet/eCommerce Medium eBay EBAY United States 31.62 35,700 BUY Internet/eCommerce Medium Baidu.com-ADR BIDU China 179.80 62,319 BUY Internet/eCommerce Medium Baozun BZUN China 17.08 846 BUY Internet/eCommerce Medium Sina Corp SINA China 74.73 5,221 BUY Internet/eCommerce Medium Sohu.com Inc SOHU China 42.94 1,663 BUY Internet/eCommerce Medium Vipshop VIPS China 15.23 8,915 BUY Internet/eCommerce Medium


Table 6: MILLENNIALS - Primer Picks 3Q16 (Buy-rated with material exposure)

Company BofAML

Location Price Mkt. Cap

Rating Millennials Millennials

Ticker 10/7/2016 US$m Sub-Sector Exposure Yandex YNDX Russian Federation 22.00 7,060 BUY Internet/eCommerce Medium Netflix NFLX United States 104.82 44,939 BUY Media & Entertainment High AMC Networks AMCX United States 51.52 3,679 BUY Media & Entertainment Medium Walt Disney Co. DIS United States 92.49 148,641 BUY Media & Entertainment Medium 21st Century Fox FOX United States 24.68 45,537 BUY Media & Entertainment Medium Comcast Corp CMCSA United States 65.36 157,637 BUY Media & Entertainment Medium CBS Corp-B CBS United States 55.22 24,587 BUY Media & Entertainment Medium Sirius XM Radio SIRI United States 4.16 20,292 BUY Media & Entertainment Medium Townsquare Media Gro TSQ United States 9.64 177 BUY Media & Entertainment Medium GameStop GME United States 26.68 2,774 BUY Video Games Medium Electronic Arts EA United States 83.81 25,207 BUY Video Games Medium Nvidia NVDA United States 66.85 35,765 BUY Video Games Medium Take-Two TTWO United States 44.69 3,844 BUY Video Games Medium NetEase, Inc NTES China 252.95 33,257 BUY Video Games Medium Consumer Urban Outfitters URBN United States 36.61 4,292 BUY Fast-Fashion High Kate Spade & Co. KATE United States 17.99 2,303 BUY Affordable Luxury Medium Signet Jewelers SIG Bermuda 80.07 6,053 BUY Affordable Luxury Medium Carters CRI United States 88.31 4,421 BUY Apparel Medium American Eagle AEO United States 17.47 3,175 BUY Apparel Medium Expedia EXPE United States 117.77 17,652 BUY Travel & Leisure Medium priceline.com PCLN United States 1,479.82 73,143 BUY Travel & Leisure Medium Makemytrip Limited MMYT India 21.90 925 BUY Travel & Leisure Medium Ctrip.Com-ADR CTRP China 47.08 23,429 BUY Travel & Leisure Medium Target Corp. TGT United States 69.04 39,689 BUY General Retail Medium Constellation STZ United States 168.84 34,029 BUY Beverages (Alcohol) Medium Panera Bread PNRA United States 189.28 4,476 BUY Health & Wellness Medium Starbucks Corp SBUX United States 53.46 78,404 BUY Health & Wellness Medium Sprouts Farmers Mkt SFM United States 21.14 3,138 BUY Health & Wellness Medium The Kroger Co. KR United States 29.00 27,381 BUY Health & Wellness Medium Fitbit FIT United States 14.04 3,119 BUY Sports apparel & equipment High Planet Fitness, Inc. PLNT United States 19.83 1,955 BUY Sports apparel & equipment High Dick's DKS United States 57.71 6,516 BUY Sports apparel & equipment Medium Finish Line FINL United States 22.41 909 BUY Sports apparel & equipment Medium Foot Locker FL United States 69.05 9,201 BUY Sports apparel & equipment Medium Under Armour UA United States 37.78 15,354 BUY Sports apparel & equipment Medium Education Bright Horizons BFAM United States 65.31 3,845 BUY Childcare High Adobe ADBE United States 108.64 54,019 BUY EdTech Medium Alphabet C GOOG United States 775.08 540,875 BUY EdTech Medium Apple Inc. AAPL United States 114.06 614,606 BUY EdTech Medium HP Inc. HPQ United States 15.58 26,655 BUY EdTech Medium Intel INTC United States 38.10 180,251 BUY EdTech Medium Microsoft Corp MSFT United States 57.80 449,919 BUY EdTech Medium The Ad Board Company ABCO United States 42.58 1,714 BUY EdTech Medium Grand Canyon LOPE United States 40.47 1,908 BUY Post-secondary, Colleges & Universities High Household Soufun SFUN China 4.01 1,906 BUY Online Housing Medium The Home Depot HD United States 128.31 158,536 BUY Home Improvement Medium Lowe's LOW United States 71.30 62,363 BUY Home Improvement Medium Masco Corp MAS United States 33.51 11,065 BUY Home Improvement Medium At Home HOME United States 13.60 821 BUY Home Furnishings Medium Tempur Sealy Interna TPX United States 52.80 3,084 BUY Home Furnishings Medium Whirlpool WHR United States 163.49 12,334 BUY Home Furnishings Medium Toll Brothers TOL United States 29.25 4,797 BUY Homebuilders / REITS Medium Avalon Bay AVB United States 165.63 22,743 BUY Homebuilders / REITS Medium AIMCO AIV United States 41.96 6,572 BUY Homebuilders / REITS Medium Essex Property ESS United States 212.27 13,903 BUY Homebuilders / REITS Medium American Homes 4Rent AMH United States 20.46 4,878 BUY Homebuilders / REITS Medium Financials First Data FDC United States 13.30 12,330 BUY FinTech Medium ONDK ONDK United States 5.31 377 BUY FinTech Medium Source: BofA Merrill Lynch Global Research


RIC asset class views Table 7: Research Investment Committee asset class views Asset Class RIC view Comments

(+ / = / –) Equity markets

US equities = Low but rising rate expectations, modest inflation and a strong dollar are good for stocks, but concern about high valuations, high expectations for earnings growth and lack of sales growth keep us neutral. Focus on larger cap, high quality stocks that are dividend growers.

Consumer Discretionary – Home to some “disruptors” but sector overowned and demographics work against it. Apparel malaise likely to continue. Margins under pressure. Consumer Staples = High quality stocks with combination of attractive dividend yields plus dividend growth; good hedge against recessions but expensive. Energy + Oil price forecasts suggests significant upside; sentiment remains poor and investors still UW; larger cap stocks have good dividend yields. Financials – Sector U/P when yield curve flattens; lower for longer rates hurt banks and life insurers; return on capital is below weighted average cost of capital. Health Care + Good hedge against volatility; close to all-time low on valuation. Demographic beneficiary. Biotech offers secular growth; pharma a good yield play. Industrials = Highest quality sector, beneficiary of higher commodity prices and improving global growth; many multinationals have good div yield/div growth. Information Technology + Balance sheets strong; stable earnings and lots of cash; less dollar sensitive than other sectors with global sales; hurt by slowdown in capex. Materials – Sensitive to commodity prices and driven more by macro events; most exposed sector to China but leverage is high and still have excess capacity. Real Estate + U/W by large cap funds; expect significant fund flows to sector as PMs reduce U/W; good combination of dividend yield plus div growth. Telecom Services + Yield at a reasonable price; good hedge against lower interest rates and macro uncertainty. Opportunities for growth here as data usage rises. Utilities = Good dividend yield but expensive and payout ratios high; good hedge against macro uncertainty but leverage is high.

Growth – Growth may lose momentum as profits growth accelerates, but it is cheap and we like exposure to Technology and selected Industrials. Prefer “half growth, half yield” stocks.

Value + Value tends to outperform when profits are accelerating as we believe they are today. Value indices have high exposure to Energy and Financials.

Small cap – Small caps have done better and still trade at a premium to large caps. Rising EPS estimates a positive, but volatility works against small caps, and they are highly levered; we still favor higher quality and larger caps.

Large cap = Prefer high quality stocks with good dividend growth potential.

Europe (ex. UK) = We think equities can grind higher as inflows return, as long as macro data improve. Investors UW and cash levels are high. Barbell of growth and yield preferred – O/W industrials, energy, materials that benefit from EM growth.

United Kingdom − Brexit fallout is GBP weakness and slower economic growth. Large caps should do best as they have lower exposure to domestic economy and benefit from EM and commodities. Cautious on UK consumer. O/W energy and materials.

Japan + BoJ program now involves yield curve control targeting interest rates and expanding monetary base until CPI exceeds 2% target. We think yen weakens in 2017 as oil prices rise and Fed adopts a more hawkish stance. Steeper yield curve should benefit banks.

Asia Pac (ex. Japan) + Region is underowned, valuations are attractive and EPS expectations low. ROEs could rise as profit margins improve. Easier monetary and fiscal policies will help profit margins. Strong commodity prices, tame US dollar should also help – Australia a favored market.

Emerging markets + Limited upside for the dollar, firmer commodity prices, improved Chinese monetary policy boost EM view. However, tactically neutral within long term O/W as markets have risen sharply in 2016. EM currencies competitive and valuations attractive. Brazil, China, Russia, Taiwan, Korea favored.

Fixed income markets

Treasuries –- Treasuries will benefit from risk-off trades as they occur, but we see better yield opportunities elsewhere. One risk is a pullback in global monetary easing.

Agencies / MBS = Historically, MBS have had a good mix of returns and volatility. Potential regulatory changes are a risk for GSEs. TIPS + Inflation will likely rise modestly in the coming 12-18 months; breakevens on TIPS look attractive. US IG Corporates + Investment grade (IG) debt offers a good yield pickup over Treasuries, while still high quality. US HY Corporates – High debt levels and weak earnings pose a risk. Rising defaults and further spread widening is likely this year. Preferred securities = Favor $1000 par QDI payers and fixed-to-floating structures. Non-US DM Sovereigns – Yields are low, and currency translation should work against dollar-based investors if the dollar strengthens as we expect. EM $ Sovereigns – Economic growth is likely to outpace that in developed nations. One risk is a decline in commodity prices. EM local currency Sovereigns + Favorable growth prospects. Threat of a stronger dollar has diminished.

Commodities/FX Gold + Global crises favor gold, while a very hawkish Fed would be a risk. We expect the price to average $1,475/oz in 2017. Oil + We see global crude oil prices averaging $55-75 over the next five years. US dollar = A modest path of Fed rate hikes could limit further gains in the dollar. EM currencies are likely to strengthen on balance. Source: BofA Merrill Lynch Global Research

Notes to RIC views Ratings designations are as follows: (+) favorable view; (=) neutral view; (-) unfavorable view. Ratings reflect the Research Investment Committee’s view for an investment time horizon of 12 months. Typically, the RIC view will agree with regional/product strategists, but at times there may a difference of opinion based on investor suitability or time frame.


Fixed Income, Economics, Commodities, Currencies: views and risks Table 8: Regional strategist views and associated risks

Views Risks Global Economics (Ethan Harris) • US growth should rebound in 2H after an unexpectedly weak first half. Job growth remains decent

after an earlier soft patch. We expect one Fed rate hike this year, in December. • The UK is likely to skirt a recession following Brexit, and we have cut our 2017 Euro area growth forecast

by one-half percent to 1.1%. We expect a 0.2pp drag on average to other parts of the globe from Brexit. • We forecast EM GDP growth of 4.0% in 2016, matching the pace in 2015. We look for activity to

bottom out in 2H 2016 and then improve. EM monetary policy divergence should widen this year. Inflation remains subdued in most of EM.

• • Downside risks: heightened uncertain and weaker global trade in the aftermath of the Brexit vote. Chinese debt accumulation, policy uncertainty and geopolitical concerns also threaten.

