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The RIC Report

Stimulating events

Investment Strategy | Global 10 March 2015

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

Click the image above to watch the video.

Table of Contents Financial markets recap 2 Stimulating events 3 Raising allocation to European equity 6 The Fed’s single mandate 7 Screening for Japanese and European exporters 10 RIC asset class views 11 Fixed Income, Econ, Commodities, Currencies: views & risks

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Global equity markets: views & risks 13 Asset allocation for individual investors 14 Portfolio of the month 20 Stock lists 21 Economic forecast summary 24 Global economic forecast summary 25 Interest rate forecast summary 25 FX rate forecast summary 25 Team Page 31

Shift back to European equities

The Federal Reserve is likely to raise short-term interest rates later this year; US stocks are within 5% of our target level, and earnings growth may be scarcer if oil prices remain low. We are therefore shifting weight from the US to Europe, where the European Central Bank’s monetary stimulus, combined with credit growth, should help boost equity market returns. Other global central banks are pursuing expansive monetary policies.

Also favor Japan, India, China Our case for Japan combines improvement in both fundamentals and market dynamics. For India, the likely drivers are a combination of lower inflation, falling oil prices, a reform-oriented government and an independent central bank. China should benefit from a mix of both monetary and fiscal stimulus.

It’s all about inflation, inflation, inflation The guest column this month, authored by US Economist Michael Hanson, examines Fed Chair Janet Yellen’s recent congressional testimony. The Fed appears focused on inflation as the primary determinant of interest rate policy.

Global stocks that may benefit from strong dollar In our ideas section, Strategist Matthew Trapp screens the BofAML Global Research universe for listed ADRs from favored markets of Japan and Europe that derive a high percentage of sales from North America. Many of these companies are likely to benefit as their home currencies weaken versus the dollar.

