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The RIC Report

The spillover from China

11 August 2015

China effect on US appears to be limited The sharp and sudden decline in China’s stock market, along with concerns that its economy could slow beyond the official 7% GDP growth target, have sparked questions about the ramifications for the rest of the world. We conclude that weakness in China by itself does not present a threat to the US, largely because of other positives.

Emerging markets and rest of Asia are affected Emerging markets are likely to be affected by slowing China growth through lower commodity prices and diminished export growth. China is the largest consumer of most non-petroleum based commodities. Many Asian countries such as Hong Kong, Korea, Taiwan and Japan have strong trade links with China.

Asset allocation shift from EM to developed markets We are moving 1% from Emerging Markets to Developed Markets in our US model and 2% from EM to Europe (ex-UK) in our Global model. India remains our only preferred large cap emerging market at this time, although significant policy action in China may be cause to adopt a more favorable view.

High yield not even in the woods yet The stress in the high yield market has yet to make a meaningful impact to non-commodity sectors, but Credit Strategist Michael Contopoulos expects it will happen. With heightened sensitivity to earnings coupled with rate risk and further commodity weakness, Contopoulos anticipates poor fundamentals and demand for higher compensation for illiquidity will soon be reflected in prices.

Stocks for consistency and predictability US Equity and Quant Strategist Savita Subramanian offers a stock screen of selections that have high quality, low earnings volatility and a high degree of consistency in meeting earnings expectations.

Schedule change for September RIC Our next RIC report will be published on Wednesday, September 9 due to the Labor Day holiday.

Investment Strategy Global

Table of Contents

Financial markets recap 2

The spillover from China 3

Asset allocation changes 9

A screen for consistency and predictability 10

High yield not even in the woods yet 12

RIC asset class views 15

Fixed Income, Econ, Commodities, Currencies:

views and risks 16

Global equity markets: views and risks 17

Asset allocation for individual investors 18

Portfolio of the month 24

Stock lists 25

US economic forecast summary 28

Global economic forecast summary 29

Interest rate forecast summary 29

FX rate forecast summary 29

Research Analysts 34

Research Investment Committee MLPF&S Martin Mauro Fixed Income Strategist MLPF&S Cheryl Rowan Portfolio Strategist MLPF&S Matthew Trapp, CFA Investment Strategist MLPF&S See Team Page for Full List of Contributors

http://research1.ml.com/C?q=VH-U0XXRnky3liYCFDIkqA

2 The RIC Report | 11 August 2015

Financial markets recap July 2015 review • Most developed market equities were up in July, while weakness in China caused

significant declines in Hong Kong and emerging markets. Positive developments in Greece led to a 3.8% gain the Euro Stoxx 50, while the Hang Seng and the MSCI EM index were down over 6%. The TOPIX is the best performing index this year at 14.7%.

• The Russell 2000 fell 1.2% in July compared to a 1.9% gain for the Russell 1000. For the year, large caps are now ahead of small caps at 3.7% vs 3.5%. Growth outperformed value in all three size segments (large, mid, and small) in July and for the year to date.

• As for US sectors, Energy dropped 7.7% in July and it is down 12% for the year. Utilities was the top sector last month at 6.1%, but it is still down 5.3% for the year. Health Care has the best performance this year at 12.6%, with Discretionary close behind at 12.0%.

• High Yield was the only sector of the bond market in negative territory last month, but it remains one of the top performers this year at 1.9%. 30-year Treasuries had the best performance in July at 3.8%, but they are still down 2.4% for the year.

• Commodities were hit hard in July, with WTI oil falling over 20%, while gold fell 6.8%. The US dollar gained 1.9% last month and it is up 7.4% this year.

Table 1: Equity indexes – total return (%) As of 31 July 2015 Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 Equity Indices (%, US dollar terms) S&P 500 2.1 1.4 11.2 3.4 17.6 16.2 7.7 Dow Jones Industrial Avg. 0.5 -0.2 9.3 0.6 13.5 13.9 8.0 NASDAQ Comp 2.9 4.1 18.7 9.0 21.9 19.3 10.0 MSCI All Country World 0.9 -1.5 3.4 3.9 13.4 11.0 6.7 FTSE 100 2.1 -1.3 -4.6 4.5 9.7 8.7 4.9 DJ Euro Stoxx 50 3.8 -0.9 -2.6 6.2 14.5 5.3 2.9 MSCI EAFE 2.1 -1.2 0.1 8.1 12.8 8.5 5.5 TOPIX 0.3 0.7 8.8 14.7 14.7 8.7 4.1 Hang Seng -6.1 -10.9 2.7 6.8 11.5 7.0 8.8 MSCI Emerging Markets -6.9 -12.8 -13.1 -4.0 1.0 0.9 7.0 Size & Style (%, US dollar terms) Russell 1000 1.9 1.3 11.2 3.7 18.0 16.5 7.9 Russell 1000 Growth 3.4 3.0 16.1 7.5 18.8 17.7 8.9 Russell 1000 Value 0.4 -0.4 6.4 -0.2 17.1 15.1 6.8 Russell Midcap 0.7 0.1 10.7 3.1 19.5 16.8 8.9 Russell Midcap Growth 1.6 1.2 14.7 5.9 19.9 17.5 9.2 Russell Midcap Value -0.1 -1.0 6.6 0.3 18.9 16.0 8.4 Russell 2000 -1.2 1.9 12.0 3.5 17.9 15.3 7.6 Russell 2000 Growth 0.4 5.5 20.1 9.2 21.0 17.9 9.2 Russell 2000 Value -2.8 -1.8 4.3 -2.0 14.8 12.6 6.0 S&P 500 Sectors (%, US dollar terms) Consumer Discretionary 4.8 6.9 23.7 12.0 24.6 22.7 10.5 Consumer Staples 5.5 4.5 19.3 4.7 15.0 16.4 10.9 Energy -7.7 -15.0 -25.7 -12.0 1.4 7.1 5.6 Financials 3.1 4.7 14.4 2.7 22.0 13.4 0.5 Health Care 2.8 7.2 27.5 12.6 28.0 24.2 11.3 Industrials 0.2 -2.0 6.9 -2.9 17.1 14.8 7.7 Information Technology 3.0 0.8 12.8 3.8 17.1 16.7 9.3 Materials -5.0 -8.3 -4.2 -4.5 11.9 10.7 7.4 Telecom Services 0.0 -4.1 -1.7 3.1 4.1 12.1 6.9 Utilities 6.1 0.4 10.5 -5.3 9.2 12.1 7.3 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 31 July 2015 Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) 2-Year Treasury 0.0 0.1 1.0 0.6 0.6 0.7 2.6 5-Year Treasury 0.5 0.1 3.2 1.7 0.7 2.5 4.5 10-Year Treasury 1.3 -0.9 5.3 0.8 0.6 4.2 5.1 30-Year Treasury 3.8 -3.2 10.2 -2.4 0.5 7.2 6.4 US Broad Market Index 0.7 -0.6 3.0 0.7 1.7 3.4 4.6 TIPS 0.2 -1.7 -1.5 0.4 -1.3 3.5 4.4 Municipals* 0.8 0.3 3.7 0.9 2.9 4.6 4.7 US Corporate Bonds 0.5 -1.6 1.7 0.1 2.8 4.9 5.4 US High Yield Bonds -0.6 -1.8 0.2 1.9 5.9 7.5 7.5 Emerging Mkt Corp Bonds 0.0 -0.9 -0.7 2.7 3.5 5.3 6.2 Emerging Mkt Sov Bonds 0.5 -1.9 -2.8 0.0 2.8 5.4 6.9 Preferreds 1.8 1.2 8.5 4.4 7.0 7.3 3.0 Foreign exchange** (%, in local currencies) US dollar 1.9 3.4 19.1 7.4 8.6 4.5 0.8 British pound 0.3 3.5 5.9 6.2 3.7 2.7 -0.6 Euro 0.4 -0.4 -9.4 -7.6 -0.2 -1.8 -0.6 Yen -0.6 -2.6 -10.1 -0.1 -12.7 -5.7 -0.7 Commodities** (%, US dollar terms) CRB Index -10.8 -11.7 -31.2 -11.9 -12.2 -5.9 -4.2 Gold -6.8 -7.4 -14.7 -7.9 -12.2 -1.5 9.8 WTI Crude Oil -20.8 -21.0 -52.0 -11.5 -18.8 -9.8 -2.5 Brent Crude Oil -17.9 -21.8 -50.8 -8.9 -20.8 -7.8 -1.3 Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ -1.3 -0.5 3.3 2.0 7.1 6.2 5.9 Hedge Fund - HFRI Fund of Funds¹ -1.0 0.2 4.0 2.7 6.3 4.1 3.2 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 August 2015 3

The spillover from China Martin Mauro MLPF&S

Cheryl Rowan MLPF&S

Matthew Trapp, CFA MLPF&S

The sharp and sudden decline in China’s stock market, along with concerns that its economy could slow below the official 7% GDP growth target, have sparked questions about the ramifications for the rest of the world. The International Monetary Fund estimates that China, the world’s second largest economy, accounted for one-third of global GDP growth over the past three years. The state of affairs in China has the potential to be much more disruptive than the turmoil in Greece. In what follows, we dissect the effects that a slowing in China’s economy could have on other nations’ economies, commodities and the combined effects of those developments on the US markets. We conclude that the weakness in China by itself does not present a threat to the US, largely because of other positives, but that the spillover effects from weakness in emerging markets pose a downward risk.

Table 3: Where China is ranked No. 1

Category Amount as of Population 1.4 billion Jul-14 GDP (PPP basis) 18.0 trillion intl $ 2014 Labor Force 772 million 2014 Exports $2.3 trillion 2014 FX reserves & gold $3.7 trillion Jul-15 Auto purchases 20.2 million Jul-15 Electricity consumption 5.3 trillion kWh Cellular telephones 1.3 billion 2014 Internet users 642 million 2014 Navigable waterways 110 thousand km 2011 Source: BofA Merrill Lynch Global Research, World Factbook, World Bank, Internet Livestats, Statistica, China Automotive Information Net, Bloomberg, Haver Analytics

Why China’s economy is slowing China’s GDP growth has been slowing for the last several years, from a double-digit pace to the current official government target of 7%, and there is a risk that it could slip below that pace. The causes of the slowing are cyclical and structural. The cyclical headwinds include a property market slowdown and excess capacity, which has curbed growth in industrial production. In addition, the government’s anti-corruption campaign and local government debt reforms have held back infrastructure investment. Renminbi appreciation and high real interest rates have weighed on growth as well.


Chart 1: China YoY GDP growth China's GDP growth has been slowing

Source: BofA Merrill Lynch Global Research, Bloomberg

China also faces structural issues, including a declining labor force, declining returns on capital, lackluster productivity growth and tightening environmental standards. China’s potential GDP growth has slowed to 7% from 10% in 2008, according to estimates from our China economics team.

More stimulus coming Despite these headwinds, the government still has plenty of room to adjust its fiscal and monetary policies to stimulate growth. In order to accelerate investment growth, the government will likely roll out more public and infrastructure projects and take multiple measures to improve project funding, such as larger local government bond issuance, in our opinion. On the monetary front, our China economics team expects the People’s Bank of China to cut rates by another 25 basis points in the third quarter, cut the required reserve ratio by another 100 basis points, and inject liquidity and guide down rates through various lending facilities. Our economics team believes that quantitative easing, in the form of direct purchases of securities, is unlikely in the near term given the monetary policy tools available.

Does the nearly 30% decline in the Shanghai Composite pose a threat to China’s growth? Our China economics team sees a limited negative impact. The primary impact should come from reduced trading activity, which we estimate could reduce the financials sector’s direct contribution to GDP by 0.5%. The negative wealth effect from the selloff is likely to be limited, since less than 7% of the population has a trading account, and there was little evidence of positive wealth effects when the stock market was rising. However, we will be watching for signs of softness in consumer spending. On that note, US autos analyst John Murphy notes that in June Chinese passenger vehicle sales declined slightly for the first time in over two years.

Effects on the rest of Asia and Europe The countries in Northeast Asia would likely face knock-on effects from a slowing in China. Trade links with China are highest for the Northeast Asian economies, including Hong Kong (88% of GDP), Taiwan (16%) and Korea (10%). More than a quarter of exports from Korea and Taiwan are destined for China. Almost a fifth of Japan’s exports go to China. The impact is much smaller in Southeast Asia, where only around 10% of exports go to China.