• Upside risks: clear signs of stabilization in Chinese growth, solid gains from US consumers, and more rapid acceleration of EM growth as commodity prices stabilize.

Global Rates (Shyam Rajan, Ralf Preusser) • US: Even in an environment of improving US data, a shortage of global positive yielding govt. bonds

and heavy inflows into the US will keep a lid on the ability of long end nominal yields to rise materially. Uncertainty stemming from the Brexit vote and the US election should also bias rates lower over the near term. That said, we think the 5y point on the rate curve looks vulnerable in either direction. Record long manager positioning and increased expectations of fiscal stimulus and/or higher inflation targets will likely lead to a cheapening of the 5y point on the curve, in our view.

• Europe: While the lack of ECB action at the Sep meeting put bear steepening pressure on core curves, the tightening in monetary conditions that this represents and the risks it entails for the periphery suggest the selloff in Bund should ultimately reverse. The pick-up in ECB purchases with increased front-loading ahead of the Dec lull also supports lower rates.

• US: A long end VaR shock in JGBs/Bunds or an upturn in global growth is a risk to our view of contained nominal yields and curve flatteners.

• Europe: Risks comes from increased tapering talks globally, if they come in conjunction with better than expected data. Large long-end supply in the EZ over October and November is another risk.

Global Commodities (Francisco Blanch) • OPEC just agreed to reduce crude production to 32.5-33.0 mm b/d without country-specific quotas-

a soft output cut at best. After adjusting for higher Kashagan production and lower OPEC output, we leave our forward oil balances roughly unchanged. We retain our $61 average Brent forecast for next year. OPEC's action won't propel prices much above our $70 mid-year target.

• For gold prices we forecast a rise to $1,475/oz on average in 2017. We changed our bearish gold view in February and the metal has rallied since; the Fed flipping from being hawkish in a non-inflationary environment to being dovish in a reflationary environment has been a key bullish price driver. Gold lacks an immediate trigger to rally near-term; US presidential elections and the December Fed meeting are key; we see further upside into 2017.

• Following an abysmal 2015, commodity returns have outpaced equities and bonds YTD on the back of improved micro fundamentals. Looking into 2H16, we see commodities being much more affected by the broader market reaction to upcoming Fed rate hike(s). Commodities may outperform if rate hikes trail inflation, but higher real rates and flatter curves would hurt the asset class.

• Looking to the next five years, technical and political challenges in large oil producers such as Kazakhstan, Russia, Iran and Iraq, combined with capex cuts in response to recently low oil price, put investments in oil production growth here at risk. This should continue to put upward pressure on long-dated crude oil prices.

Global Credit (Michael Contopoulos, Hans Mikkelsen) • We expect US high grade spreads to tighten to 135bp this year and to 120bp in 2017. However,

most of the total return for this year is now behind us. • We remain bullish on high grade spreads for two reasons: 1) big foreign inflows on top of bond fund

and ETF inflows; 2) expected improving fundamentals as M&A and share buyback volumes decline. Valuations are attractive only a spread basis as we find yields unattractive.

• In high yield, fundamentals remain lackluster, but strong technicals from global QE have the capability to tip the scale in HY’s favor in the near to medium term. Therefore, we remain neutral HY into the year end. However, we think a big negative catalyst such as an unexpected bankruptcy outside commodities, an oil slide, or a turn in economic data can alter HY’s current course and bring weak fundamentals back to the forefront. We also think that loss given default in this cycle will be higher than past cycles. We like new issues coming to the market today and Fallen Angels that enter the HY index.

• The biggest risk to US investment grade is the possibility of wider credit spreads following a rates shock, likely prompted by a rebound in the global economy, leading to fund outflows and institutional repositioning.

• If the magnitude/duration of global QE continues to increase, credit markets open for the riskiest issuers, and we don’t get significant negative catalysts, this could extend the current credit cycle and go in favor of owning risky assets such as HY. This could induce a risk-on behavior amongst investors and HY could outperform Loans as a result.

Municipals (Philip Fischer) • The underperformance of munis is likely to continue in both rally or selloff of Treasuries, as the

supply/demand condition has deteriorated significantly. We see no improvement in the next several weeks, with the possible worst point to come by mid-November. December should be a good time for bulls to be back to the market.

• Muni money market rates have spiked for several weeks due to the new regulation to be implemented in Mid October. Supply/demand imbalances in the money market is not likely to improve materially unless crossover buyers from taxable funds step in. However, since the taxable side needs to deal with a similar problem, it is hard to see how muni money market rates can revert after the Mid October.

• The risks to our bearish call are: (1) Fed hikes earlier than December or (2) the Fed declares the end of its tightening cycle due to a dramatically deteriorating economy or external shocks before the end of January 2017.

Global FX (David Woo) • We look for a rangy USD dollar with near-term upside; we have a year-end EUR-USD target of 1.08

for end-16 and 1.15 for year-end 2017. • Given our expectations of one Fed hike this year and two in 2017, we see the magnitude of USD

moves more limited relative to 2015, implying that investors need to be more selective in where they play USD strength.

• Even in the face of Fed hikes, easy ECB policies as well as an improving EM vs DM current account differential are likely to underpin EM currencies. Moreover, the recovery in commodity prices and domestic demand in Asia bodes well for reflation in some of the most undervalued currencies in Central Eastern Europe as well as Asia.

• An upside surprise to persistently low US inflation could induce expectations of faster Fed normalization, higher yields and thereby a higher USD.

• Downside risk for EUR-USD comes from the possibility of more aggressive QE moves from the ECB and falling oil prices.

• Downside risks in China pose a significant risk for EM. A pick-up in US inflation that leads the Fed to hike faster than anticipated could be negative for EMFX.

Source: BofA Merrill Lynch Global Research


Global equity markets: views and risks Table 9: Regional strategist views and associated risks

Views Risks Global Equities (Michael Hartnett) • The MSCI All-Country World Index is up 7% YTD (TR). Peak liquidity, peak globalization and peak

inequality suggests peak returns, but also big rotation. • Positioning, policy & profits to deliver a 2016/17 “flip” from “deflation” to “inflation”, from “ZIRP winners” to

“ZIRP losers”, from Wall Street to Main Street. • Long stocks and commodities, short bonds. We expect slim returns from bonds & stocks in coming

quarters; but double-digit upside likely for “ZIRP losers” in 2017.

• Dovish central banks (e.g. Fed passes in Dec) induce tech bubble. • Wall St. systemic event = disorderly spike in bond yields (corroborated by

lower financials, wider credit spreads, gold<$1200). • End of globalization = recession. • Policy baton is shifting from monetary to fiscal stimulus in 2016/17. Clearer

fiscal commitment and/or further declines in US$ would pose upside risks. United States (Savita Subramanian) • Our 2016 year-end S&P 500 target is 2000 and our 10-year S&P 500 target is 3500. • We forecast 2016 EPS of $117 (flat y/y) and 2017 EPS of $125 (+7% y/y). • Valuations are above historical levels across most metrics, but most metrics are far from stretched, and

stocks still look attractive relative to bonds. • We prefer large caps over small caps, high quality over low quality, stocks with strong balance sheets, and

“YARP” – yield at a reasonable price. • Overweight Health Care, Telecom, Real Estate, Energy, and Tech; Underweight Materials, Consumer

Discretionary and Financials.

• Risks: global growth disappoints, economic shock tied to credit, global recession, oil prices fall, corporates continue to hoard their cash, or another round of QE, suggesting $4.5tn was not enough to prop up the economy.

• We expect volatility to rise in the near-term and see elevated risk of a correction, given risks around the US election, FOMC tightening amid a profits recession, a seasonally weak period for the market, elevated leverage and tightening credit conditions, and high expectations for growth and stimulus that could disappoint.

• Do not forget the bull risks: a sentiment and technically driven bull market in which skepticism shifts to optimism and perhaps euphoria. Note that the average S&P 500 returns in the last two years of a bull market is 60%.

• Five percent pullbacks happen three times per year on average; 10% corrections occur 1x per year on average.

Europe (James Barty) • We think European equities have modest upside (our 12m rolling PO is 360 for Stoxx 600) but the market

can grind higher into year-end with better September data. Any return of flows to Europe could drive outperformance. We look for a return to mid-single digit EPS growth in 2017 albeit not enough for an upgrade cycle.

• Bullish EM – o/w Basic Resources, Oil, Industrials. All three are strongly correlated with and have above average exposure to EM as well as the strongest earnings momentum currently.

• Positioning can drive Europe higher. We are generally o/w where consensus is not and vice versa (o/w Basics, Oil, Utilities and u/w Food & Beverage and tactically in Tech).

• Maintain DY stories with EPS upside; avoid UK consumer. We continue to like yield in Europe (given there is so little in fixed income now) - Oil, Utilities, big Pharma, some Industrials.

• Rising Brexit concerns are putting renewed pressure on GBP. That supports the UK big caps and the USD earners we own (Resources and Health). It is less supportive of the domestic UK exposure as a falling pound (and indeed higher oil) is likely to squeeze UK consumer spending and/or margins. This is why we are u/w Retail and Travel & Leisure.

• Return of softer US data presages a stalling economy and event risk around Presidential election. More hawkish ECB policy without a complementary pick-up in growth and inflation expectations. Political risk in Italy around the Constitutional referendum. Near-term EM bias may be vulnerable to any shift in dollar or rising treasury yields.

Asia-Pac ex-Japan (Ajay Kapur) • Remain structurally bullish on Asia – China’s monetary easing is gaining traction – autos sales and house

prices are robust, PPI is up to -0.8% from 5.9% in Dec’15; SOEs – the low ROE underperformers are much smaller part of the China Indices; Q2’16 earnings and sales beats are healthy at 58%.

• AxJ’s ROE could rise from 10% to 14% in next 3-4 years as profit margins would improve due to lower prior capex and competitive currencies; asset turns will improve due to easier monetary & fiscal policies. Also, asset turns are correlated to China nominal growth, which is picking up sharply.

• Overweight: Korea, China, Taiwan and Australia; Underweight: Philippines, India, Malaysia and Hong Kong.

Downside risks • China does not continue with its easing cycle. • Stronger USD.

Emerging Markets (Ajay Kapur) • EM valuations are attractive, currencies are competitive, prior capex cuts would lead to higher profit

margins, earnings expectations are easy to beat, China’s monetary easing is gaining traction, the low ROE underperformers are much smaller part of the indices and the US dollar may have limited upside, if any. Our long-term structural bullishness on Asia/EMs remains intact. However, we are pausing for breath, turning tactically neutral.

• EM GDP growth is still likely to continue improving vs DM in 2016-17. Oil price base effects mean rising inflation globally in 2H16.

• EEMEA cross asset strategist David Hauner is positioned for a short-term correction. He believes legal and political resistance may put debate on QE extension in the spotlight. Medium-term, he is positive as earnings recovery and scope for renewed flows suggest the rally has another leg and is overweight high-beta and commodity-exposed markets.

• LatAm strategist Felipe Hirai, remains positive on Brazil equities, given strong earnings growth potential in the next few years.

• Overweight: Russia, Korea, China, Turkey, Taiwan and Chile; Underweight: the Philippines, India, Malaysia, South Africa, and Mexico.

• Downside risks • China does not continue with its easing cycle. • US growth is weaker and inflation is higher than what consensus expects.