http://research1.ml.com/C?q=gyN2jTxVQHwfT4gQ72WEZA

http://research1.ml.com/C?q=gyN2jTxVQHwfT4gQ72WEZA

The RIC Repor t 10 March 2015

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Financial markets recap Table 1: Total returns (%) As of 28 February 2015 Asset class 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 2014 Equity Indices (%, US dollar terms) S&P 500 5.7 2.3 15.5 2.6 17.8 16.2 8.0 13.7 NASDAQ Comp 7.3 3.9 16.6 5.0 20.0 18.6 10.3 14.7 FTSE 100 6.2 2.7 -2.5 5.3 8.3 9.4 4.9 -5.3 TOPIX 5.6 7.3 9.4 8.0 9.2 7.1 3.1 -3.0 Hang Seng 1.3 3.5 13.3 5.2 8.8 7.5 9.5 5.5 DJ Euro Stoxx 50 6.5 0.0 -4.8 6.0 9.3 5.0 3.1 -8.7 MSCI EAFE 6.0 2.9 0.4 6.5 9.8 8.3 5.3 -4.5 MSCI Emerging Markets 3.1 -1.0 5.4 3.7 0.3 4.0 8.2 -1.8 Size & Style (%, US dollar terms) Russell 2000 5.9 5.5 5.6 2.5 16.0 16.0 8.3 4.9 S&P 500 Citigroup Growth 6.0 3.2 17.2 4.2 18.6 17.5 9.0 14.9 S&P 500 Citigroup Value 5.5 1.4 13.6 0.8 17.0 14.9 6.9 12.4 S&P 600 Citigroup Growth 6.2 7.4 8.3 4.3 17.4 18.7 9.8 3.9 S&P 600 Citigroup Value 5.9 3.1 7.0 0.3 17.0 16.6 8.7 7.5 S&P 500 Sectors (%, US dollar terms) Consumer Discretionary 8.6 6.3 15.5 5.3 22.6 22.1 10.2 9.7 Consumer Staples 4.2 2.0 21.7 3.1 18.0 16.4 10.9 16.0 Energy 4.1 -0.5 -7.2 -1.0 3.2 9.1 7.2 -7.8 Financials 5.9 0.3 14.2 -1.5 20.3 12.6 0.2 15.2 Health Care 4.3 4.2 23.5 5.6 28.1 20.5 11.3 25.3 Industrials 5.6 1.6 12.6 1.8 18.0 17.1 8.2 9.8 Information Technology 8.2 2.2 22.5 4.0 16.6 16.9 9.9 20.1 Materials 8.0 5.3 11.1 6.0 13.2 13.6 7.8 6.9 Telecom Services 6.6 -1.1 13.3 5.4 12.3 14.8 7.8 3.0 Utilities -6.4 -0.8 16.1 -4.2 13.5 13.8 8.7 29.0 BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) 10-Year Treasury -2.7 2.2 8.7 1.8 2.6 5.9 5.4 10.7 2-Year Treasury -0.2 0.1 0.7 0.3 0.5 0.9 2.7 0.7 TIPS -1.3 0.9 3.8 2.0 0.4 4.6 4.7 4.5 Municipals* -1.0 1.4 6.8 0.8 3.9 5.2 4.9 9.8 US Corporate Bonds -0.8 1.7 6.4 1.9 4.9 6.5 5.7 7.5 US High Yield Bonds 2.4 1.6 2.8 3.1 7.7 9.2 7.8 2.5 Emerging Market Corporate Bonds 1.4 -1.9 1.2 0.9 4.2 6.1 6.2 2.3 Emerging Market Sovereign Bonds 0.6 -1.9 3.2 0.4 4.6 6.6 7.1 5.2 Preferreds 0.7 2.6 12.5 2.5 6.9 8.2 2.9 15.4 Foreign exchange** (%, in local currencies) US dollar 0.1 6.3 17.1 4.6 8.4 3.9 1.2 11.8 British pound 3.2 5.3 5.6 3.4 4.3 3.1 -1.1 3.6 Euro -0.8 -8.2 -10.8 -7.1 -2.3 -2.9 -0.8 -4.9 Yen -1.8 3.3 -7.3 2.8 -10.1 -4.5 -0.7 -7.2 Commodities** (%, US dollar terms) CRB Index 2.4 -11.9 -25.9 -2.6 -11.5 -4.0 -3.0 -17.9 Gold -4.8 4.0 -8.2 2.2 -12.1 1.8 10.8 -1.4 WTI Crude Oil 3.2 -24.8 -51.5 -6.6 -22.4 -9.0 -0.4 -45.9 Brent Crude Oil 18.1 -10.8 -42.6 9.2 -19.9 -4.2 2.3 -48.3 Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ 0.8 2.3 5.3 0.8 6.6 6.0 5.9 4.1 Hedge Fund - HFRI Fund of Funds¹ 0.1 1.6 3.8 0.1 5.1 3.4 3.0 3.3 Notes: *Not tax adjusted. **BoE calculated effective FX indices. ¹Data lagged by one month; 23yr, 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).

February 2015 review The S&P 500 rebounded in February, gaining 5.7%. Performance overseas was also strong with Japan’s TOPIX up 5.6%, the Euro Stoxx 50 up 6.5% and the FTSE 100 up 6.2%. Small caps were slightly ahead of large caps in February, at 5.9%. Growth was ahead of value last month in both large caps and small caps. As for US sectors, Discretionary, Tech, and Materials were each up at least 8%. The only sector in the red was Utilities, at -6.4%. For the year, Materials is on top, while Utilities is the laggard. We saw mixed results in the bond market, with high yield, EM bonds, and preferreds in positive territory, while the remaining sectors were in the red. In FX markets, the pound gained 3.2%, while the dollar was slightly positive, and the yen and euro lost ground. Oil moved higher; however, there was a wide disparity between Brent, at +18.1%, and WTI, at +3.2%. Gold fell by almost 5%.


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Stimulating events We continue to favor equities over bonds, as we expect global growth to pick up and the Fed to begin raising rates later this year. But we are now tilting a bit from US equities to Europe. US indexes are near our target levels, and we believe that the monetary stimulus from the European Central Bank (ECB) is likely to boost economic growth and equity markets. We also like the equity markets in Japan, China, and India, because of policy stimulus and reasons largely unique to each country.

US broad indices nearing target levels; be more selective The S&P 500 index rose 5.75% in February, more than reversing January’s decline, and we expect another year of positive returns in 2015. But the road is getting a little steeper, in our view. With the market up 61% in the past three years, the S&P 500 is now within 6% of US Equity Strategist Savita Subramanian’s year-end target of 2200.