Asian countries with sizable foreign direct investment in China could also incur losses in the event of a sharp downturn. FDI into China is disproportionately large from Hong Kong, which accounted for 46% of total FDI into China from 2000 to 2014. Other countries with sizable FDI into China include Japan (5.7%), Singapore (4.5%), Korea (4%) and Taiwan (2.9%).

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Little effect on Europe A moderate slowdown in China would have limited effects on Europe, according to economist Ruben Segura-Cayuela. The direct real links between China and Europe are not sizable enough to generate substantial concern. Exports to China represent 3.7% of the Euro area’s total exports and 1.3% of Euro area GDP. There is divergence among countries, with Germany being the most exposed (Chart 2 and Chart 3). China represents 6.6% of German exports, which is about 2.5% of GDP. Segura-Cayuela estimates that if China’s GDP slows by 1%, the effect on export growth for the Euro area’s four largest countries would be -0.2%, with the largest decline in Germany at -0.25% and the smallest for Spain at -0.15%.

Chart 2: Exports to China, % total exports


Chart 3: Exports to China, % GDP


Meaningful effect on emerging markets Emerging markets are likely to feel a bigger impact from changes to China’s growth, largely through lower commodity prices (see next section) and diminished export growth. Economist Gustavo Reis estimates that China was a significant driver of EM ex-China growth during 2005-2008. He also found that the slowing in China’s growth has weighed on the rest of EM in recent years, particularly since late 2013. Over the past year, EM ex-China economic growth has fallen 1.6pp below its average since 1998 and China has likely accounted for more than a third of the shortfall. We lower our allocation to EM stocks because we expect these effects could build in coming months (see page 9).

Commodity prices hit hard China is both the largest producer and largest consumer of aluminum and iron ore, and the largest consumer of most other commodities (around 40-50% of copper; Chart 4). In the past 10 years, commodity demand growth in China represented between 50% and 100% of global consumption increases across most major commodity markets.

Chart 4: China's share of global commodity consumption With the exception of oil and gas, China is the world's largest consumer of most commodities

Source: BP, Antaike, IAI, ICSG, INSG, CRU, Woodmac, Metal Bulletin, BofA Merrill Lynch Global Commodity Research

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With Chinese demand easing, producers are rushing to cancel marginal investments and reduce ongoing production costs. On the supply side, China faces challenges fueled by years of overinvestment. Excess supply in China should keep steel, steel scrap, and iron ore prices low, hurting iron ore, met coal, aluminum smelters, and fixed cost steel producers, according to industry analyst Timna Tanners. Domestic Chinese aluminum prices recently hit a new low and steelmakers margins are also at record lows, as prices for hot rolled coil and rebar are at the lowest in over a decade.

Commodity and Derivatives Strategist Francisco Blanch notes that power generation in China has been flat and cement production, a proxy for construction, is contracting sharply. Reflecting that weakness, prices for industrial materials such as copper are near their lows for the year (Chart 5). As China shifts its exports to higher-end products, greater metals volumes are likely to flow to the rest of the world, creating an ongoing challenging environment for most commodities producers.

Lower commodity prices hurting EM nations A large part of the impact of the China slowdown on emerging markets comes from the decline in commodity prices. Most EM currencies have been declining too, adding to domestic inflation pressures. (Chart 6)

Commodity prices are also vulnerable to a devaluation in the Chinese renminbi (CNY), which appears likely if rates in China fall while the Fed is raising rates in the US. Blanch believes that a small CNY devaluation, which is what we expect, would be a slight net negative for commodity prices. But a sharp devaluation would be much more disruptive to commodities.

Oil prices are declining too, because of supply factors and demand. Blanch notes that Saudi Arabia, Iraq and the UAE have been increasing crude oil output as prices have been falling. The potential lifting of oil export sanctions against Iran would add to the glut. Blanch estimates an excess in supply averaging 1 million barrels per day over the next 18 months.

Chart 5: Copper, price per pound Copper is tumbling


Chart 6: USD vs EM currencies, 12/29/2000 = 100 EM currencies are falling


Limited impact on US The slowing in China should have little direct impact on the US economy and markets. US export exposure to China is modest, at only about 7% of total US exports, or roughly 1% of US GDP. The impact of the strengthening US dollar and the problems in EM countries appears to be limited as well, largely because favorable fundamentals outweigh the negatives. Ethan Harris, co-head of Global Economics, points out that balance sheet repair is progressing and the US does not face the fiscal drag from federal spending cuts or tax increases that hobbled activity in recent years.

Negative impact on US outweighed by other positives Recent data indicate a limited impact from the stronger dollar and slower global demand. Although manufacturing activity is slowing – the 12-month growth rate in industrial production has fallen from 4.7% last July to 1.3% in June – overall growth remains decent. The latest jobs report showed payroll employment up 2.1% from a year ago, and the unemployment rate at a cyclical low of 5.3%. Second quarter real GDP growth improved to 2.3% from 0.6% in the first quarter.

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Nonetheless, there are important risks If the slowdown in China continues and/or has a more widespread impact among other EM nations, the dollar would likely strengthen further, inflation would remain low, and problems in manufacturing industries could worsen. Although China accounts for only a small share of US exports, about half of US exports go to EM nations. Should EM economies weaken substantially, earnings weakness could spread beyond commodity-related economies, and investor confidence would erode. Under that scenario, the Fed would probably limit its rate hikes. Fed officials have stressed that the magnitude and pace of rate hikes will be “data dependent”

After energy and materials, US sectors most exposed to a China slowdown are those with direct investment or exports to the country. We take a snapshot of selected industries below.

Next to metals, industrials affected the most by China slowdown The US machinery industry is highly dependent on the strength and sentiment in commodities, so the China outlook is critical for these stocks, according to analyst Ross Gilardi. Direct machinery sales exposure to China is only around 5-10% sales, but the industry is also affected indirectly. The China Construction Machinery Association (CCMA) reports that the excavator segment has been in decline for three years and sales were down 27% in June. China machinery analyst Jacqueline Li notes that recent poor trends are the result of a decline in new property starts plus weak demand from industrial and infrastructure sectors. Gilardi believes the construction equipment market in China is riddled with overcapacity. He also notes that lower prices of crude oil are having a negative impact on construction equipment dealers and reduced oil field needs are lowering demand for rental equipment.

Most large cap industrials are affected more by oil price weakness than by China; however, there is a relationship between the two. Our commodities strategy team estimates that EM accounted for all of the oil demand growth in the past decade, of which China accounted for one-half. For this year and next, the team forecasts China to account for 20% of growth in demand for oil and one-third for natural gas. This decline directly affects engineering stocks, according to analyst Anna Kaminskaya, as suspension or postponement of oil and gas projects have significant effects on revenue streams.

Many industrial conglomerates have reported challenges in their China-related businesses recently. Common threads are reduced industrial capital spending, weak equipment markets, and sluggish oil and gas and process activities. General Electric reports a significant decline in China orders, even in the more defensive health care division. However, those with consumer and/or life sciences divisions report that those seem to be holding up well. Among the transportation stocks, slowdown in China directly affects stocks like Federal Express and UPS; FedEx has already reduced capacity between Asia and the US 30% over the past two years and China is 2-3% of FedEx’s revenues and slightly less at UPS, according to analyst Ken Hoexter. Railroads and truckers are indirectly affected to the extent that a slowdown in global growth impacts shipping and freight volumes.

Technology still a bright spot in China Our global semiconductors team writes that China has the most growth of any region for analog and memory chips, and notes that LTE (high speed network technology) penetration in China is only 12% of the more than 1 billion user base. LTE adds among the major Chinese telcos appear to be strong, as those companies are benefitting from tower spinoffs and potential state-owned enterprises reforms. In Apple’s recent earnings release, analyst Wamsi Mohan noted that China accounted for 26% of its total iPhone sales in the most recent quarter and revenues grew 112% versus last year. Overall market penetration of smartphones in China is less than 15%, suggesting considerable upside. Non-iPhones appear to be growing faster than iPhones, however. Apple’s China market penetration is high at over 60%, implying less opportunity for share gains and incremental risk to unit growth in the near term.


Consumer stocks not yet affected by China market decline, but flags are raised Most US autos and auto parts stocks have little direct China exposure, according to analyst John Murphy. The China Passenger Car Association reports that June auto sales declined slightly, but it was the first decline in over two years. Murphy estimates that if car sales to China were to decline 10% from estimates, the earnings hit to Ford and GM would be 3% and 4%, respectively. Tesla could be more adversely affected because a China slowdown is more likely to affect luxury customers.

There is already evidence of price discounting among luxury goods in China, particularly watches and leather goods, according to analyst Ashley Wallace. Although Asia is the largest contributor to margins for most luxury brands, Wallace believes the discounting is related more to a maturing customer base than to any Chinese stock market effect. China contributes 40% of earnings to restaurant company Yum brands, owner of KFC China and Pizza Hut. Same store sales in China have posted double-digit declines, but analyst Joe Buckley thinks these are part of ongoing challenges for Yum in China and not related to stock market volatility.

Equity and Quant Strategist Savita Subramanian writes that China-exposed stocks had a lower proportion of earnings beats and weaker guidance than other multinationals in the most recent quarterly EPS reports. Downward revisions to 2015 EPS have been made to those stocks already. Global Quant Strategist Nigel Tupper notes that stocks with revenue exposure to China have underperformed the MSCI All Country World Index since mid-January and suggests that investors with a negative view on China’s future growth prospects consider avoiding those stocks.


Asset allocation changes Reduce EM equities and add to Intl Developed/Europe ex UK We take our emerging markets equity exposure from an equal-weight to an underweight. China’s shadow looms large over EM and its slowing economy will likely remain a headwind. China is the largest constituent in the EM index at almost 24%. South Korea and Taiwan have significant trade linkages with China and they account for 26% of the EM index. South Africa, Brazil and Russia, which have significant commodities exposure, represent over 18% of the index.

We believe there will always be opportunities and volatility in emerging markets. India is an emerging market that we continue to find attractive. However, for a sustained uptrend, Emerging Markets Strategist Ajay Kapur believes a few things need to happen, including 1) a weaker USD; 2) a sharp rise in global inflation expectations; 3) a sustained rise in commodity prices; and 4) a massive easing in Chinese monetary policy. However, most of these are unlikely to happen in the near term, in our opinion.

Asset allocation change details For US investors with Tier 0 liquidity and a moderate risk profile, the RIC decreased its weight in Emerging Markets by 1% from 2% to 1% and increased its weight to International Developed by 1% from 11% to 12%.

Table 4: RIC asset allocation changes for US clients with a Tier 0 liquidity profile

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Previous New Diff. Previous New Diff. Previous New Diff. Previous New Diff. Previous New Diff. Stocks 22% 22% 0% 42% 42% 0% 64% 64% 0% 76% 76% 0% 84% 84% 0% Large Cap Growth 9% 9% 0% 16% 16% 0% 24% 24% 0% 27% 27% 0% 27% 27% 0% Large Cap Value 12% 12% 0% 17% 17% 0% 24% 24% 0% 27% 27% 0% 22% 22% 0% Small Growth 0% 0% 0% 2% 2% 0% 2% 2% 0% 3% 3% 0% 6% 6% 0% Small Value 0% 0% 0% 1% 1% 0% 1% 1% 0% 2% 2% 0% 5% 5% 0% International: Developed 1% 1% 0% 5% 6% 1% 11% 12% 1% 14% 15% 1% 20% 21% 1% International: Emerging 0% 0% 0% 1% 0% -1% 2% 1% -1% 3% 2% -1% 4% 3% -1% Bonds 54% 54% 0% 48% 48% 0% 32% 32% 0% 21% 21% 0% 13% 13% 0% Cash 24% 24% 0% 10% 10% 0% 4% 4% 0% 3% 3% 0% 3% 3% 0% Source: BofA Merrill Lynch Global Research

For global investors with Tier 0 liquidity and a moderate risk profile, the RIC reduced its weight in Emerging Markets by 2% from 8% to 6%, and increased its weight to Europe (ex-UK) by 2% to 14%.