Asset allocation for individual investors The tables below represent asset allocation recommendations by investor profile (Conservative – Aggressive). Strategic allocations are long-term, 20-30 year benchmarks developed by Merrill Lynch Global Wealth Management. RIC allocations have a 12-month horizon, and are provided by the BofA Merrill Lynch Global Research Investment Committee. Asset allocation for US clients Table 10: Strategic and RIC allocations without alternative assets (Tier 0 liquidity) Tier 0 (highest liquidity): Highest liquidity needs with none of the portfolio invested in less liquid alternative asset categories. Tier 0 clients can also reference the Tier 1 strategic allocations if fulfilling the Alternative Assets allocation with liquid forms of alternative investments (including non-traditional funds).

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Traditional Assets Stocks 20% 21% 40% 41% 60% 62% 70% 73% 80% 82% Bonds 55% 54% 50% 48% 35% 32% 25% 21% 15% 13% Cash 25% 25% 10% 11% 5% 6% 5% 6% 5% 5% Table 11: Strategic and RIC allocations with alternative assets (Tier 1 liquidity) Tier 1 (higher liquidity): Up to 15% of the portfolio may be unavailable for 3–5 years.

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Traditional Assets Stocks 20% 21% 40% 41% 55% 56% 65% 68% 70% 72% Bonds 50% 49% 45% 43% 30% 28% 20% 16% 10% 8% Cash 25% 25% 10% 11% 5% 6% 5% 6% 5% 5% Alternative Assets Real Assets* 1% 1% 1% 1% 2% 2% 2% 2% 6% 6% Hedge Fund Strategies 4% 4% 4% 4% 8% 8% 8% 8% 9% 9% Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% * “Real Assets” defined to include commodities, TIPS and Real estate, including REITs; Figures may not sum to 100 because of rounding. Table 12: Strategic and RIC allocations with alternative assets (Tier 2 liquidity) Tier 2 (moderate liquidity): Up to 30% of the portfolio may be unavailable for 3–5 years.

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Traditional Assets Stocks 15% 16% 35% 36% 50% 52% 55% 57% 55% 57% Bonds 50% 49% 45% 44% 25% 23% 20% 17% 10% 9% Cash 25% 25% 10% 10% 5% 5% 5% 6% 5% 4% Alternative Assets Real Assets* 3% 3% 3% 3% 7% 7% 7% 7% 10% 10% Hedge Fund Strategies 6% 6% 6% 6% 8% 8% 8% 8% 8% 8% Private Equity 1% 1% 1% 1% 5% 5% 5% 5% 12% 12% * “Real Assets” defined to include commodities, TIPS and Real estate, including REITs; Figures may not sum to 100 because of rounding. Table 13: Strategic and RIC allocations with alternative assets (Tier 3 liquidity) Tier 3 (lower liquidity): Up to 45% of the portfolio may be unavailable for 3–5 years.

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Traditional Assets Stocks 15% 16% 35% 36% 40% 41% 50% 53% 40% 42% Bonds 45% 44% 40% 38% 25% 24% 15% 11% 10% 8% Cash 25% 25% 10% 11% 5% 5% 5% 6% 5% 5% Alternative Assets Real Assets* 3% 3% 3% 3% 9% 9% 9% 9% 11% 11% Hedge Fund Strategies 10% 10% 10% 10% 14% 14% 14% 14% 14% 14% Private Equity 2% 2% 2% 2% 7% 7% 7% 7% 20% 20% * “Real Assets” defined to include commodities, TIPS and Real estate, including REITs; Figures may not sum to 100 because of rounding. Source: BofA Merrill Lynch Global Research

Notes: The Strategic Profile Asset Allocation Models with Alternative Assets were developed by Merrill Lynch Global Wealth Management for private clients. The Strategic allocations are identified by Merrill Lynch Global Wealth Management and are designed to serve as guidelines for a 20-30 year investment horizon. The RIC allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The Merrill Lynch

Global Wealth Management models allocate assets among specified asset classes and, within each class, reflect broad investment diversification. The models offer benchmarks for traditional asset class allocation (stocks,

bonds and cash), as well as models for allocations among traditional and alternative asset classes reflecting portfolios targeting varying liquidity levels. The models are designed to provide allocation benchmarks based on risk/return profiles. Merrill Lynch Global Wealth Management defines liquidity as the percentage of assets, by invested value, within a portfolio that can be reasonably expected to be liquidated within a given time duration

under typical market conditions. Given the less-liquid nature of certain alternative assets, BofA Merrill Lynch Global Research does not make RIC allocation recommendations for portfolios that include these asset classes.

Merrill Lynch Global Wealth Management clients should consult with their financial advisor about these allocations.


A closer look at asset allocation for US clients Size, style and international The tables below present in-depth size and style recommendations for US clients using the stocks, bonds and cash weights from the most liquid (Tier 0) liquidity profile on the previous page.

Table 14: Strategic and RIC allocations without alternatives Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Stocks 20% 21% 40% 41% 60% 62% 70% 73% 80% 82% Large Cap Growth 8% 7% 16% 14% 23% 21% 25% 22% 27% 23% Large Cap Value 12% 13% 16% 18% 23% 25% 25% 29% 21% 24% Small Growth 0% 0% 2% 1% 2% 1% 3% 2% 6% 5% Small Value 0% 0% 2% 2% 2% 2% 3% 3% 6% 6% International: Developed 0% 1% 3% 5% 8% 10% 11% 12% 16% 18% International: Emerging 0% 0% 1% 1% 2% 3% 3% 5% 4% 6% Bonds 55% 54% 50% 48% 35% 32% 25% 21% 15% 13% Tsys, CDs & GSEs 35% 32% 27% 23% 13% 12% 6% 7% 2% 4% Mortgage Backeds 14% 8% 13% 8% 9% 6% 6% 4% 4% 2% IG Corp & Preferred 6% 14% 10% 13% 9% 9% 9% 6% 5% 4% High Yield 0% 0% 0% 1% 2% 1% 1% 1% 2% 1% International 0% 0% 0% 3% 2% 4% 3% 3% 2% 2% Cash 25% 25% 10% 11% 5% 6% 5% 6% 5% 5% Source: BofA Merrill Lynch Global Research

Table 15: Stocks only – by size and style Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Large cap growth 40% 33% 40% 35% 38% 33% 35% 30% 33% 28% Large cap value 60% 62% 40% 44% 38% 41% 35% 40% 26% 30% Small growth 0% 0% 4% 2% 4% 2% 4% 3% 8% 6% Small value 0% 0% 4% 5% 4% 3% 4% 4% 8% 7% International: Developed 0% 5% 10% 12% 13% 16% 18% 16% 20% 22% International: Emerging 0% 0% 2% 2% 3% 5% 4% 7% 5% 7% Source: BofA Merrill Lynch Global Research

Table 16: Bonds only – by sector Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Tsys, CDs & GSEs 65% 60% 55% 49% 40% 39% 25% 36% 15% 33% Mortgage Backed 25% 15% 25% 17% 25% 20% 25% 19% 25% 18% IG Corp & Preferred 10% 25% 20% 26% 25% 27% 35% 29% 40% 30% High yield 0% 0% 0% 2% 5% 3% 5% 4% 10% 5% International 0% 0% 0% 6% 5% 11% 10% 12% 10% 14% Source: BofA Merrill Lynch Global Research

Notes: Figures may not sum to 100 because of rounding

The Investor Profile Asset Allocation Model was developed by Merrill Lynch Global Wealth Management for private clients. The Strategic allocations are identified by Merrill Lynch Global Wealth Management and are designed to serve as guidelines for a 20-30-year investment horizon. The RIC allocations are provided by the BofA Merrill Lynch Global Research Investment Committee and reflect the group’s outlook over the next 12 months.


Fixed-income allocation for US clients

Table 17: Combined municipal and taxable recommended sector allocations by Investor Profile Conservative Moderate** Aggressive Federal tax bracket Sector <25%* 28% 43.40% <25%* 28% 43.40% <25%* 28% 43.40% Munis 0% 45% 50% 0% 58% 63% 0% 75% 80% Treasuries & CDs 50% 28% 25% 29% 12% 12% 24% 6% 4% TIPS 5% 3% 3% 10% 4% 4% 9% 2% 2% Agencies (GSEs) 5% 3% 2% 0% 0% 0% 0% 0% 0% Mortgages 15% 8% 7% 20% 8% 7% 18% 5% 3% Corporates 25% 13% 13% 25% 11% 9% 28% 7% 6% Preferreds 0% 0% 0% 2% 1% 1% 2% 1% 0% High Yield* 0% 0% 0% 3% 1% 1% 5% 1% 1% International: Developed Markets 0% 0% 0% 1% 0% 0% 1% 0% 0% International: Emerging Markets USD 0% 0% 0% 4% 2% 1% 5% 1% 2% International: Emerging Markets Local 0% 0% 0% 6% 3% 2% 8% 2% 2% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100% TAXABLE-Maturity 1-4.99 years 100% 100% 100% 38% 38% 38% 34% 34% 34% 5-14.99 years 0% 0% 0% 53% 53% 53% 55% 55% 55% 15+ years 0% 0% 0% 9% 9% 9% 11% 11% 11% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100% TAX EXEMPT-Maturity 1-4.99 years 90% 90% 10% 10% 10% 10% 5-9.99 years 10% 10% 40% 40% 20% 20% 10-14.99 years 0% 0% 20% 20% 25% 25% 15+ years 0% 0% 30% 30% 45% 45% TOTALS 100% 100% 100% 100% 100% 100% * Including tax-deferred accounts like IRAs and 401(k)s. ** The Moderate Category applies to the "Moderately Conservative", "Moderate", and "Moderately Aggressive" Profiles. Changes from last month are highlighted in bold.


US equity sector allocations for various levels of investment risk Table 18: Research Portfolio team's US equity sector weightings by investor profile. These are long-term in nature and do not reflect current market conditions.

Weight in

Conservative Moderately

Moderate Moderately

Aggressive S&P 500 Conservative Aggressive Consumer Discretionary 12.5% 10.0% 6.0% 12.0% 16.0% 16.0% Consumer Staples 9.9% 20.0% 17.0% 12.0% 8.0% 3.0% Energy 7.3% 9.0% 12.0% 8.0% 9.0% 9.0% Financials 12.8% 11.0% 11.0% 12.0% 4.0% 6.0% Health Care 14.7% 14.0% 8.0% 11.0% 17.0% 18.0% Industrials 9.7% 11.0% 12.0% 14.0% 15.0% 15.0% Info Technology 21.2% 6.0% 8.0% 16.0% 25.0% 27.0% Materials 2.9% 3.0% 0.0% 2.0% 3.0% 3.0% Real Estate 3.1% 4.0% 6.0% 4.0% 3.0% 3.0% Telecom Services 2.6% 3.0% 10.0% 3.0% 0.0% 0.0% Utilities 3.3% 9.0% 10.0% 6.0% 0.0% 0.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: BofA Merrill Lynch Research Portfolios, S&P; S&P 500 Sector Weights are as of previous month end; weights may not add up to 100% due to rounding.


Asset allocation for global investors The Asset Allocation for Global Clients is designed to reduce “home country bias” and introduce a currency perspective. RIC allocations have a 12-month horizon, and are provided by the BofA Merrill Lynch Global Research Investment Committee. Strategic allocations are based on market cap weights for the MSCI All-Country World and BofAML Global Fixed Income Markets Indices (12/31/2010). Both allocations are for individual investors.

Table 19: Strategic and RIC allocations without alternatives (Tier 0 liquidity) Tier 0 (highest liquidity): Highest liquidity needs with none of the portfolio invested in less liquid alternative asset categories. Tier 0 clients can also reference the Tier 1 strategic allocations if fulfilling the Alternative Assets allocation with liquid forms of alternative investments (including non-traditional funds).