Earnings expectations are being reset, as low oil prices have caused many companies to reduce planned capital expenditures and managements have guided analysts’ forecasted earnings lower. Our Strategy team’s forecast is for the market’s earnings to grow only 1% in 2015 vs growth of around 8% for 2014. Equity Strategist Dan Suzuki writes that the negative impact on S&P 500 earnings from lower energy earnings and capital investment greatly outweighs the positive impact of increased consumption and lower energy input costs.

There has been much debate about the stock market’s valuation, as the forward P/E ratio of just over 16x is the highest in over 10 years. Subramanian writes that valuations are far from stretched (S&P 500 Relative Value Cheat Sheet: What shouldn’t keep you up at night? Valuation 24 February 2015) but nonetheless stocks are not as inexpensive as they were in 2013 and 2014.

We suggest that investors focus portfolios on favored sectors and industries or take a thematic approach toward stock selection, paying attention to valuations and taking advantage of opportunities to rebalance. Please see page 11 for US Equity Strategy recommendations.

Widespread central bank easing outside the US Central banks in many emerging markets already cut rates this year: China, Egypt, India, Indonesia, Peru and Russia. The European Central Bank recently began its monthly €60 billion in asset purchases, and the purchases will extend through September 2016. The Bank of Japan is also expanding its balance sheet. The actions from Europe and Japan mean that central banks will be adding to global liquidity, even though the Fed is holding its balance sheet steady. (Chart 1)

The massive rate cuts have altered the relationship between yields on bonds and the dividend yields on stocks in many countries. Dividend yields exceed government bond yields by a wide margin in Germany, UK and Japan (Table 2). Prior to the financial crisis, this was a rarity. In the US, the dividend yield is about a quarter point below the 10-year Treasury yield.

Shifting emphasis back to European equities In early November, we pared our weight in European stocks and added to overweights in the US and Japan, as we were concerned about weakening economic fundamentals on the Continent. At the time, we mentioned that if the ECB were to enact sovereign quantitative easing (QE), it would likely spark a rally

Chart 1: Central banks still supplying liquidity

Source: BofA Merrill Lynch Global Research

Table 2: Yields: Stocks vs bonds 10-year Dividend govt yield yield on stocks US 2.21% 1.98% Germany 0.34% 2.37% UK 1.93% 3.69% Japan 0.44% 1.38% Source: Bloomberg

Martin Mauro Fixed Income Strategist

Cheryl Rowan Portfolio Strategist

The S&P 500 is close to our 2015 year-end forecast of 2200, while earnings growth is decelerating.


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in stocks. However, we underestimated both the magnitude of the ECB’s actions and the impact on markets. Now that European QE is a reality, it appears that stocks in Europe are poised for more than just a rally. Rather, economic fundamentals seem to be vastly improved and that should filter through to improved stock performance. We are therefore moving 1% in our US asset allocation model from US stocks to International: Developed and in our Global model, we are shifting 2% from North America to Europe ex-UK. Please see page 6 for details.

Europe moving along the path toward better growth The ECB’s announced asset purchase program (QE) exceeded market expectations and follows the accommodative stances taken by the Federal Reserve in the US and the Bank of Japan. Already this year, lower oil prices and a weaker euro, along with the ECB’s lenient treatment of French and Italian public finances, have lifted GDP growth. European Economist Gilles Moec is more confident that growth should average around 1.5% in 2015 and 2016.

Part of the reason for his optimism is that the economic recovery seems to be accompanied by an upturn in credit, which signals confidence in the future. Net flows of loans to non-financial corporations have been positive for the first time since late 2011. Further, the ECB’s Bank Lending Survey reflects looser credit standards and a pickup in credit demand (Chart 2). Unemployment in the Eurozone fell in January to the lowest level in almost three years, while euro area consumer confidence rose in February to the highest level since last July.

Chart 2: Change in credit standards and demand, past 3m

Source: Bank Lending Survey, ECB, BofA Merrill Lynch Global Research

While Europe is not out of the woods in fighting deflation, Economist Ruben Segura-Cayuela has slightly increased the inflation forecast for the region, from -0.4% to -0.2%--closer to the much-desired level above zero. His forecast is based on expectations for a mid-teens increase in oil prices in 2015 and would be at risk if this does not occur.