Table 5: RIC asset allocation changes for global clients with a Tier 0 liquidity profile

Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive Previous New Diff. Previous New Diff. Previous New Diff. Previous New Diff. Previous New Diff. Global Equities 23% 23% 0% 44% 44% 0% 64% 64% 0% 75% 75% 0% 87% 87% 0% North America 9% 9% 0% 21% 21% 0% 29% 29% 0% 33% 33% 0% 38% 38% 0% Europe (ex UK) 5% 6% 1% 8% 9% 1% 12% 14% 2% 15% 18% 3% 18% 21% 3% UK 2% 2% 0% 4% 4% 0% 5% 5% 0% 6% 6% 0% 7% 7% 0% Japan 2% 2% 0% 4% 4% 0% 8% 8% 0% 8% 8% 0% 9% 9% 0% Pac Rim (ex Japan) 1% 1% 0% 1% 1% 0% 2% 2% 0% 3% 3% 0% 3% 3% 0% Emerging Markets 4% 3% -1% 6% 5% -1% 8% 6% -2% 10% 7% -3% 12% 9% -3% Global Fixed Income 54% 54% 0% 48% 48% 0% 33% 33% 0% 21% 21% 0% 9% 9% 0% Cash (USD) 23% 23% 0% 8% 8% 0% 3% 3% 0% 4% 4% 0% 4% 4% 0% Source: BofA Merrill Lynch Global Research


A screen for consistency and predictability Savita Subramanian MLPF&S

Does a screen for consistency and predictability make sense right now? Often, when investors are all asking for the same theme, one is better served by looking elsewhere. Our indicators continue to point to heightened levels of crowding, and selling crowded stocks has been and continues to be one of the biggest sources of alpha over the last few years. We recommend that investors go against the grain by focusing on high conviction but out-of-consensus ideas. We recommend avoiding so-called safe stocks as measured by low beta – here we see a bubble that is in the process of unwinding. But there are some themes based on consistency and predictability that are still out of consensus. High quality (measured by earnings volatility) and Big Old Ugly stocks are generally unloved and inexpensive, have strong balance sheets and should hold up well in an environment of uncertainty and volatility.

A screen for consistency & predictability For those investors looking for a company with a solid track record free from major downside surprises in recent years, we include a screen of S&P 500 stocks based on the following criteria:

• S&P quality rating of B+ or higher

• Annual EPS estimate dispersion < 3%

• 2-yr standard deviation of quarterly y/y% EPS growth < 20%

A whirlwind year for macro so far (and it’s only July) Over the last several months, the market has digested another commodity price downdraft, an apparent soft patch in global growth and the return of dollar strength. Oil has been pressured by the resilience of US production as well as the prospect of Iranian oil sanctions being lifted. China data has been surprising to the downside, and even in the US, outside of housing, recent data have been lackluster. Share buybacks are slowing, and the S&P 500 is on track for its first quarter of negative EPS growth since 2009. On top of this, we are likely less than five months away (and as close as two months away) from the first Fed rate hike in almost a decade. On the bright side, monetary policy remains extremely accommodative in Europe and Asia, and the Greek crisis appears to have cooled down for the time being. What some see as the biggest support for stocks is the wave of M&A activity, where 2015 is on pace to double last year’s total deal value and to eclipse the high point in 1998.

#1 request we’re getting: consistency & predictability We can usually gauge what is driving the market by requests we are getting from clients. And with this macro maelstrom, it is not surprising that consistency and predictability are top of mind. To that end, we provide a screen of 16 S&P 500 stocks with (1) S&P quality ratings of B+ or higher, (2) EPS estimate dispersion < 3%, (3) 2-yr standard deviation of quarterly y/y% EPS growth < 20%, (4) 200-day minimum daily underperformance vs. the S&P 500 of 4ppt, (5) net debt/EBITDA < 4x; and that haven’t missed quarterly EPS expectations in the last two years.

Are investors complacent or fearful? Mostly skittish The mixed macro data has resulted in a bipolar market. Although we have not seen a 5% pullback since October, 3% pullbacks have been commonplace, and the S&P 500 has been in the tightest trading range we have seen in this recovery. Low levels for the VIX suggest to some investors a building complacency, but we disagree. In fact, a lack of complacency may be one of the reasons why we have not seen bigger pullbacks. The volatility of the VIX is unusually high, suggesting skittishness more than complacency. And just about every measure of sentiment suggests more conservative positioning.

It still pays to go against the grain


• 200-day minimum daily underperformance vs. the S&P 500 of 4ppt

• Net debt/EBITDA < 4x

• Have not missed quarterly EPS expectations in the last eight quarters.

Table 6: BofAML Consistency & Predictability Screen

Ticker Company Sector EPS

Dispersion EPS

Volatility Min Rel

Perf S&P

Quality Rtg Net

Debt/EBITDA NKE NIKE Consumer Discretionary 2.6 12.9 -2.8 A+ -1.1 UNH UnitedHealth Health Care 0.5 11.8 -3 A+ 0.7 DIS Walt Disney Consumer Discretionary 1.3 11.3 -2.2 A+ 0.8 OMC Omnicom Consumer Discretionary 1.2 9.9 -2.2 A+ 1.4 SNA Snap-on Industrials 1.2 4.5 -2.2 A 1 NOC Northrop Grumman Industrials 1.1 11.9 -2.2 A 1.1 PEP PepsiCo Consumer Staples 1.9 10.6 -2.4 A 1.8 MCO Moody's Corporation Financials 1.3 14.2 -3.5 A- 0.7 HSIC Henry Schein, Inc. Health Care 0.4 3.8 -1.4 A- 0.9 RHT Red Hat Information Technology 0.7 18.1 -3.3 B+ -1.3 CTSH Cognizant Information Technology 1.5 5.7 -2.6 B+ -1 AAPL Apple Inc. Information Technology 1.4 19.1 -4 B+ 0.3 ORLY O'Reilly Automotive Consumer Discretionary 1.1 5.9 -2 B+ 0.6 MMC Marsh & McLennan Financials 1.6 9.6 -1.6 B+ 1 LB L Brands Consumer Discretionary 1.5 17.9 -2.6 B+ 1.7 AZO AutoZone Consumer Discretionary 0.8 4.2 -2 B+ 2 Note: Data as of 9/25/2015 Source: BofAML US Equity & Quant Strategy, Standard & Poor’s, FactSet, Compustat Note: 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.


High yield not even in the woods yet Michael Contopoulos MLPF&S

Neha Khoda MLPF&S

We think we’re seeing a pattern very similar to the late ‘90s emerge in the high yield (HY) corporate bond market today. HY typically overbuilds in one industry before realizing stress in that sector – think telecom then, commodities now. Over time, this develops into a risk aversion that spills into the broader market. The stress has yet to make a meaningful impact to non-commodity sectors, but we view this lack of movement not as a positive, but just delay of the inevitable. With heightened sensitivity to earnings coupled with rate risk and further commodity weakness, we think poor fundamentals and demand for higher compensation for illiquidity will soon be reflected in prices.

On the surface, the last couple of months have been painful for high yield. Over the last 7 weeks, yields have backed up 100 bp and year-to-date returns now stand at just 1.86%. However, we think the market has not yet realized the cathartic moment that will stabilize valuations. In fact, as we approach and enter into fall we continue to believe that high yield faces significant headwinds and continue to maintain our base-case forecast of 2-3% total returns for 2015. In our view, commodity, rate, liquidity, and most importantly, fundamental pressures have yet to fully affect the market; and when they do, we expect further price loss across a broader set of companies. Although we could envision a scenario where high yield rallies toward the end of year to approach mid-single-digit returns, we think the more likely scenario is that widening pressures far outweigh any tightening bias.

Let’s set the stage for the US HY market:

• A prior year total return of just 2.9%. After a -2.2% return from August through December, however, the market largely thinks the next year could see a bounce back.

• Wild swings of as much as 4 percentage points in GDP growth in any given quarter.

• Commodity pressures cause crude oil prices to fall by more than half in a period of less than 14 months.

• After more than 20% of all issuance coming from just one sector – as new technology and excitement around the future create a rush to the primary market – defaults begin to pick up.

• Heightened geopolitical risk causes isolated global stock market routs.

• The Fed indicates and ultimately begins a hiking cycle.

• 30% of the market is owned by mutual funds.

Although seemingly setting the stage for 2015, the above bullets were actually the circumstances surrounding 1998, not this year. The similarities are uncanny, though, right down to the last 5 months of 1998 (-2.2% return) versus the last 5 months in 2014 (-1.7% return). And of course, the surge in issuance in the late 1990s was in the telecom sector whereas this cycle it has been in the commodity-based sectors. We think the similarities are unlikely to end with the above, however, and envision a world where returns and the default cycle may also look similar in coming years.

The beginning of contagion We note that what amounted to idiosyncratic risk isolated to one sector in the late 1990s ultimately gave way to much broader contagion in the early 2000s. We think we’re seeing a similar pattern emerge today. High yield typically overbuilds in one industry before realizing


stress in that sector. At first, the weakness is typically met with skepticism about the broader impact to the market. However, over period of time, risk aversion is met with scrutiny around earnings and growth for what were previously non-stressed sectors. It is this heightened skepticism that ultimately feeds into capital markets, creating a re-pricing of risk and ultimately a lack of desire to fund risky companies. We’re seeing similar behavior today. A year ago, weakness was isolated to Metals and Mining and isolated pockets of Retail. This “idiosyncratic” weakness bled into Energy in the fall, and now is beginning to afflict Wireline, Technology and Financial companies (see AMD, FTR, WIN, NAVI, all of which have bonds that have fallen by 12-22pts in the last 2 months as just a few examples).

Although we’re beginning to see some names trade off meaningfully upon bad earnings or news, generally speaking the stress has yet to make a meaningful impact to non-commodity sectors. In fact, as recently as July 21, the ex-commodity portion of high yield was still yielding less than 6%, and although through July 27 YTW backed up to 6.22%, this still stands 55bp lower than during the height of the selloff last December. We view this lack of movement not as a positive, but rather as just a delay of the inevitable and an indication that there is room to move lower (in price). Individual issuers are reacting to company earnings misses, something we haven’t seen in some time. And when coupled with what could soon be rate risk and further commodity weakness, we think poor fundamentals and a demand for higher compensation for a lack of liquidity will soon be reflected in prices.

And with uncertainty and lack of confidence, investors have largely been unwilling to buy risk. We think the trend towards higher quality continues, as so far buying the dips in higher beta paper hasn’t been a strategy that has paid during the last 12 months CCC spreads have widened relative to the HY index even as the market rallied into the first four months of the year (Chart 8). However, safety in quality may simply be a perception. As we note below, we don’t particularly like crowded trades (even if in what are considered “safer” sectors) as a likely backing out of high grade investors in double B paper as rates increase and an influx of fallen angels could cause some weakness in the space. For these reasons, we maintain our preference for long cash and single B exposure, using index products for opportunistic beta.

Chart 7: CCC issuance as percentage of US HY issuance

Source: BofA Merrill Lynch Global Research

Chart 8: CCC vs. HY Index : decompression into a rally


Unintended leverage Perhaps most interesting to us is the effect that moving away from zero interest rates will have on markets. In our view, many economists fail to appreciate the leverage effect Fed policy has had on the overall market. Here we mean that as the Fed begins to normalize policy, small changes to the macro outlook or corporate fundamentals will likely have a high impact on asset pricing. This leverage effect stems from years of easy monetary policy depressing volatility effectively creating gamma once that volatility returns. Although we’re not overly concerned about one rate hike derailing the economy, or creating unsustainable interest payments (though that will come later) we do think a surprise rate hike will likely cause what has become a relatively tight asset class to experience large swings. By inducing reach-for-yield behavior the Fed may have incentivized the market to overlook fundamentals, creating sensitivity to those metrics when macro liquidity begins to dry up. Given the near doubling in the size of the market since 2008, we think crowded trades are likely to unwind, meaning both high yield as an asset class as well as crowded sectors.

0%5%

10%15%20%25%30%

'10

Q1

'10

Q3

'11

Q1

'11

Q3

'12

Q1

'12

Q3

'13

Q1

'13

Q3

'14

Q1

'14

Q3

'15

Q1

'15

Q3 300

500

700

900

1.5

1.8

2.0

2.3

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15CCC/HY Index OAS HY Index OAS


To this end, it’s very easy to envision a scenario where the next 4 years (plus last year) closely mimic the 5 years between 1998 and 2002 when the market returned 2.9% 2.5%, -5.1%, 4.5% and -1.89%. During this time defaults migrated from 2% to nearly 14% but the path to higher default rates was not smooth. Just like in the late 1990s, we expect an increase to mid-single-digit default rates next year and in 2017 before seeing another spike up later in 2017 and 2018.