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Global Equities 20% 22% 40% 42% 60% 62% 70% 73% 80% 85% North America 8% 9% 19% 20% 28% 28% 32% 32% 37% 37% Europe (ex UK) 4% 4% 7% 7% 11% 11% 13% 14% 15% 17% UK 2% 1% 4% 3% 5% 4% 6% 5% 7% 6% Japan 2% 2% 3% 3% 5% 6% 6% 5% 7% 6% Pac Rim (ex Japan) 1% 2% 2% 2% 3% 4% 4% 6% 4% 6% Emerging Markets 3% 4% 5% 7% 8% 9% 9% 11% 10% 13% Global Fixed Income 55% 54% 50% 48% 38% 33% 28% 21% 18% 9% Govt Bonds 34% 34% 30% 27% 24% 19% 18% 12% 10% 4% Inv. Grade Credit 8% 9% 8% 11% 6% 7% 4% 5% 3% 3% High Yield Credit 2% 0% 2% 0% 1% 0% 1% 0% 1% 0% Collateralized Debt 11% 11% 10% 10% 7% 7% 5% 4% 4% 2% Cash (USD) 25% 24% 10% 10% 2% 5% 2% 6% 2% 6% *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS

Table 20: Strategic and RIC allocations with alternatives (Tier 1 liquidity) Tier 1 (higher liquidity): Up to 10% of the portfolio may be unavailable for 3–5 years.

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Global Equities 18% 20% 38% 40% 56% 58% 66% 69% 73% 75% North America 8% 9% 18% 19% 26% 26% 30% 30% 34% 33% Europe (ex UK) 3% 3% 7% 7% 10% 10% 12% 13% 14% 14% UK 2% 1% 3% 2% 5% 4% 6% 5% 6% 5% Japan 2% 2% 3% 3% 5% 6% 6% 5% 6% 5% Pac Rim (ex Japan) 1% 2% 2% 2% 3% 4% 3% 5% 4% 6% Emerging Markets 2% 3% 5% 7% 7% 8% 9% 11% 9% 12% Global Fixed Income 52% 51% 50% 48% 32% 27% 22% 15% 10% 4% Govt Bonds 32% 32% 30% 27% 20% 15% 14% 8% 6% 2% Inv. Grade Credit 8% 9% 8% 11% 5% 6% 3% 4% 2% 2% High Yield Credit 2% 0% 2% 0% 1% 0% 1% 0% 0% 0% Collateralized Debt 10% 10% 10% 10% 6% 6% 4% 3% 2% 0% Cash (USD) 25% 24% 7% 7% 2% 5% 2% 6% 2% 6% Global Real Assets 1% 1% 1% 1% 2% 2% 6% 6% 12% 12% Global Hedge Funds 4% 4% 4% 4% 8% 8% 4% 4% 3% 3% Global Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% ^The RIC does not make RIC allocations to these categories due to their long term, less liquid nature Strategic benchmark weights are reflected in both columns

*Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS

Notes: Merrill Lynch Global Wealth Management’s Strategic Profile Asset Allocation Models were developed for private Merrill Lynch Global Wealth Management Clients. The Strategic allocations are identified by Merrill Lynch Global Wealth Management are designed to serve as guidelines for a 20-30 year investment horizon. The RIC allocations are provided by the BofA Merrill Lynch Global Research Investment Committee. The Merrill Lynch Global Wealth Management models allocate assets among specified asset classes and, within each class, reflect broad investment diversification. The models offer benchmarks for traditional asset class allocation (stocks, bonds and cash), as well as models for allocations among traditional and alternative asset classes reflecting portfolios targeting varying liquidity levels. The models are designed to provide allocation benchmarks based on risk/return profiles. Merrill Lynch Global Wealth Management defines liquidity as the percentage of assets, by invested value, within a portfolio that can be reasonably expected to be liquidated within a given time duration under typical market conditions. Given the less-liquid nature of certain alternative assets, BofA Merrill Lynch does not make RIC allocation recommendations for portfolios that include these asset classes. Merrill Lynch Global Wealth Management clients should consult with their financial advisor about these allocations.


Asset allocation for global investors (continued) Table 21: Strategic and RIC allocations with alternatives (Tier 2 liquidity) Tier 2 (moderate liquidity): Up to 20% of the portfolio may be unavailable for 3–5 years.

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Global Equities 14% 16% 35% 37% 45% 47% 51% 54% 53% 58% North America 6% 7% 16% 17% 21% 21% 24% 24% 24% 24% Europe (ex UK) 3% 3% 6% 6% 8% 8% 9% 10% 10% 12% UK 1% 0% 3% 2% 4% 3% 4% 3% 5% 4% Japan 1% 1% 3% 3% 4% 5% 4% 3% 4% 3% Pac Rim (ex Japan) 1% 2% 2% 2% 2% 3% 3% 5% 3% 5% Emerging Markets 2% 3% 5% 7% 6% 7% 7% 9% 7% 10% Global Fixed Income 51% 50% 48% 46% 33% 28% 27% 20% 15% 6% Govt Bonds 31% 31% 30% 27% 21% 16% 17% 11% 9% 3% Inv. Grade Credit 8% 9% 7% 10% 5% 6% 4% 5% 2% 2% High Yield Credit 2% 0% 2% 0% 1% 0% 1% 0% 1% 0% Collateralized Debt 10% 10% 9% 9% 6% 6% 5% 4% 3% 1% Cash (USD) 25% 24% 7% 7% 2% 5% 2% 6% 2% 6% Global Real Assets 2% 2% 2% 2% 4% 4% 4% 4% 8% 8% Global Hedge Funds 6% 6% 6% 6% 9% 9% 4% 4% 6% 6% Global Private Equity 2% 2% 2% 2% 7% 7% 12% 12% 16% 16% ^The RIC does not make RIC allocations to these categories due to their long term, less liquid nature Strategic benchmark weights are reflected in both columns

*Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS

Table 22: Strategic and RIC allocations with alternatives (Tier 3 liquidity) Tier 3 (lower liquidity): Up to 30% of the portfolio may be unavailable for 3–5 years.

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Global Equities 12% 14% 32% 34% 41% 43% 47% 50% 46% 48% North America 5% 6% 14% 15% 19% 19% 22% 22% 21% 20% Europe (ex UK) 2% 2% 6% 6% 8% 8% 9% 10% 9% 10% UK 1% 0% 3% 2% 4% 3% 4% 3% 4% 3% Japan 1% 1% 3% 3% 3% 4% 4% 3% 4% 3% Pac Rim (ex Japan) 1% 2% 2% 2% 2% 3% 2% 4% 2% 4% Emerging Markets 2% 3% 4% 6% 5% 6% 6% 8% 6% 8% Global Fixed Income 48% 47% 48% 46% 27% 22% 21% 14% 7% 1% Govt Bonds 30% 30% 30% 27% 17% 12% 13% 7% 5% 0% Inv. Grade Credit 7% 8% 7% 10% 4% 5% 3% 4% 1% 1% High Yield Credit 2% 0% 2% 0% 1% 0% 1% 0% 0% 0% Collateralized Debt 9% 9% 9% 9% 5% 5% 4% 3% 1% 0% Cash (USD) 25% 24% 5% 5% 2% 5% 2% 6% 2% 6% Global Real Assets 3% 3% 3% 3% 6% 6% 7% 7% 15% 15% Global Hedge Funds 9% 9% 9% 9% 16% 16% 11% 11% 14% 14% Global Private Equity 3% 3% 3% 3% 8% 8% 12% 12% 16% 16% ^The RIC does not make RIC allocations to these categories due to their long term, less liquid nature Strategic benchmark weights are reflected in both columns *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS Notes: The Strategic Asset Allocation Model was developed by Merrill Lynch Global Wealth Management. The Strategic allocations are identified by Merrill Lynch Global Wealth Management and are designed to serve as guidelines for a 20-30 year investment horizon for Merrill Lynch Global Wealth Management clients The RIC allocations are provided by the BofA Merrill Lynch Global Research Investment Committee and reflect their outlook over the next 12 months.


US Equity Strategy Sector Views Table 23: US Equity Strategy Sector Views

Sector Weight in S&P 500

BofAML Rating Details

Highlighted sub-sectors

Health Care 14.7% O/W

• Relative valuation at a five-year low, continues to surprise to the upside on earnings and sales, strong revision trends, funds have reduced overweight to a multi-year low.

• Good hedge against elevated volatility; beneficiary of aging demographics; Biotech and Pharma offer secular growth and dividend yield/dividend growth at a reasonable price.

• Risks: Leverage has significantly increased (chiefly from M&A) though remains low relative to other sectors, wage pressure could hurt labor-intensive Health Care Providers & Services stocks, highest government exposure of any sector / political risk during an election year; still overweight by funds.

Prefer large Pharma and Biotech

Telecom 2.6% O/W

• Yield at a reasonable price – higher dividend yield and lower payout ratio than Utilities, but at lower valuation; Good hedge against macro uncertainty; safe haven from macro shocks.

• Better hedge than Utilities against lower rates in the near-term: has recently exhibited a stronger relationship with change in interest rates than Utilities.

• Opportunities for growth: monetization of data given exponential increase in data usage; continued focus on self-help Risks: high earnings volatility despite a low beta, high payout ratios (but lower than Utilities).

Real Estate 3.1% O/W

• Underweight by large cap active funds (particularly when compared to other bond proxy sectors); we estimate $30bn of inflows from active managers as they reduce their underweight.

• Attractive dividend yield along with dividend growth opportunity. • Risks: Rising rates (most hurt during Taper Tantrum), concerns on coastal cities (San Francisco, NYC); positioning trade has already played out.

Prefer Specialty REITs

Information Technology 21.2% O/W

• Strong balance sheets (only sector with net cash), inexpensive vs. history, low payout ratios, earnings more stable over time (higher quality). • Historically good for stock selection – uncorrelated stocks, most with above average secular growth prospects. • Less sensitive to dollar strength than other sectors with high foreign exposure. • Risks: Hurt by slowdown/stagnation in capex spending (which typically slows further ahead of elections), smaller/growthier Tech is

crowded/expensive.

Prefer Internet Software and Tech Hardware

Energy 7.3% O/W

• BofAML oil price forecasts imply significant upside to oil prices. • The sector’s PE multiple appears expensive on depressed earnings, but the uplift in oil prices should continue to drive estimates higher. • And on P/BV, the sector is still near 30-year low valuations despite the cuts to book values due to asset impairments. Current book values should

be supported by higher oil prices. • Investors are still heavily underweight the sector and the sector’s weight in the S&P 500 has fallen to historically bullish levels. • Risks: oil prices could stagnate or decline; high debt levels could weigh on the sector if credit markets tighten up again.

Avoid Energy Equipment & Services

Consumer Staples 9.9% M/W

• High quality (stable earnings), globally diversified, underowned by active managers; best hedge against recessions (saw earnings growth in every recession except 2007-09).

• Attractive dividend yield plus dividend growth potential (lower payout ratio than Utilities/Telecom); attractive return vs. risk; low-end consumption benefits from lower-for-longer oil.

• Has generated among the highest and most consistent spread above its cost of capital. • Expensive: trading at a record premium vs. Health Care; most of performance over last five years has been driven by multiple expansion. • Higher inflation hurts the group; multinationals hurt by a stronger dollar; higher oil prices are a headwind to low-end consumption.