Stocks in Europe seem to be pricing in at least some of the expected improvement in economic and macro conditions, as the Euro Stoxx 50 Index is up almost 15% so far in 2015 (local currency). We think significant potential remains. Macro indicators such as the PPI and OECD are not yet improving, and they usually lead a stock recovery, according to European Equity Strategist Manish Kabra. He expects earnings growth of around 5.7% this year, but if oil prices rise, this is likely to be revised higher. Investors should focus on large cap multinationals with attractive dividends, and look to increase weight in financials, energy and smaller cap stocks as the recovery takes hold.

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2005 2007 2009 2011 2013 2015

Change in credit standards

Change in Loan Demand

Europe’s recovery may have staying power, as Central Bank liquidity is accompanied by an upturn in credit demand.

Stocks in Europe seem to be pricing in some recovery, but we think more upside remains. Focus on large cap multinationals with attractive dividends.


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Japan: negative real rates should boost stocks The case for Japan combines improvement in both fundamentals and market dynamics, in the view of Asia Pacific Equity Strategist Ajay Kapur.

The key element is that deflation, the bane of the Japanese economy for more than a decade, has turned into mild inflation. With nominal interest rates remaining near zero, real rates are now negative.

Negative real interest rates should lead corporations to buy back shares and individual investors to shift towards stocks, in the view of Kapur. Low borrowing rates should encourage corporations to borrow in order to finance share repurchases. Corporations also have a huge amount of cash on their balance sheets that could be used to buy back shares. Japanese corporate cash totals roughly US$2.1 trillion, or about 45% of market capitalization.

For individual investors, particularly retirees seeking income, the return of inflation means that staying in cash causes an erosion of wealth. Stocks offer substantially better income than bonds as Table 2 on page 3 shows.

India: improving growth, better earnings The case for India lies largely in fundamentals. India Equity Strategist Jyoti Jaipuria believes that earnings and share prices could double in the next four years, as margins recover from their current low levels.

The drivers for growth in India are a combination of lower inflation, falling oil prices, a reform-oriented government that has loosened regulations, and an independent central bank. With inflation heading lower, the central bank has cut interest rates twice this year. We believe this should feed through to improved consumer and business confidence and correspondingly higher economic growth. In addition, Kapur expects much-needed advances in infrastructure and education to spur future growth.

The key risks are potential military conflicts with neighboring China and Pakistan, and Afghanistan, and potential disruptions associated with the emergence of a large young population.

China: lift from fiscal and monetary policy China faces more potent headwinds than other EM nations, but we think central bank actions and fiscal stimulus will ultimately benefit stocks. Economic growth is slowing – we expect GDP growth of 7.1% this year and 6.8% next year, following 7.4% last year – and deflation is becoming a bigger threat. Our strategists believe that the People’s Bank of China will have to ease substantially. Kapur suggests overweighting the China equity market and favors interest rate sensitive stocks.

Chart 3: Inflation returns in Japan

Source: Statistics Bureau of Japan

-3%

-2%

-1%

0%

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5%Japanese consumer prices, %

change prior yr

India and China are favored emerging markets. India should benefit from lower inflation and interest rates, falling oil prices and a reform-oriented government China’s central bank easing and fiscal stimulus should propel stocks higher.


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Raising allocation to European equity We are increasing our weight in European equities, reversing earlier moves over the last few months. The ECB’s quantitative easing was greater than expected, which has led to a rally in European equities. We think this rally can continue as fundamentals are improving.

European Economist Gilles Moec recently raised his GDP growth forecast to 1.5% this year and 1.6% for 2016. Europe has also had positive net flows of loans to the corporate sector for the first time since 2011, which can make the recovery increasingly self-sustaining.

Estimate revisions in Europe improved for the second consecutive month in February, which also bodes for a continuation of the rally in equities.

Asset allocation change details For US investors with Tier 0 liquidity and a moderate risk profile, the RIC decreased its asset allocation to Large Cap Growth by 1% to 25% and increased International: Developed by 1% to 11%.