Fundamentals rule At the end of the day, however, fundamentals will rule in high yield, and recently we have been getting a lot of questions with regard to our leverage measures. Our data nearly universally shows that over the last several years there has been a re-leveraging within high-yield; somewhat of an anomaly during periods of decent growth, low default rates and strong equity markets. We have run the numbers using unadjusted EBITDA, adjusted EBITDA, including and excluding Energy, Metals and Mining, and Materials and the story is consistently the same: leverage is increasing.

We also considered that our methodology, total sum of debt over total sum of EBITDA may be skewing the data higher because of some large issuers that have increased leverage over the last 5 years. To account for this, we decided to explore leverage several other ways. Unsurprising to us, the results generally remain the same: companies have re-levered to an extent not seen since the late 1990s, consistent with our previous discussions about debt to EBITDA being at or near all-time highs.

One method we chose to evaluate is simply the percentage of issuers increasing year-over-year leverage. Looking at this un-weighted sample of issuers, we see that 60% of companies have increased leverage y-o-y.

Chart 9: Proportion of HY issuers with increase in year-over-year leverage


Chart 10: Average leverage for HY issuers (with all issuers equally weighted)


Chart 11: Median leverage for HY universe and the top and bottom 20th percentile (by leverage)


Similarly, if we equal weight every issuer (calculate each issuers debt to EBITDA and average across all names) we see leverage, though below the late 1990s, is well above crisis levels and is near all-time highs (Chart 11).

Finally, looking at median leverage, we see a steady trend higher, also consistent with levels seen in the late 1990s, and further notice that the upper 20th and lower 20th percentile of issuers have also been steadily increasing leverage post crisis.

30%35%40%45%50%55%60%65%

1998 2001 2004 2007 2010 20133.00

3.50

4.00

4.50

5.00

1998 2001 2004 2007 2010 2013

-2

3

8

1998 2001 2004 2007 2010 2013

Top 20%Median Leverage: 100%Bottom 20%


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

(+ / = / –) Equity markets

US equities + Low but rising rates, tame inflation and a strong dollar are good for stocks, but slowing EPS growth and higher valuations suggest selectivity and protecting gains.

Consumer Discretionary – The sector usually underperforms when rates rise and the housing recovery is slow. It is expensive and overowned by active funds. Consumer Staples = Defensive sector with high quality, good yield and good dividend growth. Benefits from low oil prices. Energy + Cheap on most metrics and unloved by fund managers. Needs improved global growth for stocks to outperform. Investors will likely need patience. Financials = Benefits from US economic recovery; outperforms with rising dollar and higher short-term rates; good dividend growth potential. Healthcare = Best performing sector year-to-date and the preferred defensive sector. Healthcare services benefit from healthcare reform. Pharma a good yield play. Industrials + Good value and high quality here, but be selective given the slowdown in global growth and near-term challenges in China and Europe.

Info Technology + Our favorite sector. It has the highest foreign exposure and is the only sector with more cash than debt. EPS volatility is low. We like “old tech” and newer, thematic companies.

Materials = Poor risk/reward trade-off. Materials is the most exposed sector to China and Europe. It underperforms in rising dollar environment. Telecom – The best dividend yield sector, but payout ratios are high. The sector typically underperforms when rates rise. Worst risk/reward of any sector. Utilities – Typically lags in cyclical recoveries. It is hurt by rising rates. EPS growth is low and stocks have little room to raise dividends as payout ratios are high. Growth = Not much value in the “growth vs value” trade, but growth is starting to look more interesting. Growth should do better as profit growth slows. Value = Scarcity of yield gives credence to value stocks; favor financials, industrials and selected energy for patient investors. Small cap = Valuations and EPS are a bit better, but not enough to be bullish. Volatility works against small caps. Prefer larger and higher quality within segment. Large cap + Large look attractively valued vs small or mid caps. Prefer high quality stocks with good dividend growth potential.

Europe (ex. UK) + European Central Bank goals for gradual economic improvement and tame inflation appear to be on track, recovery is gaining traction as Grexit takes a back seat and EPS growth is improving, Favor recovery stocks with some defensive bias, including financials, technology, utilities and health care.

United Kingdom = Housing recovery and moderate GDP growth suggest the economy is on track. Expect Bank of England rate hikes to begin in 2016.

Japan + The market is improving with fundamentals, as well as strong corporate profits and the government’s commitment to end deflation. Pension funds shifting more to equities is also a plus for the TOPIX. Our favored sector is financials, as banks, real estate and insurance should all benefit from the end of deflation.

Asia Pac (ex. Japan) – The region depends on People’s Bank of China easing to fight looming deflation or a strong global recovery. Inflation data look weaker and should prompt further interest rate cuts. Lower oil prices are a positive because most are net importers.

Emerging markets – We downgrade to underweight this month on concerns that China is weaker for longer and influences other EM markets – we need some version of QE to become more bullish. Weaker LatAm currencies and government reform could benefit Brazil, but not yet. India is the only favored EM for rate cuts and reforms.

Fixed income markets Treasuries = Intermediate and long-term yields should end the year close to today’s levels. Agencies / MBS = A shortage of new supply should contain yields. TIPS = Inflation will likely remain low, but yields and breakevens on TIPS look attractive. US IG Corporates = We favor average quality and intermediate maturities. Liquidity and fund outflows present a risk. US HY Corporates = Fed rate hikes and declining commodity prices pose a near-term risk. Preferred securities = Favor QDI payers and fixed-to-floating structures. Non-US DM Sovereigns – Yields are low, and currency translation should work against dollar-based investors. EM $ Sovereigns + Possible slowing in China presents a risk, but yields are relatively attractive. EM local crncy Sovereigns = Strengthening dollar should hold back performance. Commodities/FX Gold = Fed rate hikes are the main obstacle to a sustained bull market. We forecast average price of $1313 in 2016. Oil = Prices could remain soft near-term, but should rise on balance for the next few years. We forecast WTI prices will average $57/bbl in 2016. US dollar + The US dollar should strengthen vs the euro, hold about steady vs yen, and rise against most EM currencies, except the Mexican peso.


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, Econ, Commodities, Currencies: views and risks Table 8: Regional strategist views and associated risks

Views Risks Global Economics (Ethan Harris, Alberto Ades) • US growth should remain solid amid continued weak inflation, resulting in the Fed patiently waiting

to raise interest rates in September 2015. • Growth in other developed markets has remained stable recently and should improve in 2015. • EM growth is likely to slow down due to lower commodity prices and less favorable financial

conditions.

• Downside risks: US capex softness, geopolitical crises, Greece exit, Chinese financial crisis and weak corporate investment in Japan.

• Upside risks: stronger US labor market recovery, lower oil prices, faster EM growth.

Global Rates (Shyam Rajon, Ralf Preusser) • US: We remain neutral in the near term. Rates are at the bottom end of the recent range, helped by

a stronger dollar and weaker commodities. Seasonals and low net issuance dynamics in Europe and the US in August could lead to a continued rally in rates. Over the medium term, we maintain our below consensus target of 2.35% for year-end on the 10y following our stronger dollar view.

• Europe: Summer technicals have resulted in the Bund rally we were expecting. While the low government bond supply may keep a lid on rates in August, we see risks of a slight selloff in September, driven by a pick-up in government and corporate bond issuance and potentially more hawkish than expected central banks.

• US: Lower commodity prices and continued weakness in emerging markets could move rates lower and flatten the yield curve further.

• Europe: Risks are that weakness in Chinese data persists, putting further pressure on commodity prices and global growth expectations. This could lead to an extended Bund rally in September.

Global Commodities (Francisco Blanch) • Given seasonal demand weakness, renewed USD strength, negative macro news on China and

the Iran deal, we recently lowered our end-of-3Q15 target to $45/bbl for WTI and to $50/bbl for Brent. We stick to our average 2016 forecast of $62/bbl for Brent and $57 for WTI as lower non-OPEC output partly offsets Iranian output increases. However, if cyclical conditions worsen or China experiences a hard landing, oil could head much lower.

• We see copper prices falling to $5,000/mt by year-end. We estimate Chinese copper demand growth at 2.5% YoY in 2015, which is not sufficient to absorb higher domestic refined production, implying that refined imports will likely decline this year. While China’s stimulus should help offtake and may support prices temporarily in 2H15, the government remains behind the curve, in our view, partially on caution not to exacerbate already existing overcapacities.

• If cyclical conditions worsen or China experiences a hard landing, oil could head much lower than our $62/bbl forecast for average Brent prices in 2016.

• Since crude oil is a very cyclical commodity, and demand and supply are inelastic in the short run, OPEC’s formalized policy shift will mean much more volatile oil prices going forward.

• 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 and high yield credit spreads to widen in 2015 and produce zero and low-

single-digit returns, respectively. Globally, we recommend quality positioning. • The coming US shift toward monetary policy tightening has substantial negative implications for

the corporate bond market. Rising interest rates are typically positive for credit spreads. However, we believe interest rates will increase too rapidly at times and lead to periods of wider credit spreads.

• In high yield, we expect low-single-digit returns for high yield this year. Globally, we recommend high quality positioning. The case for loan outperformance over bonds keeps getting stronger. Loan issuance year-to-date is running 40% lower than the same time last year, while CLO supply is roughly flat.

• The biggest risk to US investment grade is the possibility of wider credit spreads following fund outflows and institutional repositioning should interest rates rise meaningfully in the front end of the curve.

• The most underappreciated HY risk over a 12-18 month horizon is that global growth improves, the dollar weakens, and the Fed raises rates more aggressively than the market expects, in our view.

Municipals (Municipal Strategy Group) • The Public Finance Corporation paid just 1% of its $54.9mn of debt service due on 3 August, the

first default on debt bearing Puerto Rico's name. The default is indicative of severe credit stress, forcing Puerto Rico to choose which obligations it can honor.

• Puerto Rico notified GO bondholders that it temporarily suspended monthly GO debt service set-asides. While it does not necessarily mean that a default on GO debt service payments will occur, it certainly seems to increase the likelihood.

• PREPA released key terms of the various recovery plan proposals, including a 65-70% recovery for non-forbearing creditors. The parties seem far apart and this estimate is not necessarily a prediction of final recoveries.

• We continue to expect 2015 issuance to hit $400bn. • The tax risk to munis lies at the margin this year. In order to finance some other

governmental objectives, constraints to the municipal bond tax exemption may be attempted.

• Away from Puerto Rico, muni defaults and bankruptcies in 2015 should remain low as tax revenues rise at the state and local levels.

Global FX (David Woo, Alberto Ades) • We continue to look for a stronger USD, targeting parity for end-2015 EUR-USD, and generally

expect a higher dollar across the board. • Look for the USD to strengthen against G10 on stronger US growth, concomitantly higher US

yields, and chronic European weakness. • Our base case is for mild EMFX depreciation as the USD appreciates over the medium term.

Downside risks in China and commodity prices, as well as room to ease for EM central banks, also favor our view.

• 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.

• Any delays in the start of the Fed’s tightening cycle could allow for short-term rallies in EM currencies. A further drop in commodity prices could lead to a very sharp depreciation of currencies of exporters such as Russia, Colombia, and South Africa.



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 1% YTD; our year-end 2015 target is 470. We are bullish stocks,

bullish US dollar and bearish rates. We are opportunistic in EM and Commodities. • The investment regime will change from High Liquidity & Low Growth to Higher Growth & Lower Liquidity. • We believe the modest normalization of monetary policy will not lead to lower growth. It will likely raise

volatility; gold is suitable hedge against this risk.

• A rate shock in either the US or Europe, and/or a worsening US EPS trends in 2015 would be catalysts for asset prices to surprise on downside.

• On the upside, an uber-dovish Fed could fuel speculative activity in risk asset prices.

United States (Savita Subramanian) • Our year-end 2015 S&P 500 target is 2200, which is 18.7x our 2015 EPS forecast of $117.50 and 17.5x our

2016 EPS of $126. • Valuations have normalized from cheap to fair value, but stocks still look attractive relative to bonds. • The bull market is not over, but it is time to be selective. Positioning should continue to matter in 2015,

and we see the biggest opportunities in two areas of the market: 1) High Quality stocks and 2) “Big, Old & Ugly” stocks.

• Sector preferences: for the near term, Healthcare ranks best in our models. For the next year: O/W tech, industrials and energy, U/W utilities, telecom and consumer discretionary. For the next decade: favor healthcare over discretionary, tech over energy.