Prefer Beverages and Tobacco; Avoid Food & Staples Retailing

Industrials 9.7% M/W

• Highest quality sector; globally diversified; very heterogeneous (contains both defensive industries and ultra-cyclical industries). • Many mega-cap multinationals have attractive dividend yields/dividend growth potential along with diversified end market exposure (such as Multi-

Industrials). • Benefit from a rise in commodity prices (contains many suppliers to commodity producers). • Hurt by a stronger dollar; capex growth has slowed (and may slow further ahead of the election).

Prefer Industrial Conglomerates and Defense

Utilities 3.3% M/W

• Yield, but at a price – expensive vs. history but with lower dividend yield and higher payout ratios than Telecom. • Good hedge against macro uncertainty, may benefit from flight to defensive stocks during “risk-off” periods; lowest correlation with the market of

the last one, three and 30 years. • More likely to trade based on macro than on themes. • Many Utilities have high leverage; has high earnings volatility (low quality) despite low betas.

Materials 2.9% U/W

• Very sensitive to commodity prices; may continue to be driven more by macro and less by themes, excess global capacity still needs to be rationalized.

• Most correlated with China (where other globally-oriented cyclical sectors have more diversified global exposure). • Leverage is at post-crisis highs while sales growth has continued to decelerate; unattractive risk-reward (highest beta but among the lowest long-

term growth of the cyclical sectors).

Consumer Discretionary 12.5% U/W

• Most crowded sector by fund managers, historically underperforms during tightening cycles; “Apparel Malaise” likely to continue; wage inflation impacts this sector most from a cost basis, which could pressure already-elevated margins for labor intensive co's.

• Demographic trends unfavorable to traditional discretionary spending. • Historically one of the best sectors for stock-picking. • Heterogeneous; home to some “disruptors”/companies with pricing power, along with companies that are being disrupted (Traditional hotels and

retailers impacted by disrupters like Airbnb, fast fashion, etc.). Some industries exposed to mid-cycle purchasing patterns (ex – Autos, Home Improvement Retailers).

Avoid department stores, traditional retails, and hotels/restaurants amid pressures from disruptors and higher wages

Financials (ex Real Estate)

12.8% U/W

• Historically underperforms when yield curve is flattening; many Life Insurers and Banks hurt by lower-for-longer rates. • Valuations in-line with history on relative forward P/E. • Value destruction for nearly two decades: return on capital has failed to clear the weighted average cost of capital for 219 of the last 230 months. • Historically underperforms mid/late cycle, regulatory/litigation risks (though in the later innings for Banks); contagion risk from European banking

sector. • A positive: has been slowly morphing back into a higher quality/cash return sector; dividend growth potential.

Prefer P&C Insurance, avoid regional Banks and Life Insurance

*Weights in S&P 500 as of previous month-end. May not add to 100% due to rounding. Source: BofA Merrill Lynch US Equity & US Quant Strategy


Portfolio of the month Equity International Portfolio • The primary objective is to build wealth over a multi-year period through ownership of a

geographically diverse portfolio of non-US equities.

• The portfolio will invest in primarily ADRs that are exposed to currency and geopolitical risks. The tax withholding policies of various countries can affect the receipt of dividend income.

Table 24: Equity International Portfolio International

Price Sectors/Target Weights Symbol Proposed Weight Country Close 10/7/2016 Average Cost QRQ Rating Yield † Footnote Consumer Discretionary (11.5%) Sony SNE 3.00% Japan $32.53 $24.92 B-1-7 0.55% Bbijopsv Delphi DLPH 3.00% UK $70.12 $86.78 C-1-7 1.65% BObgijopsvw Gildan GIL 3.00% Canada $27.48 $28.78 C-1-7 1.14% Bbgijopsv Vipshop VIPS 2.50% China $15.23 $19.50 C-1-9 0.00% Bbw Consumer Staples (11.5%) British American BTI 4.00% UK $121.53 $73.01 A-1-7 3.71% Bbijopsv CCEP CCE 3.50% Netherlands $38.85 $40.16 C-1-7 1.76% Bbgijopvw Diageo DEO 4.00% UK $112.66 $111.22 A-1-7 3.28% BNbijopsvw Energy (7.0%) Canadian Natl Re CNQ 3.00% Canada $31.91 $31.78 B-1-7 2.88% BObijopsv Sinopec - A SNP 4.00% China $76.32 $60.81 C-1-7 3.12% Bbijopsvw Financials (24.5%) TD Bank TD 4.00% Canada $43.84 $36.09 B-1-7 3.86% BObgijopsvw HDFC Bank HDB 3.50% India $72.37 $61.25 C-1-7 0.58% Bbijopsv ICICI Bank - A IBN 2.50% India $7.50 $6.85 C-1-7 1.98% BObgijopsvw Prudential PUK 2.50% UK $36.08 $16.52 B-1-7 3.97% Bbgijopsv Chubb Ltd CB 3.50% Switzerland $124.43 $44.03 B-1-7 2.22% BObijopsv Credicorp Ltd BAP 3.50% Peru $146.53 $131.12 C-1-7 1.58% Bbijopv ING Group ING 2.50% Netherlands $12.56 $14.33 B-1-7 5.86% Bbgijopsv Itau Unibanco-A ITUB 2.50% Brazil $11.83 $9.74 C-1-7 3.04% Bbijopsv Health Care (8.5%) Sanofi SNY 3.00% UK $38.53 $40.48 B-1-7 4.32% Bbijopsv Teva TEVA 3.00% Israel $45.06 $57.97 C-1-7 3.02% BObgijopsvw GW Pharmaceuticals P GWPH 2.50% UK $131.17 $78.44 C-1-9 0.00% Bbgisvw Industrials (11.5%) Sensata ST 3.00% Netherlands $39.49 $45.47 C-1-9 0.00% Bbijopsvw Allegion ALLE 3.00% Ireland $66.88 $60.45 A-1-7 0.72% Bbijopsvw Philips PHG 2.50% Netherlands $29.34 $26.73 B-1-7 3.07% Bbijopsvw Ingersoll-Rand IR 3.00% Ireland $67.45 $58.79 B-1-7 2.37% BObijoprvw Information Technology (9.5%) NetEase, Inc NTES 3.00% China $252.95 $181.48 C-1-7 1.23% Bb Baidu.com-ADR BIDU 3.50% China $179.80 $117.64 C-1-9 0.00% BObijopv SAP SAP 3.00% Germany $89.57 $90.96 A-1-7 1.46% Bbijopsvw Materials (7.5%) Vale ON VALE 3.50% Brazil $5.57 $4.85 C-1-9 0.00% BObijopsv LyondellBasell LYB 4.00% Netherlands $81.44 $64.67 C-1-7 4.17% Bbijopsvw Real Estate (0%) Telecom Services (5.0%) Vodafone Group VOD 2.50% UK $28.21 $34.49 A-1-7 7.26% BObgijopsv SK Telecom SKM 2.50% Korea $21.73 $23.23 XRVW 4.44% Bbijopv Utilities (3.5%) National Grid NGG 3.50% UK $65.28 $71.68 A-2-7 4.87% BNObgijopsvw Cash (0%) 0%

100% 2.42% Source: BofA Merrill Lynch Global Research. †: Investors should be aware that foreign governments sometimes withhold a percentage of dividends paid to US shareholders, which may adversely impact an investor who is following the portfolio. This may affect the yield received when compared to the stated yield for the Research Portfolios. One or more analysts responsible for selecting the securities held in the International Portfolio own such securities: Baidu


Stock lists US 1 List (link to latest report) Table 25: US 1 list (October 7, 2016)

Ticker Company Rating Date added Price when added Price as of Oct. 7 Footnotes AGN Allergan C-1-9 06/28/16 227.72 238.92 Bbijopsvw AVGO Broadcom C-1-7 04/26/16 149.83 174.21 Bbijopsvw BURL Burlington Stores C-1-9 06/21/16 64.12 81.39 Bbijopsvw CCE CCEP C-1-7 05/31/16 38.62 38.85 Bbgijopvw CMCSA Comcast Corp A-1-7 11/24/15 60.60 65.36 #BObgijopsv DLR Digital Realty Trust B-1-7 09/28/16 99.26 91.62 Bbgijopsvw DOV Dover Corp B-1-7 07/26/16 71.92 72.24 Bbgijopsvw DVN Devon Energy B-1-7 08/16/16 42.41 42.81 BObgijopsvw FOXA 21st Century Fox B-1-7 06/01/16 29.13 24.35 #BObgijopsv FRC First Republic C-1-7 03/01/16 64.69 78.50 Bbgijopsvw GD General Dynamics B-1-7 02/02/16 131.35 152.96 BObgijopsvw LLY Eli Lilly & Co. A-1-7 05/10/16 75.89 82.09 BObijopsvw LOW Lowe's B-1-7 08/24/16 76.96 71.30 Bbgijopsvw LRCX Lam Research C-1-7 12/08/15 79.52 100.35 Bbijopvw MET MetLife Inc. B-1-7 06/01/16 45.36 47.22 BObijopsvw NEE NextEra Energy A-1-7 09/27/16 126.79 121.74 BObijopsvw NWL Newell C-1-7 10/20/15 41.78 51.91 BObijopsv PCAR PACCAR Inc B-1-7 05/10/16 57.13 59.03 Bbijopsvw QCOM QUALCOMM B-1-7 11/24/15 47.61 68.19 Bbijopvw SIVB SVB Financial B-1-9 04/11/16 99.62 118.89 Bbijopvw SPG Simon Property B-1-7 10/06/15 185.53 196.81 BObgijopsv T AT&T A-1-7 01/13/16 32.56 38.87 BObijopsvw Source: BofA Merrill Lynch Global Research; Note: Please see the original report for details, including price objectives and investment rationale. Please see Footnote Key at the back of this report. One or more members of the US 1 Committee (or a household member) owns stock of one or more companies on the US 1 list; ***Coca-Cola European Partners (‘‘new CCE’’) replaced Coca-Cola Enterprises Inc. (‘‘old CCE’’) post-merger on May 31, 2016.

Endeavor, the Small Cap US Buy List (link to the latest report) Table 26: Endeavor Stocks / US Small Cap Buy List (7 October 2016) MLSCR Model Scores (100=best; 1=worst)

GICS Sector Company Symbol BofA ML Opinion Price 10/7/16

Mkt Value ($ Millions) Aurora

Enhanced Contrarian Add Date

Price on Add date Footnote

Cons. Discr. American Eagle Outfitters Inc AEO C-1-7 17.47 3,160 86 82 8/17/2016 18.33 Bbijopsvw Cons. Discr. Intl Game Technology Plc IGT C-1-7 26.29 5,264 100 100 6/20/2016 19.14 Bbijopv Cons. Discr. Jack In The Box Inc JACK C-1-7 94.75 3,095 72 25 7/9/2012 27.62 Bbijopvw Financials Endurance Specialty Holdings ENH No Rating 91.75 6,199 51 63 7/15/2014 53.43 Bbjopw Financials Selective Ins Group Inc SIGI B-2-7 39.18 2,265 86 85 3/9/2015 26.73 Bbijopvw Health Care Charles River Labs Intl Inc CRL B-1-9 83.04 3,926 92 83 12/10/2015 75.56 Bbijopsvw Health Care Hill-Rom Holdings Inc HRC B-1-7 62.21 4,073 88 78 9/8/2015 51.46 Bbijopsv Health Care Surgical Care Affiliates Inc SCAI C-1-9 47.52 1,907 93 99 4/14/2015 34.90 Bbw Industrials Air Lease Corp AL C-1-7 29.50 3,034 47 92 12/10/2015 32.22 Bbgijopsv Industrials Curtiss-Wright Corp CW B-1-8 87.87 3,903 65 44 2/11/2014 59.41 Bbijopsvw Industrials Greenbrier Companies Inc GBX C-1-7 36.59 1,032 94 99 11/12/2014 62.45 Bbijopsvw Industrials Swift Transportation Co SWFT C-1-9 20.98 2,800 80 94 8/15/2013 17.50 Bbijopvw Info Tech Advanced Energy Inds Inc AEIS C-2-9 47.80 1,897 100 100 2/5/2015 26.32 Bbivw Info Tech Fitbit Inc FIT C-1-9 14.04 3,104 33 53 4/18/2016 17.04 Bbgijopsvw Info Tech Take-Two Interactive Sftwr TTWO C-1-9 44.69 3,906 26 5 3/13/2014 20.88 Bbijovw Info Tech Tessera Technologies Inc TSRA C-1-7 39.02 1,895 77 87 5/11/2015 38.76 Bbijosvw Materials Berry Plastics Group Inc BERY C-1-9 43.21 5,250 100 99 6/14/2013 23.44 Bbijopsvw Materials Summit Materials Inc SUM C-1-9 18.77 1,181 54 89 5/18/2016 21.07 Bbgijopsvw Real Estate Corp Office Pptys Tr Inc OFC B-1-7 27.52 2,606 77 58 2/16/2016 21.50 Bbijopsvw Real Estate Kennedy-Wilson Holdings Inc KW C-1-7 21.95 2,469 85 82 9/20/2016 21.81 Bbgijopsvw Source: BofA Merrill Lynch Global Research