Table 3: 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 23% 23% 0% 44% 44% 0% 66% 66% 0% 78% 78% 0% 86% 86% 0% Large Cap Growth 9% 9% 0% 18% 17% -1% 26% 25% -1% 29% 28% -1% 28% 27% -1% Large Cap Value 12% 12% 0% 18% 18% 0% 25% 25% 0% 28% 28% 0% 24% 24% 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% 4% 5% 1% 10% 11% 1% 13% 14% 1% 19% 20% 1% International: Emerging 1% 1% 0% 1% 1% 0% 2% 2% 0% 3% 3% 0% 4% 4% 0% Source: BofA Merrill Lynch Global Research

For global investors with Tier 0 liquidity and a moderate risk profile, the RIC decreased its asset allocation to North America by 2% to 31% and increased its weight in Europe (ex-UK) by 2% to 12%.

Table 4: 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 24% 24% 0% 45% 45% 0% 66% 66% 0% 78% 78% 0% 90% 90% 0% North America 11% 10% -1% 23% 22% -1% 33% 31% -2% 39% 36% -3% 44% 41% -3% Europe (ex UK) 4% 5% 1% 7% 8% 1% 10% 12% 2% 12% 15% 3% 15% 18% 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% 4% 0% 6% 6% 0% 8% 8% 0% 10% 10% 0% 12% 12% 0% Source: BofA Merrill Lynch Global Research


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The Fed’s single mandate Finely balanced The initial reaction to Fed Chair Janet Yellen's 24-25 February Semiannual Monetary Policy Congressional testimony – declines in Treasury yields and the dollar, and a rally in equities – suggests that markets were positioned for more hawkish remarks. Objectively, she said relatively little that deviated from her press conference in December or the views of the majority as evidenced by the January FOMC statement and minutes. But Yellen did clarify two important aspects of Fed policy and communications that helped to feed the dovish market reactions, in our view.

First, she shifted attention squarely onto inflation from the labor market as the main determinant of when liftoff occurs. In our view, given that Fed officials are more comfortable that employment and activity growth should continue, the question is when will they be “reasonably confident” in their inflation outlook. In this sense, we think the Fed is effectively focused on a “single mandate.” Each year the FOMC has started out optimistic that near-2% inflation is just two years away, but then the inflation outlook gradually deteriorates (Chart 4). We expect more of the same when the economic projections are updated again at the 18-19 March FOMC meeting, which is why our base case has long been that liftoff will not happen before September.

Chart 4: Median FOMC projection for core PCE inflation (%, by FOMC meeting)

Source: BofA Merrill Lynch Global Research, Federal Reserve Board

Second, Yellen explicitly decoupled changes in guidance from subsequent policy moves. Dropping “patient” from the FOMC statement no longer signals that the Fed will necessarily increase rates a couple meetings later. Rather, such a change in guidance “should be understood…that conditions have improved to the point where it soon will be the case that a change in the target range could be warranted at any meeting.” This shift gives the Fed maximum flexibility, leaving a possible June rate hike on the table, but placing more emphasis on later dates relative to pre-testimony market expectations. It also highlights that data dependence is inconsistent with clear forward guidance: things should get a little foggier from here on out.

Maximum flexibility Turning first to the implications of Yellen’s testimony for Fed communications, we think the odds that the FOMC will decide to drop “patient” from its policy guidance in March arguably have risen. The minutes to the January 28 FOMC meeting noted that “many participants regarded dropping the ‘patient’ language…as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates.” In effect, the Committee was sufficiently concerned about the market reaction from dropping “patient” – shades of the

Michael S. Hanson US Economist

Yellen shifted attention squarely onto inflation from the labor market as the main determinant of when interest rate hikes begin.

Yellen explicitly decoupled changes in guidance from subsequent policy moves.


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taper tantrum, perhaps – that they appeared willing to risk keeping it in for March, yet still start hiking by June.

Yellen’s prepared remarks directly addressed this issue, and it should now be much less of a concern. Much as the Fed gradually backed away from the policy thresholds in 2013 or “considerable time” last year, the Fed now is de-emphasizing guidance that has outlived its usefulness. However, the Fed has prepped the markets for the possibility of pushing tightening out in time, later than June, rather than pulling it forward as it did during the taper tantrum.

We think the trade-off here is that the Fed cannot give the markets as clear a signal as many market participants have been anticipating. In the January FOMC meeting, “a number” of Fed officials noted that “as the start of normalization approaches, there would be limits to the specificity that the Committee could provide about its timing.” Yellen embraced that view directly, noting at some point in time, every meeting effectively will be a candidate for a rate hike. This is the ultimate in data dependence, which we believe likely augurs for more market volatility as time goes on.