• Risks: global growth continues to disappoint, global recession, US growth does not reaccelerate, oil prices continue to fall, corporates continue to hoard their cash.

• A risk-off trade that drives Treasury yields even lower could cause bond proxies to outperform.

• The path to 2200 may not be a straight line; 5% pullbacks happen on average 3x per year.

Europe (James Barty) • Markets have bounced after looking oversold on Grexit risk. While this has not fully dissipated, concerns are

now on the backburner. Expect markets to grind higher in August. Medium-term focus is on the Fed hike with the latest payroll numbers increasing the probability of a September liftoff.

• Near-term, investors are focusing on China economic weakness and equity market volatility. Struggles persist for the commodity complex with Brent sub-$50/bbl and flattening cost curves.

• Constructive on Europe as the recovery gains traction and solid results seasons – 56% beat EPS expectations, 57% beat revenue estimates. Should translate into earnings growth (2% (13% EMU) 2015, 11% (12% EMU) 2016). Our base case 12-month outlook is Stoxx 600 at 450.

• Sector wise, favor domestic cyclicality plays: Banks our conviction overweight on European macro and fundamentals, and we are overweight technology on the 2H outlook and to gain exposure to global GDP. Utilities is our defensive yield play.

• We upgraded healthcare to neutral as a short-term safe haven and downgraded oils/industrials to neutral and basics to underweight (bearish metals prices) to reduce exposure to China and resources.

• Autos and staples remain our key underweights on sentiment and valuations.

• Downside risks are US rate hike expectations, Chinese equity markets, and the economic slowdown creating pressure on the European recovery and return of Grexit threat given question marks about Greece’s domestic banking system.

Japan (Kenji Abe) • We remain bullish, as we believe the end of deflation, new management mindset, record-high corporate

profits, valuation expansion, and public money flows into Japanese equities. • With wages picking up after Shunto negotiations, this should help achieve the government’s commitment

of and the BoJ to end deflation. • We recommend financials as the sector benefits the most from the end of deflation and our favorable view

of stocks increasing dividends and share buybacks.

Downside risks • Strong consensus USD bullishness is a contrary negative for yen and Japan

equities. A sharp slowdown of the Chinese economy could hurt Japanese company earnings.

• The inflation target not being met in the given timeframe due to lower oil dampening inflation expectations. On the other hand, too rapid rises in wages could cause investors to expect a change in the BoJ's QQE.

Asia-Pac ex-Japan (Ajay Kapur) • Valuations in China A-shares are still high despite more than a 30% rout since 12 June – median trailing

EV/EBITDA is at 22.3x (in the 83rd percentile) vs 12x for the US. Monetary policy in China is still exceptionally tight and corporate debt is high and rising, from 72% of GDP in 2007 to 125% currently, which could contribute to sluggish growth. De-leveraging and sharply lower interest rates will be required. Wait for aggressive policy easing to get back in the market. We remain neutral.

• China Risk-Love (investor sentiment), which reached egregiously euphoric levels in May, has come off a lot, but is still far from panic levels.

• OW: India, Taiwan UW: The Philippines, Malaysia and Hong Kong.

Downside risks • Simultaneous slowdowns in China and the US would be detrimental to

EM exporters. • Any unexpected rise in US bond yields and stronger USD, which will

reverse the carry flow and hurt dollar-short EM countries. • If lower oil prices are a sign of global growth recession and not due to

extra supply, EMs and their earnings are likely to go down with falling oil prices.

Emerging Markets (Ajay Kapur) • Emerging markets have been in a frustrating trading range over the past five years. We believe for

emerging equity markets to get into a sustained uptrend, we need a few things to happen, most of which are quite unlikely: 1) a weak USD; 2) a sharp rise in global inflation expectations; 3) a sustained rise in commodity prices; and 4) a massive easing in Chinese monetary policy.

• Stay with defensives, underweight cyclicals until a reversal in Chinese monetary policy • EM equities, especially in Latin America and South Africa, correlate with China’s monetary conditions,

which remain exceptionally tight. Russian equities are linked with oil. Chinese monetary policy looms large as a driver.

• BofAML’s base case is that Brazil loses its investment grade rating in the next 12 months. • Vladimir Osakovskiy, our Russia economist, thinks that the 2Q15 real GDP decline for Russia will likely

exceed 4% yoy, but that this will most likely mark the trough of the recession in Russia. • OW: India, Taiwan, South Africa, Brazil; UW: The Philippines, Mexico, Malaysia, Chile and Turkey.

Downside risks • Simultaneous slowdowns in China and the US would be detrimental to

EM exporters. • Any unexpected rise in US bond yields and stronger USD, which will

reverse the carry flow and hurt dollar-short EM countries. • If lower oil prices are a sign of global growth recession and not due to

extra supply, EMs and their earnings are likely to go down with falling oil prices.



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% 22% 40% 42% 60% 64% 70% 76% 80% 84% Bonds 55% 54% 50% 48% 35% 32% 25% 21% 15% 13% Cash 25% 24% 10% 10% 5% 4% 5% 3% 5% 3%

Table 11: Strategic and RIC allocations with alternative assets (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 Traditional Assets Stocks 20% 22% 40% 42% 55% 58% 65% 71% 70% 73% Bonds 50% 49% 45% 43% 30% 28% 20% 16% 10% 8% Cash 25% 24% 10% 10% 5% 4% 5% 3% 5% 4% 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 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 Traditional Assets Stocks 15% 17% 35% 37% 50% 53% 55% 59% 55% 57% Bonds 50% 49% 45% 44% 25% 23% 20% 17% 10% 9% Cash 25% 24% 10% 9% 5% 4% 5% 4% 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 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% 17% 35% 37% 40% 42% 50% 55% 40% 43% Bonds 45% 44% 40% 38% 25% 24% 15% 11% 10% 8% Cash 25% 24% 10% 10% 5% 4% 5% 4% 5% 4% 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% 22% 40% 42% 60% 64% 70% 76% 80% 84% Large Cap Growth 8% 9% 16% 16% 23% 24% 25% 27% 27% 27% Large Cap Value 12% 12% 16% 17% 23% 24% 25% 27% 21% 22% Small Growth 0% 0% 2% 2% 2% 2% 3% 3% 6% 6% Small Value 0% 0% 2% 1% 2% 1% 3% 2% 6% 5% International: Developed 0% 1% 3% 6% 8% 12% 11% 15% 16% 21% International: Emerging 0% 0% 1% 0% 2% 1% 3% 2% 4% 3% Bonds 55% 54% 50% 48% 35% 32% 25% 21% 15% 13% Tsys, CDs & GSEs 35% 42% 27% 21% 13% 12% 6% 8% 2% 5% Mortgage Backeds 14% 1% 13% 12% 9% 8% 6% 5% 4% 3% IG Corp & Preferred 6% 11% 10% 11% 9% 7% 9% 5% 5% 2% High Yield 0% 0% 0% 1% 2% 2% 1% 1% 2% 1% International 0% 0% 0% 3% 2% 3% 3% 2% 2% 2% Cash 25% 24% 10% 10% 5% 4% 5% 3% 5% 3% 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% 41% 40% 39% 38% 38% 35% 36% 33% 32% Large cap value 60% 55% 40% 41% 38% 38% 35% 35% 26% 26% Small growth 0% 0% 4% 4% 4% 3% 4% 4% 8% 7% Small value 0% 0% 4% 2% 4% 2% 4% 2% 8% 6% International: Developed 0% 4% 10% 14% 13% 18% 18% 20% 20% 25% International: Emerging 0% 0% 2% 0% 3% 1% 4% 3% 5% 4% 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% 78% 55% 43% 40% 38% 25% 38% 15% 36% Mortgage Backed 25% 2% 25% 24% 25% 24% 25% 24% 25% 22% IG Corp & Preferred 10% 20% 20% 23% 25% 23% 35% 23% 40% 20% High yield 0% 0% 0% 3% 5% 6% 5% 6% 10% 8% International 0% 0% 0% 7% 5% 9% 10% 9% 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 40% 22% 20% 32% 13% 12% 30% 8% 6% TIPS 3% 2% 2% 6% 3% 2% 4% 2% 1% Agencies (GSEs) 35% 19% 17% 0% 0% 0% 0% 0% 0% Mortgages 2% 1% 1% 24% 10% 9% 21% 5% 4% Corporates 20% 11% 10% 22% 9% 9% 21% 4% 4% Preferreds 0% 0% 0% 1% 1% 0% 1% 0% 0% High Yield* 0% 0% 0% 6% 3% 2% 9% 2% 2% International: Developed Markets 0% 0% 0% 1% 0% 0% 1% 0% 0% International: Emerging Markets USD 0% 0% 0% 5% 2% 2% 7% 2% 2% International: Emerging Markets Local 0% 0% 0% 3% 1% 1% 6% 2% 1% TOTALS 100% 100% 100% 100% 100% 100% 100% 100% 100% TAXABLE-Maturity 1-4.99 years 100% 100% 100% 42% 42% 42% 38% 38% 38% 5-14.99 years 0% 0% 0% 51% 51% 51% 53% 53% 53% 15+ years 0% 0% 0% 7% 7% 7% 9% 9% 9% 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% 25% 25% 35% 35% 15+ years 0% 0% 25% 25% 35% 35% 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. Source: BofA Merrill Lynch Global Research

US Equity sector allocation models Table 18: Portfolio Strategy team's US equity sector weightings by investor profile

Weight in

Conservative Moderately

Moderate Moderately

Aggressive S&P 500 conservative aggressive Consumer Discretionary 12.9% 10.0% 6.0% 11.0% 12.0% 13.0% Consumer Staples 9.6% 22.0% 17.0% 12.0% 8.0% 3.0% Energy 7.1% 12.0% 12.0% 10.0% 12.0% 12.0% Financials 16.8% 12.0% 14.0% 15.0% 7.0% 9.0% Health Care 15.6% 15.0% 11.0% 11.0% 17.0% 18.0% Industrials 9.9% 11.0% 12.0% 16.0% 18.0% 15.0% Info Technology 19.8% 6.0% 8.0% 14.0% 23.0% 27.0% Materials 2.9% 0.0% 0.0% 2.0% 3.0% 3.0% Telecom Services 2.4% 3.0% 10.0% 3.0% 0.0% 0.0% Utilities 2.9% 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 recommendations are based on qualitative views from our BofAML Global Research strategists, translated into recommendations with a quantitative optimization model. 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% 23% 40% 44% 60% 64% 70% 75% 80% 87% North America 8% 9% 19% 21% 28% 29% 32% 33% 37% 38% Europe (ex UK) 4% 6% 7% 9% 11% 14% 13% 18% 15% 21% UK 2% 2% 4% 4% 5% 5% 6% 6% 7% 7% Japan 2% 2% 3% 4% 5% 8% 6% 8% 7% 9% Pac Rim (ex Japan) 1% 1% 2% 1% 3% 2% 4% 3% 4% 3% Emerging Markets 3% 3% 5% 5% 8% 6% 9% 7% 10% 9% Global Fixed Income 55% 54% 50% 48% 38% 33% 28% 21% 18% 9% Govt Bonds 34% 34% 30% 27% 24% 19% 18% 12% 10% 2% Inv. Grade Credit 8% 8% 8% 9% 6% 6% 4% 4% 3% 3% High Yield Credit 2% 1% 2% 2% 1% 1% 1% 1% 1% 1% Collateralized Debt 11% 11% 10% 10% 7% 7% 5% 4% 4% 3% Cash (USD) 25% 23% 10% 8% 2% 3% 2% 4% 2% 4% *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% 21% 38% 42% 56% 60% 66% 71% 73% 77% North America 8% 9% 18% 20% 26% 27% 30% 31% 34% 34% Europe (ex UK) 3% 5% 7% 9% 10% 13% 12% 17% 14% 18% UK 2% 2% 3% 3% 5% 5% 6% 6% 6% 6% Japan 2% 2% 3% 4% 5% 8% 6% 8% 6% 8% Pac Rim (ex Japan) 1% 1% 2% 1% 3% 2% 3% 2% 4% 3% Emerging Markets 2% 2% 5% 5% 7% 5% 9% 7% 9% 8% Global Fixed Income 52% 51% 50% 48% 32% 27% 22% 15% 10% 4% Govt Bonds 32% 32% 30% 27% 20% 15% 14% 8% 6% 1% Inv. Grade Credit 8% 8% 8% 9% 5% 5% 3% 3% 2% 2% High Yield Credit 2% 1% 2% 2% 1% 1% 1% 1% 0% 0% Collateralized Debt 10% 10% 10% 10% 6% 6% 4% 3% 2% 1% Cash (USD) 25% 23% 7% 5% 2% 3% 2% 4% 2% 4% 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 clients (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% 17% 35% 39% 45% 49% 51% 56% 53% 60% North America 6% 7% 16% 18% 21% 22% 24% 25% 24% 25% Europe (ex UK) 3% 5% 6% 8% 8% 11% 9% 14% 10% 16% UK 1% 1% 3% 3% 4% 4% 4% 4% 5% 5% Japan 1% 1% 3% 4% 4% 7% 4% 6% 4% 6% Pac Rim (ex Japan) 1% 1% 2% 1% 2% 1% 3% 2% 3% 2% Emerging Markets 2% 2% 5% 5% 6% 4% 7% 5% 7% 6% Global Fixed Income 51% 50% 48% 46% 33% 28% 27% 20% 15% 6% Govt Bonds 31% 31% 30% 27% 21% 16% 17% 11% 9% 1% Inv. Grade Credit 8% 8% 7% 8% 5% 5% 4% 4% 2% 2% High Yield Credit 2% 1% 2% 2% 1% 1% 1% 1% 1% 1% Collateralized Debt 10% 10% 9% 9% 6% 6% 5% 4% 3% 2% Cash (USD) 25% 23% 7% 5% 2% 3% 2% 4% 2% 4% 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% 15% 32% 36% 41% 45% 47% 52% 46% 50% North America 5% 6% 14% 16% 19% 20% 22% 23% 21% 21% Europe (ex UK) 2% 4% 6% 8% 8% 11% 9% 14% 9% 14% UK 1% 1% 3% 3% 4% 4% 4% 4% 4% 4% Japan 1% 1% 3% 4% 3% 6% 4% 6% 4% 6% Pac Rim (ex Japan) 1% 1% 2% 1% 2% 1% 2% 1% 2% 1% Emerging Markets 2% 2% 4% 4% 5% 3% 6% 4% 6% 4% 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% 7% 7% 8% 4% 4% 3% 3% 1% 1% High Yield Credit 2% 1% 2% 2% 1% 1% 1% 1% 0% 0% Collateralized Debt 9% 9% 9% 9% 5% 5% 4% 3% 1% 0% Cash (USD) 25% 23% 5% 3% 2% 3% 2% 4% 2% 4% 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: Sector Weightings (Sectors listed in order of preference)