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US High Quality & Dividend Yield Screen (methodology) Table 27: High Quality and Dividend Yield Screen October 2016

Date Added Ticker Name Sector ROE (%) Debt/

Equity Yield (%) Quality

Market Val ($mn)

Cost Price Price QRQ

FCF/ DIV Footnotes

4/1/2012 ADP ADP Information Technology 32.2 0.4 2.4 A 40,235 55.19 88.20 B-1-7 1.7 Bbijopsvw 8/1/2016 AMGN Amgen Inc. Health Care 25.8 1.1 2.1 A- 124,834 174.15 166.81 C-2-7 3.3 BObgijopsvw 11/3/2014 DOV Dover Corp Industrials 14.8 0.8 2.3 A- 11,430 79.09 73.64 B-1-7 2.8 Bbgijopsvw 3/1/2013 JNJ Johnson & Johnson Health Care 20.9 0.4 2.6 A 323,189 76.70 118.13 A-2-7 1.8 Bbgijopsvw 10/3/2016 KIM Kimco Realty Real Estate 15.6 1.0 3.5 A- 12,161 28.95 C-1-7 2.6 Bbgijopsvw 5/1/2014 MMM 3M Industrials 39.2 1.0 2.4 A+ 106,513 140.12 176.23 B-1-7 1.9 Bbgijopsvw 8/1/2016 MSFT Microsoft Corp Information Technology 22.1 0.7 2.5 A- 448,849 56.58 57.60 B-1-7 1.3 BObgijopsvw 3/1/2016 PG Procter & Gamble Consumer Staples 16.6 0.5 3.0 A 239,520 82.55 89.75 A-1-7 1.4 Bbgijopsvw 3/1/2016 QCOM QUALCOMM Information Technology 16.2 0.4 2.9 A- 100,945 52.85 68.50 B-1-7 2.0 Bbgijopvw 10/3/2016 RTN Raytheon Co. Industrials 21.0 0.5 2.1 A 40,171 136.13 A-1-7 2.6 BObijopsvw 9/1/2016 TGT Target Corp. Consumer Discretionary 24.6 1.1 3.3 A- 39,482 70.81 68.68 B-1-7 3.1 BObgijoprsvw 2/1/2016 TIF Tiffany & Co. Consumer Discretionary 15.5 0.4 2.3 A- 9,071 63.76 72.63 B-1-7 1.9 Bbijopsvw 6/1/2015 UNP Union Pacific Industrials 21.1 0.7 2.3 A+ 81,234 101.60 97.53 B-1-7 1.2 BObgijopsvw 12/3/2012 WMT Wal*Mart Stores Consumer Staples 19.0 0.6 2.7 A 223,086 72.02 72.12 A-2-7 2.1 Bbijopv Average 21.8 0.7 2.6 128,623 2.1 S&P 500 benchmarks: 13.6 1.1 2.0 Source: BofA Merrill Lynch Global Research, BofA Merrill Lynch US Quantitative Strategy, FactSet, S&P Note: Calculations are based on data from the last 12 months. Financials stocks are excluded because they typically

have very high Debt/Equity ratios that have nothing to do with their capital structure. We calculate the benchmark S&P 500 ROE by taking the average of the aggregate ROE (S&P 500 EPS ÷ by book value per share) and

the median ROE. Disclaimer: These stocks have been selected according to the specified screening criteria and do not constitute a recommended list. Investors looking for a high quality dividend yield oriented investment can consider this analysis as one part of their decision making process, but should also consider other factors including fundamental opinions, financial risk, investment risk, management strategies and operating and

financial outlooks.

International Low Volatility & Dividend Yield Screen (link to latest report) Table 28: International Low Volatility & Dividend Yield screen (October 2016)

BofAML Ticker Company Country GICS Sector

Market Value

Price as of Oct. 7

LT Debt / Equity†

Gross Div.

Yield1†

5 Year Annualized

Dividend Growth† QRQ Footnote

ABB ABB Switzerland Industrials 50,673 22.72 39.9 3.3 1.9 B-2-7 BObijopsv AZN AstraZeneca United Kingdom Health Care 81,619 32.29 76.4 4.2 0.7 B-1-7 Bbgijopsvw BMO Bank of Montreal Canada Financials 41,075 63.15 11.1 4.0 3.7 XRVW BObgijopsv BCE BCE Inc. Canada Telecommunication Services 39,479 44.77 88.8 4.5 0.3 A-2-7 Bbgijopsv CAJ Canon Japan Information Technology 38,479 29.02 0.0 4.9 3.7 A-2-7 Bbijopv HSBC HSBC Holdings Plc United Kingdom Financials 152,339 38.55 56.5 5.3 6.1 B-1-7 BObgijopsv MFC Manulife Financial Corporation Canada Financials 28,687 14.41 22.8 4.1 0.8 B-1-7 Bbgijopsv NVS Novartis Switzerland Health Care 206,097 78.29 21.2 3.4 2.8 A-2-7 Bbijopsv PSO Pearson United Kingdom Consumer Discretionary 8,262 10.03 31.9 7.4 2.5 B-2-7 Bbijopv PHG Philips NV Netherlands Industrials 28,217 29.34 34.8 3.1 1.3 B-1-7 Bbijopsvw PUK Prudential Corporation United Kingdom Financials 46,914 36.08 38.7 3.9 11.5 B-1-7 Bbgijopsv SNY Sanofi France Health Care 99,282 38.53 22.6 4.3 3.2 B-1-7 Bbijopsv SKM SK Telecom Korea, Republic Of Telecommunication Services 15,842 21.73 42.7 4.3 0.3 XRVW Bbijopv SU Suncor Energy Incorporated Canada Energy 46,490 27.76 37.1 3.2 15.4 B-1-7 Bbgijopsv TRI Thomson Reuters Canada Financials 30,373 40.50 52.1 3.3 2.1 B-2-7 Bbgijopsvw TD Toronto-Dominion Bank Canada Financials 81,734 43.84 12.9 3.8 3.9 B-1-7 BObgijopsvw TOT Total France Energy 120,665 47.88 43.6 5.8 1.4 B-2-7 BObgijopsvw TM Toyota Motor Japan Consumer Discretionary 194,338 115.89 54.1 3.5 9.9 B-2-7 Bbgijopsv WPPGY WPP Group, Plc Jersey Consumer Discretionary 29,285 112.52 58.2 2.9 18.5 A-1-7 BNbijopsv Average: 39.2 4.2 4.7 MSCI ACWI ex-USA index: 97.1 2.9 This is a screen and not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their own individual circumstances / objectives before making any investment decisions. 1Investors should be aware that foreign governments sometimes withhold a percentage of dividends paid to US shareholders, which may adversely impact an investor who is following the list and may affect the yield received when compared to the stated yield for a security. † Data as of prior month-end. **RSTR: RESTRICTED. SOLICITATION OF COMMISSION ORDERS PROHIBITED. BofA Merrill Lynch is currently acting as financial advisor to Onex Corp in connection with its proposed acquisition, alongside Baring Private Equity Asia, of Thomson Reuters' Intellectual Property & Science business, which was announced on July 11, 2016. Source: Bloomberg; FactSet Research Systems; BofA Merrill Lynch Global Research

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Research portfolios and stock lists Stock lists

Note: Please be aware that links on this page are directed to lists that are updated as of the date of this publication. There may have been updates to one or more lists. Financial Advisors should check for the latest available constituents.

Regional Focus or 1 Lists are best investment ideas chosen among our Buy-rated stocks.

US

Europe

Growth 10 & Value 10 each chosen by the highest five-year EPS growth rates (Growth 10) or the lowest trailing 12-month P/E ratio (Value 10) based on quantitative screening criteria.

Stock portfolios US Large Cap Equity Five portfolios offerings are available to match each of the client profiles of Capital Preservation, Income, Income & Growth, Growth and Aggressive Growth. A sixth portfolio called the Core Portfolio is designed to reflect weighting decisions of our US equity strategy team. Each of these portfolios employs a combination of top-down sector weightings and bottom-up stock selection focusing on the 10 GICS sectors.

Holdings Primer

US Mid Cap Equity Launched in April 2010, this portfolio invests in stocks between $2-12 billion that are selected using a combination of fundamental, quantitative and portfolio management tools, and is built on the GICS sector framework.

Holdings Primer

International Equity This portfolio consists of ADRs and US-listed shares of non-US companies representing all major regions outside the US: Europe/Middle East/Africa, Asia, Latin America and Canada, and is built on the GICS sector framework.

Holdings Primer

Thematic Equity Launched in June 2014, this portfolio invests in stocks that are expected to benefit from one or more investment themes.