Chart 5: Less FOMC core inflation uncertainty, but more downside risk (Percent of FOMC participants)

Source: BofA Merrill Lynch Global Research, Federal Reserve Board

Chart 6: Components of PCE inflation that are declining (3-month moving average of % yoy inflation rates)

Source: BofA Merrill Lynch Global Research, Federal Reserve Bank of San Francisco

When the prices are right Yellen gave a fairly upbeat assessment of the labor market recovery, checking off a number of indicators that have shown significant improvement: long-term unemployment, part-time for economic reasons, and the quit rate were cited. While she conceded that “room for further improvement remains” and that wage growth “remains sluggish,” by and large she painted an optimistic picture. Moreover, she emphasized in both her prepared remarks and during Q&A that the key to when the Fed hikes rates is no longer labor market conditions, but now the inflation outlook. We think this is notable not because Yellen materially changed her assessment of inflation, but because the market doubts the Fed’s inflation forecasts – take a look at Chart 4 again – and thus sees scope for further delay in rate hikes. This, in turn, could allow the 24-25 February shift in market pricing to be more persistent.

Yellen largely echoed the status quo view at the Fed that inflation should eventually return to target “as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” This, of course, would not be the first time the Fed saw low inflation as transitory only to recant later. Chart 5 shows the contrast between the degree of uncertainty FOMC participants

Yellen gave a fairly upbeat assessment of the labor market recovery, checking off a number of indicators that have shown significant improvement.


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see in their core personal consumption expenditure (PCE) inflation forecasts and their downside risks to inflation. The former was quite elevated in the immediate aftermath of the crisis, but has fallen steadily over the past several years. In contrast, the share of Fed officials who see downside risks to the core PCE inflation outlook has been creeping up. We would not be surprised to see it rise further after the March data.

The minutes to the 28 January FOMC meeting featured an active debate over the inflation outlook. “A number” of participants argued that alternative measures of underlying inflation, such as the “trimmed mean” were more stable. This was supposedly because “the recent intensification of downward pressure on inflation reflected price movements that were concentrated in a narrow range of items in households’ consumption basket.” Chart 6 suggests this is not entirely correct. Work by San Francisco Fed researchers reveals that the fraction of items with price declines has been steadily climbing, and is near recent highs. The share of expenditures that are declining has not risen as much, but this is hardly strongly supportive evidence that inflation is mostly transitory.

We share the market’s skepticism that inflation will improve enough to warrant liftoff by summer. That is the main reason we continue to expect the Fed will not hike rates until September at the earliest. Interestingly, in her written testimony, Yellen said the assessment of the inflation outlook would be made “on the basis of incoming data.” This need not be higher inflation data itself, but a broad combination of data: expectations and the US dollar and unemployment and wages and so forth.

Yet this focus on data contrasts with her December press conference remarks, which indicated that “theory” and “historical evidence” might be enough to infer from one dual mandate, maximum employment, to the other, price stability. Now the data broadly have to make the Fed “reasonably confident” that inflation is on a path toward 2% over the medium term. This is still not all that high a hurdle, but it is more specific – and more directly data dependent – than earlier discussions. And, we suspect it is enough to postpone liftoff a little longer.

In our view, the upshot of Yellen’s testimony is that there are rising odds of a scenario in which the Fed stops signaling a “patient” approach in March yet finds itself remaining patient in June and not hiking. That may be a recipe for more volatility in markets, but the price action after her testimony suggests it might not be nearly as disruptive as the taper tantrum. We believe Yellen’s finely balanced discussion appears to have assuaged the markets until the next big Fed event: the 17-18 March FOMC meeting, with updated forecasts and a press conference.

We share the market’s skepticism that inflation will improve enough to warrant liftoff by summer.


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Screening for Japanese and European exporters Both the European and Japanese central banks have embarked on quantitative easing programs that have significantly weakened their currency versus the US dollar. A weaker currency can make the goods that are imported into the US from Japan and Europe more competitive and could spur demand for those products and services.

We ran a screen searching for BofA ML Buy-rated Japanese and European-listed ADRs that have at least 20% of sales in North America. We found 22 stocks that represent 9 of the 10 GICS sectors.