Sector Weight in S&P 500

BofAML Weight (+ / = / -) Comments Industry Preferences / Themes

Information Technology

19.8% +

• Cash rich - dividend, buyback, capex beneficiary

• Attractive valuation –20% implied upside to return to historical average relative forward P/E

• Geographic diversity/highest foreign exposure, offers secular and cyclical growth, lower EPS volatility vs history

• Stock pickers' industries: Tech Hardware and Software

• Risks: capex recovery could stall, no acceleration in global growth

“Old Tech”

Industrials 9.9% + • Less risky than you might expect: second-highest percentage of high quality stocks after Consumer Staples

• GDP-sensitive, capex exposure, global exposure; beneficiary of recovery in Europe

• Risks: Capex recovery could stall, no acceleration in global growth

Industrial Conglomerates, Aerospace & Defense, other high quality multinationals

Energy 7.1% +

• Risk-reward has improved: our commodity strategists’ forecasts imply the bottom in oil is behind us

• Attractive valuation: trading at near lowest levels since 1986 on relative P/B

• Estimate revision trends have improved, and Energy positively surprised on 1Q earnings

• Record underweight by large cap mutual funds (since 2008)

• Risks: oil prices continue to fall, no reacceleration in global growth

High quality mega caps with attractive dividend yields and low oil betas

Financials 16.8% =

• Benefits from US cyclical recovery/housing recovery, cash deployment potential, outperforms in rising dollar

environments

• Attractively valued on relative P/B, but remains expensive vs history on relative forward P/E

• High beta, deteriorated in quality, likely to underperform mid/late cycle

• Tailwind to banks from refinancing boom and from lower credit costs have likely ended

• Risks: continued litigation, regulatory reform, stress in European financial system, US recession

Banks and Insurance (balance sheet strength, cash return potential, rising rates beneficiaries) Avoid mortgage plays (slowing housing cycle)

Health Care 15.6% =

• Large cap pharmaceuticals are our preferred yield play (underowned, not stretched on valuation)

• Beneficiary of aging demographics – both due to increased drug demand and baby boomers’ need for income

• Attractive across valuation metrics

• Health Care Reform benefits hospitals, Medicaid managed care, labs, and PBMs

• Risks: Most govt. exposure of any sector, overweight by mutual funds; implementation risk around HC Reform

Pharmaceuticals, Biotechnology, aging demographics beneficiaries

Consumer Staples

9.6% =

• Contrarian - underowned by fund managers, inexpensive vs history across valuation metrics

• High quality, dividend yield, and dividend growth potential (lower payout ratio than Utilities/Telecom)

• Beneficiary of lower oil prices (low-end consumption)

• Higher foreign exposure and less government risk than the other defensive sectors

• Risks: inflation, upside surprise to profits growth

Middle income consumption plays

Materials 2.9% = • Poor risk-reward vs other non-financial cyclicals (high beta but lower LTG)

• Risks: no bottoming in China growth (more leveraged to improvement in China than Industrials, which is also highly

exposed to improvement in Europe as well as EM), underperforms in rising dollar environments

Avoid Metals & Mining (overcapacity)

Telecom 2.4% - • High payout ratios (little room to raise dividends as rates rise)

• Highest dividend yield, hedge against macro uncertainty, low intra-stock correlations

• Worst risk-reward tradeoff of all 10 sectors, should underperform as interest rates rise

Utilities 2.9% -

• Expensive vs. history on relative forward P/E, no growth, high payout ratios (little room to raise dividends as

rates rise)

• High dividend yield, underowned by fund managers, hedge against macro uncertainty, purely domestic

• Should underperform as interest rates rise

Consumer Discretionary

12.9% -

• Overweight by active managers, expensive across various valuation metrics, deteriorating management guidance

• Rising rates may drive shift from spending to saving and may slow housing recovery

• Consumers may save rather than spend extra disposable income from lower oil prices, and more beneficiaries

of low-end spending are found within Consumer Staples

• Historically underperforms mid/late cycle

• Most labor-intensive sector and operating margins near peak levels

We prefer middle-income consumption plays over high-end Avoid labor-intensive stocks trading near peak margins

*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

Core Portfolio The Equity Core Portfolio attempts to achieve capital gains over a 1-2 year time horizon by combining tactical sector weighting decisions from our US Equity Strategy team with stock selections that offer attractively valued growth potential. For recent changes and current holdings, please see the following: Research Portfolios: Equity Core Portfolio Snapshot Monthly 10 August 2015


Portfolio of the month Growth Portfolio The primary objective is appreciation of capital, rather than generating current income, over a long-term time horizon. A buy and hold strategy of well-positioned companies in strategically favored sectors and industries is utilized

Focus on companies with consistent and above-average earnings growth that has been demonstrated over time under a variety of economic circumstances.

Willing to consider a higher price/earnings multiple for a faster pace of earnings per share growth.

Table 24: Equity Growth Portfolio Model Price

Sectors/Target Weights Symbol Proposed Weight Close 8/7/2015 Average Cost Yield † QRQ Rating Footnote Consumer Discretionary (12%) Dick's DKS 3% 51.23 $41.52 1.07% C-1-7 Bbijopsvw Amazon.com AMZN 3% 488.27 $203.77 0.00% B-1-9 BObgijopsv Disney Walt DIS 3% 119.33 $83.90 1.11% B-1-7 BObijoprsvw BorgWarner BWA 3% 51.55 $43.22 1.01% C-1-7 Bbgijopsvw Consumer Staples (8%) Mondelez Int MDLZ 4% 42.25 $37.06 1.61% B-1-7 Bbijopsvw Costco COST 4% 146.38 $68.31 1.09% B-1-7 Bbijopsvw Energy (12%) Anadarko Petro APC 3% 72.66 $84.18 1.49% C-1-7 Bbgijopsvw Schlumberger SLB 3% 85.26 $89.74 2.35% B-1-7 Bbijopsvw Cabot Oil & Gas COG 3% 27.91 $35.55 0.29% C-1-7 Bbgijopsw Noble NBL 3% 36.90 $50.60 2.01% B-1-7 Bbgijopsvw Financials (7%) Affiliated Mgrs. AMG 4% 218.69 $56.60 0.00% C-1-9 Bbgijopsvw American Tower AMT 3% 96.54 $85.87 1.82% B-1-7 Bbgijopsvw Health Care (17%) Zoetis ZTS 3% 50.02 $30.95 0.66% C-1-7 Bbijopsvw Express Scripts ESRX 3% 94.08 $50.05 0.00% B-1-9 BObijopsvw Thermo Fisher TMO 4% 140.06 $55.65 0.43% A-1-7 Bbgijopsvw Allergan AGN 4% 315.35 $221.58 0.00% C-1-9 Bbijopsv Celgene Corp. CELG 3% 138.26 $106.12 0.00% B-1-9 BObijopsvw Industrials (18%) Danaher DHR 4% 87.86 $73.56 0.61% B-1-7 Bbijopsvw Honeywell HON 3% 104.74 $38.89 1.98% B-1-7 Bbijopsvw Stericycle SRCL 4% 134.61 $134.61 0.00% A-1-9 Bbgijopsvw FedEx Corp. FDX 4% 168.50 $87.32 0.59% B-1-7 Bbgijopsvw HD Supply HDS 3% 33.71 $33.71 0.00% C-1-9 Bbgijopsvw Information Technology (23%) Twitter TWTR 3% 36.09 $44.30 0.00% C-2-9 Bbgijopsv Google A GOOGL 4% 695.10 $436.65 0.00% B-1-9 Bbijopsv Apple Inc. AAPL 3% 125.22 $64.44 1.66% C-2-7 BObgijopsv Avago AVGO 3% 129.59 $33.79 1.23% C-1-7 Bbijopsvw VMware Inc VMW 3% 86.11 $91.80 0.00% C-1-9 Bbijopsvw Salesforce.com CRM 3% 73.87 $18.22 0.00% C-1-9 Bbijopsvw Adobe ADBE 4% 80.73 $67.04 0.00% B-1-9 Bbgijopsvw Materials (3%) Monsanto Company MON 3% 105.35 $68.71 2.05% XRVW Bbgijopsvw Telecomm. Services (0%) Utilities (0%) Cash (0%) 0% 100% 0.74% †: Yields are estimated based on historical information. There is no assurance that the yield will remain the same or increase. Yields may decrease. Yields do not reflect transaction costs/fees or taxes and may be affected by currency fluctuations. One or more analysts responsible for selecting the securities held in the Research Portfolios own such securities: Costco Source: Bloomberg, BofA Merrill Lynch Global Research


Stock lists US 1 List (link to latest report) Table 25: US 1 list (7 August 2015) Ticker Company Rating Date added Price when added Price as of Aug. 7 Footnotes MMM 3M B-1-7 02/25/15 168.89 148.89 Bbijopsvw ACM AECOM Technology C-1-9 08/12/14 35.08 30.26 Bbgijopsvw AIG AIG C-1-7 02/03/15 51.33 63.39 Bbgijopsv ALLY Ally Financial Inc. B-1-9 08/04/15 22.98 21.98 BObgijopsv BLK BlackRock, Inc. B-1-7 02/10/15 370.67 331.85 BCbgijopsvw BCC Boise Cascade C-1-9 06/16/15 37.32 31.45 Bbijopvw BURL Burlington Stores C-1-9 06/25/15 52.86 52.86 Bbijopsvw CCE CCE A-1-7 03/24/15 44.06 51.71 Bbijopsvw CELG Celgene Corp. B-1-9 10/28/14 105.70 128.60 BObgijopsvw CHKP Check Point C-1-9 11/18/14 76.53 80.86 Bbivw C Citigroup B-1-7 02/10/15 49.39 57.91 Bbgijopsvw CMCSA Comcast Corp A-1-7 11/25/14 56.62 58.82 #BObgijopsvw CYH Community Health C-1-9 06/02/15 54.93 56.56 Bbijopsvw LLY Eli Lilly & Co. A-1-7 06/25/15 84.80 82.27 BObgijopsvw FB Facebook C-1-9 07/21/15 98.39 94.30 Bbijopsv FDX FedEx Corp. B-1-7 12/02/14 180.39 166.99 Bbgijopsvw GGP General Growth Prop B-1-7 02/03/15 30.53 27.75 Bbijopsv HAIN Hain Celestial B-1-9 06/16/15 64.54 67.82 Bbijopsvw KMI Kinder Morgan C-1-7 09/23/14 38.21 32.14 BObgijopsvw NWL Newell C-1-7 10/21/14 33.66 43.24 Bbgijopsvw NXPI NXP C-1-9 11/18/14 74.55 96.34 Bbgijopsvw OXY Occidental B-1-7 09/24/14 94.44 68.78 Bbgijopsvw PNRA Panera Bread C-1-9 09/30/14 162.72 202.05 Bbijopsvw PCP Precision Cast -6- 01/21/15 208.75 193.88 Bbgijopsvw SIVB SVB Financial B-1-9 03/27/15 121.73 145.75 Bbgijopsvw TMO Thermo Fisher A-1-7 03/05/15 131.46 136.02 Bbgijopsvw VZ Verizon Comm A-1-7 03/05/15 48.92 46.36 BObgijopsvw DIS Walt Disney Co. B-1-7 02/25/15 105.57 109.35 BObijoprsvw WHR Whirlpool B-1-7 09/23/14 152.49 170.41 BObgijopsvw ZTS Zoetis C-1-7 07/21/15 49.12 48.31 Bbijopsvw 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.