Holdings Primer

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The RIC R

eport | 11 October 2016

31

US economic forecast summary

Real Economic Activity, % SAAR 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 2014 2015 2016 2017 Real GDP 2.6 2.0 0.9 0.8 1.4 3.0 2.7 2.1 1.9 1.8 1.7 2.4 2.6 1.6 2.2 % Change, Year Ago 3.0 2.2 1.9 1.6 1.3 1.5 2.0 2.3 2.4 2.1 1.9 Final Sales 3.2 2.5 1.2 1.3 2.6 2.4 2.0 1.9 1.7 1.8 1.7 2.5 2.4 2.0 1.9 Domestic Demand 3.2 3.1 1.7 1.3 2.4 2.0 2.3 2.3 2.1 2.1 2.0 2.6 3.1 2.0 2.2 Consumer Spending 2.9 2.7 2.3 1.6 4.3 2.6 2.5 2.5 2.2 2.2 2.1 2.9 3.2 2.6 2.5 Residential Investment 14.8 12.6 11.5 7.8 -7.8 -2.5 4.0 4.0 4.0 4.0 4.0 3.5 11.7 4.7 2.4 Nonresidential Investment 1.6 3.9 -3.3 -3.4 1.0 2.2 2.0 1.8 2.3 2.3 2.3 6.0 2.1 -0.4 2.0 Structures -2.7 -4.3 -15.2 0.1 -2.1 10.0 1.0 1.0 1.0 1.0 1.0 10.3 -4.4 -2.9 1.9 Equipment -0.3 9.1 -2.6 -9.5 -3.0 -2.5 1.0 1.0 2.0 2.0 2.0 5.4 3.5 -2.7 0.7 Intellectual Property 8.0 2.1 4.5 3.8 9.0 4.0 4.0 3.5 3.5 3.5 3.5 3.9 4.8 5.0 4.0 Government 3.2 1.9 1.0 1.6 -1.7 0.3 1.1 0.5 0.5 0.5 0.5 -0.9 1.8 0.8 0.4 Exports 2.8 -2.8 -2.7 -0.7 1.8 7.5 1.0 1.0 1.0 2.0 2.0 4.3 0.1 0.4 2.0 Imports 2.9 1.1 0.7 -0.6 0.2 3.5 3.0 3.5 3.5 4.0 4.0 4.4 4.6 0.9 3.3 Net Exports (Bil 09$) -525 -547 -567 -566 -559 -543 -558 -576 -594 -610 -627 -426 -540 -556 -602 Contribution to growth (ppts) && -0.1 -0.5 -0.5 0.0 0.2 0.4 -0.3 -0.4 -0.4 -0.3 -0.3 -0.1 -0.7 -0.1 -0.2 Inventory Accumulation (Bil 09$) 93.8 70.9 56.9 40.7 -9.5 15.0 46.1 56.1 64.1 64.1 64.1 57.7 84.0 23.1 62.1 Contribution to growth (ppts) () -0.5 -0.6 -0.4 -0.4 -1.2 0.6 0.7 0.2 0.2 0.0 0.0 -0.1 0.2 -0.4 0.2 Nominal GDP (Bil $, SAAR) 17998 18142 18223 18282 18450 18662 18869 19057 19237 19416 19589 17393 18037 18566 19325 % SAAR 4.9 3.2 1.8 1.3 3.7 4.7 4.5 4.1 3.8 3.8 3.6 4.2 3.7 2.9 4.1 Key Indicators Industrial Production (% SAAR) -2.7 1.5 -3.4 -1.8 -0.5 2.4 0.0 1.4 1.8 2.0 2.0 2.9 0.3 -0.9 1.3 Capacity Utilization (%) 76.7 76.6 75.8 75.4 75.3 75.7 75.7 75.8 76.1 76.3 76.6 78.2 76.7 75.5 76.2 Nonfarm Payrolls (Avg mom change, 000s) 251 192 282 196 146 192 170 170 165 163 160 251 229 176 165 Civilian Unemployment Rate (%) 5.4 5.1 5.0 4.9 4.9 4.9 4.9 4.9 4.8 4.8 4.7 6.2 5.3 4.9 4.8 Civilian Participation Rate (%) 62.7 62.5 62.5 62.9 62.7 62.9 62.9 62.9 62.9 62.9 62.9 62.9 62.7 62.8 62.9 Productivity (% SAAR) 1.2 2.0 -2.4 -0.6 -0.6 0.6 0.9 0.5 0.5 0.2 0.1 0.8 0.9 -0.3 0.5 Personal Savings Rate (%) 5.7 5.9 6.1 6.1 5.5 5.3 4.9 4.8 4.7 4.6 4.3 5.6 5.8 5.5 4.6 Light Vehicle Sales (Millions SAAR) 17.2 17.7 17.9 17.3 17.1 17.5 17.2 17.6 17.7 17.8 17.9 16.4 17.4 17.3 17.7 Housing Starts (Thous. SAAR) 1156 1156 1135 1151 1159 1169 1180 1211 1236 1262 1289 1001 1108 1165 1250 Current Account (% of GDP) -2.3 -2.6 -2.9 -3.0 US Budget Balance ($bn, Fiscal Year) -483 -439 -590 -610 Inflation GDP Price Index (% SAAR) 2.2 1.2 0.9 0.5 2.3 1.6 1.7 1.9 1.9 2.0 1.9 0.5 1.1 1.3 1.9 % Change, Year Ago& 1.1 1.0 1.1 1.2 1.2 1.3 1.5 1.9 1.8 1.9 1.9 PCE Chain Prices (% SAAR) 1.8 1.1 0.4 0.3 2.0 1.1 1.5 2.0 1.9 2.2 1.9 1.5 0.3 1.0 1.8 % Change, Year Ago$* 0.3 0.3 0.4 0.9 1.0 1.0 1.2 1.7 1.6 1.9 2.0 Core PCE Chain Prices (% SAAR) 1.8 1.4 1.2 2.1 1.8 1.7 1.4 1.7 1.8 2.0 2.0 1.6 1.4 1.7 1.7 % Change, Year Ago$ 1.4 1.3 1.4 1.6 1.6 1.7 1.7 1.7 1.7 1.7 1.9 CPI, Consumer Prices (% SAAR) 2.4 1.4 0.8 -0.3 2.5 1.7 4.2 2.2 1.8 2.3 2.1 1.6 0.1 1.3 2.5 % Change, Year Ago! 0.0 0.1 0.4 1.1 1.1 1.2 2.0 2.6 2.5 2.6 2.1 CPI ex Food & Energy ( % SAAR) 2.3 1.8 2.2 2.7 2.1 2.0 2.5 2.4 2.4 2.4 2.4 1.7 1.8 2.3 2.4 % Change, Year Ago@ 1.8 1.8 2.0 2.3 2.2 2.3 2.3 2.3 2.3 2.4 2.4 Shaded regions represent BofA Merrill Lynch US Economics Research forecast Source: BofA Merrill Lynch US Economics Research


Global economic forecast summary GDP growth, % CPI inflation, % Short-term interest rates, % 2014 2015 2016F 2017F 2014 2015 2016F 2017F Current 2015 2016F 2017F Global 3.4 3.2 3.0 3.5 2.9 2.6 2.6 2.8 3.57 3.75 3.84 3.94 Global ex US 3.6 3.4 3.3 3.8 3.2 3.1 2.9 3.0 4.28 4.49 4.54 4.54 Euro Area 1.1 1.9 1.5 1.1 0.4 0.0 0.2 1.0 0.00 0.05 0.00 0.00 UK 3.1 2.2 1.9 0.7 1.5 0.0 0.7 2.2 0.25 0.50 0.25 0.10 Japan -0.1 0.6 0.6 0.9 2.7 0.7 -0.2 1.0 -0.10 0.10 -0.10 -0.10 Canada 2.5 1.1 1.1 1.6 1.9 1.1 1.6 1.8 0.50 0.50 0.50 0.50 Emerging EMEA 2.0 0.9 1.3 2.2 5.8 8.7 6.4 6.0 6.94 6.91 6.69 6.39 Latin America 1.0 -0.3 -1.1 2.0 5.0 6.0 6.0 4.3 10.41 11.42 13.88 13.93 Brazil 0.1 -3.8 -3.5 1.5 6.3 9.0 8.9 5.5 14.25 14.25 13.25 11.25 Emerging Asia 6.4 6.2 6.0 6.2 3.2 2.4 2.7 2.7 4.55 4.73 4.48 4.58 China 7.3 6.9 6.4 6.5 2.0 1.4 1.8 1.3 4.35 4.35 4.35 4.35 Shaded regions represent BofA Merrill Lynch Global Economics Research forecast. Source: BofA Merrill Lynch Global Economics Research

Interest rate forecast summary

(% EOP) 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 2013 2014 2015 2016 Fed Funds 0-0.25 0-0.25 0-0.25 0-0.25 0.25-0.50 0.25-0.50 0.25-0.50 0.25-0.50 0.50-0.75 0.50-0.75 0.75-1.00 0.75-1.00 0-0.25 0-0.25 0.25-0.50 0.50-0.75 Fed effective 0.06 0.06 0.08 0.07 0.20 0.25 0.30 0.25 0.62 0.62 0.87 0.87 0.07 0.06 0.20 0.62 3-Month T-Bill 0.04 0.02 0.01 -0.02 0.16 0.20 0.26 0.25 0.50 0.50 0.75 0.75 0.07 0.04 0.16 0.50 3-Month LIBOR 0.26 0.27 0.28 0.33 0.61 0.63 0.65 0.84 1.05 1.05 1.25 1.25 0.25 0.26 0.61 1.05 2-Year T-Note 0.66 0.56 0.64 0.63 1.05 0.72 0.58 0.75 0.95 1.00 1.20 1.25 0.38 0.66 1.05 0.95 5-Year T-Note 1.65 1.37 1.65 1.36 1.76 1.20 1.00 1.13 1.15 1.25 1.40 1.45 1.74 1.65 1.76 1.15 10-Year T-Note 2.17 1.92 2.35 2.04 2.27 1.77 1.47 1.57 1.50 1.75 2.00 2.10 3.03 2.17 2.27 1.50 30-Year T-Bond 2.75 2.54 3.12 2.85 3.02 2.61 2.28 2.29 2.25 2.45 2.60 2.75 3.97 2.75 3.02 2.25 2-Year swap 0.90 0.81 0.90 0.75 1.18 0.84 0.73 0.99 1.15 1.15 1.35 1.40 0.49 0.90 1.18 1.15 5-year swap 1.77 1.53 1.79 1.38 1.74 1.17 0.98 1.15 1.20 1.30 1.40 1.50 1.79 1.77 1.74 1.20 10-year swap 2.28 2.02 2.46 2.00 2.19 1.64 1.36 1.14 1.35 1.65 1.90 2.02 3.09 2.28 2.19 1.35 30-year swap 2.70 2.39 2.94 2.52 2.62 2.14 1.83 1.74 1.80 2.05 2.20 2.30 3.93 2.70 2.62 1.80 Note: Federal funds rate forecasts are modal expectations; other values are for market rates. Shaded regions represent BofA Merrill Lynch US Rates Research forecast. Source: BofA Merrill Lynch US Rates Research

FX rate forecast summary

Spot 16-Dec 17-Mar 17-Jun 17-Sep 17-Dec G3 EUR-USD 1.12 1.08 1.08 1.10 1.15 1.15 USD-JPY 103 105 108 112 114 115 EUR-JPY 115 113 117 123 131 132 Dollar Bloc USD-CAD 1.32 1.34 1.33 1.32 1.31 1.30 AUD-USD 0.76 0.69 0.68 0.68 0.68 0.68 NZD-USD 0.72 0.65 0.63 0.61 0.61 0.61 Europe EUR-GBP 0.90 0.84 0.84 0.87 0.88 0.88 GBP-USD 1.24 1.29 1.29 1.26 1.31 1.31 EUR-CHF 1.09 1.09 1.09 1.10 1.12 1.12 USD-CHF 0.98 1.01 1.01 1.00 0.97 0.97 EUR-SEK 9.65 9.40 9.30 9.20 9.20 9.15 USD-SEK 8.63 8.70 8.61 8.36 8.00 7.96 EUR-NOK 9.02 9.00 8.90 8.80 8.70 8.60 USD-NOK 8.07 8.33 8.24 8.00 7.57 7.48 Note: Spot exchange rate as of day before publishing. The left of the currency pair is the denominator of the exchange rate. Forecasts for end of period. Source: BofA Merrill Lynch Global FX Rates & Commodities Research


Methodology: US High Quality & Dividend Screen We list a screen of preferred securities that meet specified selection criteria and have relatively high yields for their credit rating and industry sector. The US High Quality & Dividend Yield Screen is not a recommended list.

Screening criteria We combined our two secular themes through the following criteria. In our view, these screening factors were likely to uncover higher-quality companies that offered relatively secure dividend yield. The stocks are selected from the S&P 500.

• S&P Common Stock Rank of A+, A, or A-. The S&P Common Stock Rankings are our main measure of quality. These rankings are based primarily on the growth and stability of earnings and dividends over a 10-year period.

• Return on Equity (ROE) greater than the average S&P 500 ROE.