Endeavor, the Small Cap US Buy List (link to the latest report) Table 26: Endeavor Stocks / US Small Cap Buy List (7 August 2015)

MLSCR Model Scores (100=best; 1=worst)

GICS Sector Company Symbol BofA-ML Opinion

Price 8/7/2015

Mkt Value ($ Millions) Aurora

Enhanced Contrarian Add Date

Price on Add date Footnote

Consumer Disc American Axle & Mfg Holdings AXL C-1-9 20.72 1,558 96 99 8/9/2010 10.37 Bbgijopsvw Consumer Disc Jack In The Box Inc JACK C-1-7 90.21 3,330 73 32 7/9/2012 27.62 Bbijpvw Consumer Disc Stage Stores Inc SSI C-1-7 16.67 546 63 91 3/9/2015 21.06 Bbjpw Energy California Resources Corp CRC C-1-7 4.02 1,801 56 53 5/11/2015 7.95 BObgijopsvw Financials Coresite Realty Corp COR C-1-7 48.51 1,283 94 87 5/14/2012 24.65 Bbijpvw Financials Endurance Specialty Holdings ENH C-2-7 67.98 3,074 94 92 7/15/2014 53.43 Bbjpw Financials Selective Ins Group Inc SIGI B-2-7 30.92 1,760 86 91 3/9/2015 26.73 Bbijopvw Health Care Molina Healthcare Inc MOH B-1-9 75.64 4,278 98 97 8/15/2013 34.48 Bbgijopsvw Health Care Pharmerica Corp PMC C-1-9 32.95 1,051 89 85 1/19/2009 16.21 Bbijpsvw Health Care Surgical Care Affiliates Inc SCAI C-1-9 37.80 1,448 79 98 4/14/2015 34.90 Bbgw Industrials Swift Transportation Co SWFT C-1-9 22.79 3,367 75 88 8/15/2013 17.50 Bbijopsvw Industrials Curtiss-Wright Corp CW B-1-8 66.63 3,156 48 62 2/11/2014 59.41 Bbijopsvw Industrials West Corp WSTC C-1-7 26.78 2,237 83 88 8/13/2014 26.66 BObgijopsvw Industrials Greenbrier Companies Inc GBX C-1-7 43.63 1,267 41 88 11/12/2014 62.45 Bbijopsvw Info Tech Advanced Energy Inds Inc AEIS C-1-9 27.03 1,103 94 71 2/5/2015 26.32 Bbw Info Tech Mentor Graphics Corp MENT C-1-7 25.90 2,980 89 85 5/14/2012 14.05 Bbijopsvw Info Tech Take-Two Interactive Sftwr TTWO C-1-9 31.46 2,787 97 74 3/13/2014 20.88 Bbijopvw Info Tech Tessera Technologies Inc TSRA C-1-7 36.93 1,923 90 98 5/11/2015 38.76 Bbijosvw Materials Ak Steel Holding Corp AKS C-1-9 3.04 580 3 20 10/13/2014 5.78 Bbgijopsw Materials Berry Plastics Group Inc BERY C-1-9 29.31 3,490 72 67 6/14/2013 23.44 Bbijopsvw Source: BofA Merrill Lynch Global Research


US High Quality & Dividend Yield Screen (methodology) Table 27: High Quality and Dividend Yield Screen August 2015

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 24.0 0.0 2.4 A 37,454 55.19 79.77 B-1-7 1.7 Bbijopsvw 2/2/2015 CHRW C.H. Robinson Industrials 45.4 1.0 2.1 A+ 10,230 75.23 70.15 B-2-7 2.4 Bbijopsw 3/2/2015 CMI Cummins Inc Industrials 22.1 0.2 2.4 A- 23,354 145.36 129.53 B-1-7 2.6 Bbijopsvw 11/3/2014 DOV Dover Corp Industrials 17.9 0.7 2.5 A 10,276 79.09 64.07 B-2-7 4.2 Bbijopsvw 3/1/2013 JNJ Johnson & Johnson Health Care 21.6 0.3 2.8 A+ 277,887 76.70 100.21 A-2-7 2.0 Bbgijopsvw 10/1/2012 LLTC Linear Technology Information Technology 35.8 0.0 2.8 A- 9,818 31.82 41.00 B-2-7 1.8 Bbjpw 5/1/2014 MMM 3M Industrials 32.7 0.7 2.5 A+ 96,001 140.12 151.34 B-1-7 2.0 Bbijopsvw 8/3/2015 PH Parker Hannifin Industrials 19.5 0.7 2.0 A 15,636 112.75 B-1-7 3.9 Bbijopsvw 4/1/2012 PAYX Paychex Information Technology 37.9 0.0 3.3 A 16,854 30.99 46.40 A-2-7 1.2 Bbjopw 12/1/2014 QCOM QUALCOMM Information Technology 17.0 0.3 2.7 A- 104,928 73.32 64.39 C-1-7 2.2 Bbgijopsvw 8/1/2013 RTN Raytheon Co. Industrials 19.7 0.5 2.3 A+ 33,288 75.65 109.09 A-1-7 2.8 Bbgijopsvw 6/1/2015 UNP Union Pacific Industrials 24.3 0.6 2.2 A+ 85,449 101.60 97.59 A-1-7 1.4 Bbgijopsvw 6/2/2014 UTX United Tech Industrials 19.6 0.7 2.5 A+ 89,296 117.82 100.31 B-1-7 3.0 BObgijopsvw 12/3/2012 WMT Wal*Mart Stores Consumer Staples 21.3 0.7 2.7 A+ 231,815 72.02 71.98 A-1-7 2.1 Bbgijopsv Average 25.6 0.5 2.5 74,449 2.4 S&P 500 benchmarks: 14.2 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 (August 2015)

Ticker Company Country Sector Market

Value

Price as of

August 7

LT Debt / Equity†

Gross Div.

Yield1†

5 Year Annualized

Dividend Growth† QRQ Footnote

BUD Anheuser-Busch InBev Belgium Consumer Staples 193,986 120.15 80.4 2.9 47.8 RIC Bbijopsv ABB ABB Switzerland Industrials 47,452 20.10 43.6 3.8 9.6 B-2-7 Bbijopsv AZN AstraZeneca United Kingdom Health Care 85,146 33.94 42.7 4.1 3.0 B-1-7 Bbijopsvw BMO Bank of Montreal Canada Financials 35,571 55.25 13.9 4.6 2.7 B-2-7 Bbgijopsv BHP BHP Billiton Ltd-Spon ADR Australia Materials 100,996 37.29 35.5 6.7 8.4 A-2-7 Bbijopsv BP BP plc United Kingdom Energy 108,708 36.48 40.8 6.6 7.3 B-2-7 BObijopsvw CNQ Canadian Natural Resources Limited Canada Energy 27,347 23.86 45.1 3.1 25.9 B-1-7 Bbgijopsv CAJ Canon Japan Information Technology 43,187 32.20 0.0 3.8 1.3 A-2-7 Bbijopsv CVE Cenovus Energy Incorporated Canada Energy 11,606 14.19 53.6 3.4 8.8 B-2-7 Bbgijopsv ABEV Companhia de Bebidas das Americas (AmBev) Brazil Consumer Staples 86,761 5.66 3.7 4.5 12.5 B-2-7 Bb DEO Diageo United Kingdom Consumer Staples 71,086 111.93 85.5 3.0 7.5 A-1-7 BNbijopsv PSO Pearson United Kingdom Consumer Discretionary 15,141 18.42 31.5 4.3 8.1 A-1-7 Bbijopsv PHG Philips NV Netherlands Industrials 26,565 27.92 33.8 3.2 2.7 B-1-7 Bbijopsv RY Royal Bank of Canada Canada Financials 83,889 57.79 14.4 4.1 5.2 B-1-7 BObgijopsv SNY Sanofi France Health Care 141,406 53.48 23.6 3.0 1.9 A-1-7 Bbijopsv STM STMicroelectronics NV France Information Technology 7,033 7.66 31.7 5.2 20.1 B-2-7 Bbijops SLF Sun Life Financial Inc. Canada Financials 20,914 32.36 26.6 3.8 0.3 B-2-7 Bbijopsv SU Suncor Energy Incorporated Canada Energy 41,131 27.66 30.0 3.2 20.3 B-2-7 Bbgijopsv TD The Toronto-Dominion Bank Canada Financials 73,927 39.97 13.8 4.0 6.9 B-1-7 BObgijopsv TRI Thomson Reuters Canada Consumer Discretionary 31,897 40.77 51.7 3.3 3.1 B-1-7 Bbgijopsvw UN Unilever NV Netherlands Consumer Staples 137,615 45.53 49.9 2.9 5.0 A-1-7 Bbijopsv Average: 35.8 4.0 9.9 MSCI ACWI ex-USA index: 99.1 2.7 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. Source: Bloomberg; FactSet Research Systems; BofA Merrill Lynch Global Research


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

Technical Titans List–Designed to identify common stocks that are attractive based on technical analysis, the objective of this list is to capture short to intermediate-term (3-6 month) price appreciation, but positions can be held longer term.

Growth 10 & Value 10–Consists of 10 stocks each, chosen by the highest five-year EPS growth rate (Growth 10) or lowest trailing 12-month P/E ratio (Value 10) after 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

28 The RIC R

eport | 11 August 2015

US economic forecast summary

Real Economic Activity, % SAAR 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 2013 2014 2015 2016 Real GDP 4.6 4.3 2.1 0.6 2.3 2.8 3.0 3.0 3.0 3.0 3.0 1.5 2.4 2.3 3.0 % Change, Year Ago 2.6 2.9 2.5 2.9 2.3 2.0 2.2 2.8 3.0 3.0 3.0 Final Sales 3.5 4.3 2.1 -0.2 2.4 3.3 3.3 3.0 3.0 3.0 3.0 1.4 2.4 2.2 3.1 Domestic Demand 3.6 3.9 3.0 1.7 2.3 3.6 3.4 3.2 3.2 3.1 3.1 1.2 2.5 2.8 3.2 Consumer Spending 3.8 3.5 4.3 1.7 2.9 3.0 3.5 3.0 3.0 2.9 2.8 1.7 2.7 3.0 3.1 Residential Investment 10.4 3.4 9.9 10.1 6.6 10.0 9.0 9.0 9.0 10.0 10.0 9.5 1.8 8.5 9.2 Nonresidential Investment 4.4 9.0 0.7 1.6 -0.6 6.7 4.0 5.4 5.4 5.0 5.6 3.0 6.2 2.9 4.9 Structures -0.2 -1.8 4.2 -7.4 -1.6 5.0 2.0 2.0 2.0 2.0 5.0 1.6 8.1 -0.9 2.3 Equipment 6.5 16.5 -4.9 2.3 -4.1 8.0 5.0 8.0 8.0 7.0 7.0 3.2 5.8 2.4 6.5 Intellectual Property 4.9 6.5 6.9 7.4 5.5 6.0 4.0 4.0 4.0 4.0 4.0 3.8 5.2 6.3 4.3 Government 1.2 1.8 -1.4 -0.1 0.8 2.2 1.5 1.0 1.0 1.0 1.0 -2.9 -0.6 0.5 1.2 Exports 9.8 1.8 5.4 -6.0 5.3 3.0 4.5 4.5 4.5 5.0 5.0 2.8 3.4 1.9 4.5 Imports 9.6 -0.8 10.3 7.1 3.5 4.5 4.5 5.0 5.0 5.0 5.0 1.1 3.8 5.6 4.7 Net Exports (Bil 09$) -443 -429 -464 -541 -536 -550 -556 -565 -575 -582 -589 -417 -443 -546 -578 Contribution to growth (ppts) && -0.2 0.4 -0.9 -1.9 0.1 -0.3 -0.1 -0.2 -0.2 -0.1 -0.1 0.2 -0.2 -0.6 -0.1 Inventory Accumulation (Bil 09$) 77.1 79.9 78.2 112.8 110.0 90.0 78.0 78.0 78.0 78.0 78.0 61.4 68.0 97.7 78.0 Contribution to growth (ppts) () 1.1 0.0 0.0 0.9 -0.1 -0.5 -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.2 -0.1 Nominal GDP (Bil $, SAAR) 17270 17522 17616 17649 17841 18036 18242 18455 18671 18893 19118 16663 17348 17942 18784 % SAAR 6.9 6.0 2.2 0.8 4.4 4.4 4.7 4.8 4.8 4.8 4.9 3.1 4.1 3.4 4.7 Key Indicators Industrial Production (% SAAR) 5.6 4.0 4.6 0.0 -1.8 1.5 2.2 3.6 3.7 3.5 3.1 1.9 3.7 1.6 2.7 Capacity Utilization (%) 78.0 78.3 78.8 78.5 77.8 77.8 77.9 78.3 78.7 79.1 79.4 76.7 78.1 78.0 78.9 Nonfarm Payrolls (Avg mom change, 000s) 284 237 324 195 226 205 200 200 200 200 200 199 260 207 200 Civilian Unemployment Rate (%) 6.2 6.1 5.7 5.6 5.4 5.3 5.2 5.1 5.0 5.0 4.9 7.4 6.2 5.4 5.0 Civilian Participation Rate (%) 62.8 62.8 62.8 62.8 62.8 62.7 62.7 62.7 62.8 62.8 62.9 63.2 62.9 62.7 62.8 Productivity (% SAAR) 2.9 3.9 -2.1 -3.1 2.5 1.3 1.9 2.0 1.9 1.7 1.7 0.9 0.7 0.2 1.8 Personal Savings Rate (%) 4.8 4.7 4.7 5.2 4.8 5.1 5.2 5.2 5.1 5.0 4.8 4.8 4.8 5.1 5.0 Light Vehicle Sales (Millions SAAR) 16.5 16.7 16.7 16.6 17.1 17.2 17.6 17.8 18.0 18.1 18.3 15.5 16.4 17.1 18.1 Housing Starts (Thous. SAAR) 984 1029 1055 978 1144 1170 1109 1177 1255 1339 1429 928 1001 1100 1300 Current Account (% of GDP) -2.3 -2.2 -2.7 -2.7 US Budget Balance ($bn, Fiscal Year) -680 -483 -425 -475 Inflation GDP Price Index (% SAAR) 2.2 1.6 0.1 0.1 1.4 1.6 1.6 1.7 1.7 1.8 1.8 1.6 1.6 1.1 1.7 % Change, Year Ago& 1.9 1.8 1.3 1.0 1.0 1.0 1.3 1.7 1.6 1.7 1.7 Core PCE Chain Prices (% SAAR) 2.0 1.4 1.0 1.0 1.8 1.6 1.5 1.6 1.7 1.8 1.8 1.5 1.5 1.4 1.7 % Change, Year Ago$ 1.6 1.6 1.4 1.3 1.3 1.3 1.5 1.6 1.6 1.7 1.7 CPI, Consumer Prices (% SAAR) 2.4 1.2 -0.9 -3.1 3.0 1.7 0.7 1.6 2.2 2.3 2.2 1.5 1.6 0.2 1.8 % Change, Year Ago! 2.1 1.8 1.2 -0.1 0.0 0.2 0.6 1.8 1.6 1.7 2.1 CPI ex Food & Energy ( % SAAR) 2.2 1.4 1.5 1.7 2.5 2.0 1.9 2.0 2.1 2.2 2.2 1.8 1.7 1.9 2.1 % Change, Year Ago@ 1.9 1.8 1.7 1.7 1.8 1.9 2.0 2.1 2.0 2.1 2.1 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, % 2013 2014 2015F 2016F 2013 2014 2015F 2016F Current 2014 2015F 2016F Global 3.3 3.3 3.2 3.8 3.5 3.7 3.6 4.1 3.97 4.13 4.06 4.23 Global ex US 3.5 3.5 3.4 4.0 3.9 4.2 4.3 4.6 4.86 5.06 4.85 4.83 Euro Area -0.3 0.9 1.6 1.9 1.4 0.4 0.2 1.1 0.05 0.05 0.05 0.05 UK 1.7 3.0 2.6 2.8 2.6 1.5 0.2 1.4 0.50 0.50 0.50 1.25 Japan 1.6 -0.1 1.1 1.8 0.4 2.6 0.8 1.4 0.10 0.10 0.10 0.10 Canada 2.0 2.4 0.9 1.8 0.9 1.9 1.1 1.7 0.50 1.00 0.50 0.25 Emerging EMEA 2.6 2.3 1.2 2.6 4.7 5.5 7.9 5.3 9.55 10.08 8.46 7.59 Latin America 2.8 0.6 0.2 1.9 9.7 13.4 21.3 12.2 10.24 8.62 12.15 13.07 Brazil 2.7 0.1 -1.8 0.7 6.2 6.3 8.7 6.3 14.25 11.75 14.25 11.50 Emerging Asia 6.5 6.4 6.2 6.4 4.4 3.4 2.6 3.4 5.10 5.73 4.95 4.88 China 7.7 7.4 7.0 6.8 2.6 2.0 1.5 2.4 4.85 5.60 4.60 4.60 Shaded regions represent BofA Merrill Lynch Global Economics Research forecast. Source: BofA Merrill Lynch Global Economics Research

Interest rate forecast summary

(% EOP) 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 2013 2014 2015 2016 Fed Funds 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.25-0.50 0.50-0.75 0.75-1.00 1.00-1.25 0-0.25 0-0.25 0.50-0.75 1.50-1.75 Fed effective 0.06 0.07 0.06 0.09 0.07 0.06 0.06 0.08 0.27 0.52 0.78 1.04 0.07 0.06 0.52 1.55 3-Month T-Bill 0.01 0.07 0.03 0.02 0.02 0.04 0.02 0.01 0.10 0.35 0.60 0.82 0.07 0.04 0.35 1.30 3-Month LIBOR 0.25 0.25 0.23 0.23 0.24 0.26 0.27 0.28 0.53 0.77 1.05 1.30 0.25 0.26 0.77 1.80 2-Year T-Note 0.32 0.38 0.42 0.46 0.57 0.66 0.56 0.64 0.85 1.05 1.20 1.45 0.38 0.66 1.05 2.00 5-Year T-Note 1.38 1.74 1.72 1.63 1.76 1.65 1.37 1.65 1.70 1.80 1.95 2.10 1.74 1.65 1.80 2.50 10-Year T-Note 2.61 3.03 2.72 2.53 2.49 2.17 1.92 2.35 2.25 2.35 2.50 2.65 3.03 2.17 2.35 2.85 30-Year T-Bond 3.68 3.97 3.56 3.36 3.20 2.75 2.54 3.12 2.90 3.00 3.10 3.20 3.97 2.75 3.00 3.40 2-Year swap 0.46 0.49 0.55 0.58 0.82 0.90 0.81 0.90 1.11 1.33 1.50 1.77 0.49 0.90 1.33 2.35 5-year swap 1.54 1.79 1.80 1.70 1.93 1.77 1.53 1.79 1.89 2.00 2.15 2.30 1.79 1.77 2.00 2.72 10-year swap 2.77 3.09 2.84 2.63 2.64 2.28 2.02 2.46 2.40 2.52 2.69 2.87 3.09 2.28 2.52 3.09 30-year swap 3.66 3.93 3.54 3.33 3.19 2.70 2.39 2.94 2.72 2.85 2.95 3.05 3.93 2.70 2.85 3.28 Shaded regions represent BofA Merrill Lynch US Rates Research forecast. Source: BofA Merrill Lynch US Rates Research

FX rate forecast summary

Spot 15-Sep 15-Dec 16-Mar 16-Jun 16-Sep 16-Dec G3 EUR-USD 1.09 1.05 1.00 1.00 1.00 1.00 1.00 USD-JPY 125 121 125 125 127 125 123 EUR-JPY 136 127 125 125 127 125 123 Dollar Bloc USD-CAD 1.31 1.30 1.32 1.35 1.35 1.35 1.35 AUD-USD 0.74 0.75 0.73 0.73 0.72 0.70 0.68 NZD-USD 0.65 0.68 0.67 0.67 0.66 0.66 0.65 Europe EUR-GBP 0.70 0.68 0.67 0.67 0.67 0.67 0.67 GBP-USD 1.54 1.54 1.49 1.49 1.49 1.49 1.49 EUR-CHF 1.07 1.04 1.06 1.07 1.08 1.09 1.10 USD-CHF 0.99 0.99 1.06 1.07 1.08 1.09 1.10 EUR-SEK 9.60 9.40 9.30 9.25 9.20 9.15 9.10 USD-SEK 8.83 8.95 9.30 9.25 9.20 9.15 9.10 EUR-NOK 9.05 8.85 8.70 8.60 8.50 8.40 8.30 USD-NOK 8.32 8.43 8.70 8.60 8.50 8.40 8.30 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%.


Footnote key /#/ One or more analysts responsible for covering the securities in this report owns such securities. /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 company within the last 12 months. /i/ The company 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 company for non-investment banking services or products within the past 12 months. /o/ The company 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 company 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 company. /s/ MLPF&S or an affiliate has received compensation for investment banking services from this company 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 company or an affiliate of the company within the next three months. /w/ MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 10th 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 company is organized has certain laws or regulations that limit or restrict ownership of the company's shares by nationals of other countries. /A/ One of the analysts covering the company is a former employee of the company and, in that capacity, received compensation from the company 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 company on a principal basis. /C/ Merrill Lynch is affiliated with an NYSE specialist organization that specializes in one or more securities issued by the subject companies. This affiliated NYSE specialist organization makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies. /N/ The company 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 10th day of a month, it reflects a significant financial interest on the last day of the previous month. Reports issued before the 10th day of a month reflect a significant financial interest at the end of the second month preceding the date of the report


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 Comment 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 revenues.

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Research Analysts Additional Research Investment Committee (RIC) Contributors Kenji Abe >> Equity Strategist Merrill Lynch (Japan) Alberto Ades GEM FI/FX Strategy, Economist MLPF&S James Barty >> European Equity Strategist MLI (UK) Francisco Blanch Commodity & Deriv Strategist MLPF&S Jill Carey Hall, CFA Equity Strategist MLPF&S Michael Contopoulos HY Credit Strategist MLPF&S Steven G. DeSanctis, CFA Small-Cap Strategist MLPF&S Philip Fischer Municipal Research Strategist MLPF&S Christina Giannini, CFA Small-Cap Strategist MLPF&S Ethan S. Harris Global Economist MLPF&S Michael Hartnett Chief Investment Strategist MLPF&S Ajay Singh Kapur, CFA >> Equity Strategist Merrill Lynch (Hong Kong) Hans Mikkelsen Credit Strategist MLPF&S Ralf Preusser, CFA Rates Strategist MLI (UK) Shyam S.Rajan Rates Strategist MLPF&S

Savita Subramanian Equity & Quant Strategist MLPF&S Stephen Suttmeier, CFA, CMT Technical Research Analyst MLPF&S Dan Suzuki, CFA Equity Strategist MLPF&S Nigel Tupper >> Strategist Merrill Lynch (Hong Kong) Mark Ulrich Portfolio Strategist MLPF&S David Woo FX and Rates Strategist MLPF&S >> 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.

the ric report - merrill edge · investors should consider this report as only a single factor in...

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