• Debt/Equity lower than the S&P 500.

• Dividend yield greater than the S&P 500.

• BofA Merrill Lynch Research Investment Opinion indicates Buy or Neutral as well as the likelihood that the dividend will remain the same or be increased (ie, a dividend rating of “7”).

• The ratio of the last 12 months’ free cash flow to dividends must be greater than 1.0.

Methodology: International Low Volatility & Dividend Yield Screen We list a screen of preferred securities that meet specified selection criteria and have high yields relative to their index. The International Low Volatility & Dividend Yield Screen is not a recommended list.

This monthly screen selects low volatility and high dividend yield stocks from the universe of non-US stocks that have ordinary shares or ADRs that trade on the NYSE or NASDAQ, are covered by BofA Merrill Lynch Global Research, and are constituent members of the MSCI AC World ex-USA Index. The screen uses the following criteria to uncover low volatility companies that offer relatively secure dividend yield.

• BofAML Investment Rating indicates Buy or Neutral.

• BofAML Volatility Risk Rating is A-low or B-medium.

• BofAML Income Rating is 7, which indicates the dividend is expected to remain the same or be increased.

• The dividend yield is greater than the MSCI AC World ex-USA index.

• The debt/equity ratio is less than the MSCI AC World ex-USA index.

• The five-year annualized dividend growth rate is =>0%.

• If a stock from the prior month’s screen is put on the Extended Review list (XRVW), the stock will remain on the screen as long as it meets the other screening criteria.


Stocks mentioned in PRIMER PICKS 3Q16 table BofAML Ticker Bloomberg ticker Company name Footnotes Rating FOX FOX US 21st Century Fox #BObgijopsv B-1-7 FOXA FOXA US 21st Century Fox #BObgijopsv B-1-7 ADBE ADBE US Adobe Bbijopsvw B-1-9 AIV AIV US AIMCO Bbijopvw C-1-7 BABA BABA US Alibaba BOb C-1-9 GOOGL GOOGL US Alphabet A Bbijopsv B-1-9 GOOG GOOG US Alphabet C Bbijopsv B-1-9 AMZN AMZN US Amazon.com Bbijopsv B-1-9 AMCX AMCX US AMC Networks #BObgijopsvw C-1-9 AEO AEO US American Eagle Bbijopsvw C-1-7 AMH AMH US American Homes 4Rent Bbgijpsvw C-1-7 AAPL AAPL US Apple Inc. BObgijopsv B-1-7 HOME HOME US At Home Bbgijpsv C-1-9 AVB AVB US Avalon Bay Bbgijopsv B-1-7 BIDU BIDU US Baidu.com-ADR BObijopv C-1-9 BZUN BZUN US Baozun Bbis C-1-9 BFAM BFAM US Bright Horizons Bbijops C-1-9 CRI CRI US Carters Bbijops B-1-7 CBS CBS US CBS Corp-B #BObijopsv B-1-7 CMCSA CMCSA US Comcast Corp #BObgijopsv A-1-7 STZ STZ US Constellation Bbgijopsvw B-1-7 CTRP CTRP US Ctrip.Com-ADR Bbijopvw C-1-9 DKS DKS US Dick's Bbijopsv C-1-7 EBAY EBAY US eBay Bbgijopsvw B-1-9 EA EA US Electronic Arts Bbgijopsv C-1-9 ESS ESS US Essex Property Bbijopv B-1-7 EXPE EXPE US Expedia Bbgijopsv C-1-7 FB FB US Facebook Bbijopv C-1-9 FINL FINL US Finish Line Bbjop C-1-7 FDC FDC US First Data BObgijopsv C-1-9 FIT FIT US Fitbit Bbgijopsvw C-1-9 FL FL US Foot Locker Bbjop B-1-7 GME GME US GameStop Bbgijopsvw C-1-7 LOPE LOPE US Grand Canyon Bbjopw C-1-9 HPQ HPQ US HP Inc. BObijopsv C-1-7 IAC IAC US IAC Bbijopsv C-1-9 INTC INTC US Intel BObgijopsvw B-1-7 KATE KATE US Kate Spade & Co. Bbijopsv C-1-9 XLIRF 3938 JP LINE gisv B-1-9 LN LN US LINE Bbgisv B-1-9 LOW LOW US Lowe's Bbgijopsvw B-1-7 MMYT MMYT US Makemytrip Limited Bb C-1-9 MAS MAS US Masco Corp Bbgijopsw B-1-7 MTCH MTCH US Match Group Bbgijopsvw C-1-9 MSFT MSFT US Microsoft Corp BObgijopsvw B-1-7 NTES NTES US NetEase, Inc Bb C-1-7 NFLX NFLX US Netflix Bbijopv C-1-9 NVDA NVDA US Nvidia Bbpw C-1-7 ONDK ONDK US ONDK Bbijpv C-1-9 PNRA PNRA US Panera Bread Bbijopsv C-1-9 PLNT PLNT US Planet Fitness, Inc. Bbgw C-1-9 PCLN PCLN US priceline.com Bbgijopsv C-1-9 SIG SIG US Signet Jewelers Bbjop C-1-7 SINA SINA US Sina Corp Bb C-1-9 SIRI SIRI US Sirius XM Radio Bbgijopsv C-1-9 SOHU SOHU US Sohu.com Inc Bbjo C-1-9 SFUN SFUN US Soufun Bb B-1-8 SFM SFM US Sprouts Farmers Mkt Bbijops C-1-9 SBUX SBUX US Starbucks Corp Bbgijopsvw C-1-7 TTWO TTWO US Take-Two Bbijovw C-1-9 TGT TGT US Target Corp. BObgijoprsvw B-1-7 TPX TPX US Tempur Sealy Interna Bbgijopsvw B-1-9 ABCO ABCO US The Ad Board Company Bbjopw B-1-9 HD HD US The Home Depot Bbgijopsvw A-1-7 KR KR US The Kroger Co. BObgijopsvw B-1-7 TOL TOL US Toll Brothers Bbjp C-1-9


Stocks mentioned in PRIMER PICKS 3Q16 table BofAML Ticker Bloomberg ticker Company name Footnotes Rating TSQ TSQ US Townsquare Media Gro Bbijpv C-1-9 UA UA US Under Armour Bbgijopsvw C-1-9 UA C UA/C US Under Armour Inc Bbgijopsvw C-1-9 URBN URBN US Urban Outfitter Bbijops C-1-9 VIPS VIPS US Vipshop Bbw C-1-9 DIS DIS US Walt Disney Co. BObgijopsvw B-1-7 WHR WHR US Whirlpool BObgijoprsvw B-1-7 YNDX YNDX US Yandex Bb C-1-7

Footnote key # - One or more analysts responsible for covering the securities in this report owns stock of the covered issuer. ## - One or more analysts responsible for covering the securities in this report owns bonds of the covered issuer. ### - One or more analysts responsible for covering the securities in this report owns options on the financial instrument b - MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report. g - MLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months. i - The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates. j - MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months. o - The issuer is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates. p - The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates. q - In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale. r - An officer, director or employee of MLPF&S or one of its affiliates is an officer or director of this issuer. s - MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. v - MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months. w - MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of the report. z - The country in which this issuer is organized has certain laws or regulations that limit or restrict ownership of the issuer's shares by nationals of other countries. A - One of the analysts covering the issuer is a former employee of the issuer and, in that capacity, received compensation from the issuer within the past 12 months. B - MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis. C - The covered issuer and/or one or more of its affiliates owns 2% or more of the common stock of Bank of America Corporation F - MLPF&S or one of its affiliates trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of this research report. G - MLPF&S or one of its affiliates acts as a market maker for the preferred securities recommended in the report. H - MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the preferred securities of the issuer on a principal basis. N - The issuer is a corporate broking client of Merrill Lynch International in the United Kingdom. O - MLPF&S or one of its affiliates has a significant financial interest in the fixed income instruments of the issuer. If this report was issued on or after the 15th day of the month, it reflects a significant financial interest on the last day of the previous month. Reports issued before the 15th day of the month reflect a significant financial interest at the end of the second month preceding the report. P - Class A shares are variable voting Q - Class A shares are subordinate voting R - Class A shares are nonvoting. S - Class B shares are voting T - Class B shares are nonvoting. U - Class B shares are restricted voting. V - Class B shares are subordinate voting. W - Class S shares are subordinate voting. X - Common shares are subordinate voting. Y - Common shares are limited voting.

Special Disclosures Bank of America, N.A. and First Data Corp. own approximately 46.5% and 48.5%, respectively, of Banc of America Merchant Services, LLC, which provides payment solutions to its merchant clients worldwide.


Disclosures Important Disclosures

FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*

Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30%

Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.

INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock. BofA Merrill Lynch Research Personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking. The analyst(s) responsible for this report may also receive compensation based upon, among other factors, the overall profitability of the Bank’s sales and trading businesses relating to the class of securities or financial instruments for which such analyst is responsible.

Other Important Disclosures Prices are indicative and for information purposes only. Except as otherwise stated in the report, for the purpose of any recommendation in relation to: (i) an equity security, the price referenced is the publicly traded price of the security as of close of business on the day prior to the date of the report or, if the report is published during intraday trading, the price referenced is indicative of the traded price as of the date and time of the report; or (ii) a debt security (including equity preferred and CDS), prices are indicative as of the date and time of the report and are from various sources including Bank of America Merrill Lynch trading desks. The date and time of completion of the production of any recommendation in this report shall be the date and time of dissemination of this report as recorded in the report timestamp. This report may refer to fixed income securities that may not be offered or sold in one or more states or jurisdictions. 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Research Analysts Additional Research Investment Committee (RIC) Contributors James Barty >> Investment Strategist MLI (UK) +44 20 7996 3291 [email protected] Francisco Blanch Commodity & Deriv Strategist MLPF&S +1 646 855 6212 [email protected] Jill Carey Hall, CFA Equity & Quant Strategist MLPF&S +1 646 855 3327 [email protected] Michael Contopoulos HY Credit Strategist MLPF&S +1 646 855 6372 [email protected] Philip Fischer Municipal Research Strategist MLPF&S +1 646 743 1446 [email protected] Christina Giannini, CFA Portfolio Strategist MLPF&S +1 646 855 1444 [email protected] Ethan S. Harris Global Economist MLPF&S +1 646 855 3755 [email protected] Michael Hartnett Chief Investment Strategist MLPF&S +1 646 855 1508 [email protected] Ajay Singh Kapur, CFA >> Equity Strategist Merrill Lynch (Hong Kong) +852 3508 7753 [email protected] Hans Mikkelsen Credit Strategist MLPF&S +1 646 855 6468 [email protected] Ralf Preusser, CFA Rates Strategist MLI (UK) +44 20 7995 7331 [email protected] Shyam S.Rajan Rates Strategist MLPF&S +1 646 855 9808 [email protected] Savita Subramanian Equity & Quant Strategist MLPF&S +1 646 855 3878 [email protected] Stephen Suttmeier, CFA, CMT Technical Research Analyst MLPF&S +1 646 855 1888 [email protected] Dan Suzuki, CFA Equity & Quant Strategist MLPF&S +1 646 855 2827 [email protected]

Nigel Tupper >> Strategist Merrill Lynch (Hong Kong) +852 3508 7887 [email protected] Mark Ulrich Portfolio Strategist MLPF&S +1 646 855 5206 [email protected] David Woo FX, Rates & EM Strategist MLPF&S +1 646 855 5442 [email protected] Shusuke Yamada, CFA >> FX/Equity Strategist Merrill Lynch (Japan) +81 3 6225 8515 [email protected] >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions.




















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