Table 5: Japanese and European stocks that could benefit from a weaker currency

Ticker Company Name

North American

revenue as % of total

Price March 6

Market Cap Rating Country Sector Footnote*

BUD AB InBev 74.2 124.80 200,664 A-1-7 Belgium Consumer Staples BObgijopsv ARMH ARM Holdings PLC 39.4 53.45 25,148 C-1-7 United Kingdom Information Technology Bbiovw ASML ASML Holding N.V. 32.3 107.32 47,031 B-1-7 Netherlands Information Technology Bbijopsv AZN AstraZeneca 41.0 66.27 83,718 B-1-7 United Kingdom Health Care Bbijopsv BP BP plc 34.4 40.35 122,649 B-1-7 United Kingdom Energy BObijopsv BTI British American Tobacco Plc 21.4 114.62 106,833 A-1-7 United Kingdom Consumer Staples Bbijopv DEO Diageo 45.1 115.88 72,879 A-1-7 United Kingdom Consumer Staples BNbijopsv FMS Fresenius Medical Care AG 66.6 40.45 25,168 A-1-7 Germany Health Care Bbgijopsv HMC Honda Motor 47.0 33.52 60,719 B-1-7 Japan Consumer Discretionary Bbijopsv NGG National Grid PLC 54.4 65.21 48,760 A-1-7 United Kingdom Utilities BNObijopsv NOK Nokia 23.3 7.83 28,800 C-1-7 Finland Information Technology Bbgijopsv NVO Novo Nordisk 48.6 46.51 123,252 A-1-7 Denmark Health Care Bbijopv PSO Pearson 61.0 21.75 17,841 A-1-7 United Kingdom Consumer Discretionary Bbijopsv PHG Philips NV 28.8 28.94 27,686 B-1-7 Netherlands Industrials Bbijopsv PUK Prudential Corporation 50.4 50.17 64,416 B-1-7 United Kingdom Financials Bbijopsv RUK Reed Elsevier plc 49.9 68.32 35,459 A-1-7 United Kingdom Consumer Discretionary Bbijopsv SNY Sanofi 43.5 47.42 125,129 A-1-7 France Health Care Bbijopsv SNN Smith & Nephew 43.6 34.22 15,324 B-1-7 United Kingdom Health Care BNbgijopsv SYT Syngenta AG 54.4 67.09 31,179 A-1-7 Switzerland Materials Bbijopsv TM Toyota Motor 30.8 134.89 230,527 B-1-7 Japan Consumer Discretionary BObgijopsv UL Unilever PLC 32.0 43.02 128,904 A-1-7 United Kingdom Consumer Staples Bbijopsv WPPGY WPP Group, Plc 34.0 115.47 30,324 A-1-7 United Kingdom Consumer Discretionary BNbijopsv Source: Bloomberg, BofA Merrill Lynch Global Research Note: This screen is 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. * Please see page 11 for Footnote Key

Matthew Trapp Investment Strategist


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RIC asset class views Table 6: Research Investment Committee asset class views

Asset Class RIC view (+ / = / –) Comments

Equity markets US equities + Low but rising rates, tame inflation and moderate EPS growth, strong dollar and improving economy sweet spot for stocks. Consumer Discretionary – Low oil prices a plus, but over-owned by PMs, labor-intensive sector hurt by rising rates, expensive while margins are stretched. Consumer Staples = Best defensive sector with high quality, good yield and modest div growth plus higher non-US exposure and less govt risk. Energy = Valuations attractive but not based on forward P/E as estimates have been slashed; oil price volatility will collapse multiples. Financials = Benefits from housing, US cyclical recovery; outperforms with rising dollar; risks are regulatory reform. Healthcare = Preferred defensive sector, benefits from demographics; pharma good yield play; HC reform benefits many services stocks. Industrials + Benefits from US manufacturing/global economic growth. Prefer large cap multinational; Europe recovery a risk. Info Technology + Favorite sector; benefits from cyclical recovery; highest foreign exposure; more cash than debt; low EPS volatility.” Materials = Best performing sector YTD as oil prices have bounced; watch overcapacity and China; benefits as global economy recovers. Telecom – Best dividend yield sector, but not much dividend growth as payout ratios high; worst risk/reward trade-off. Utilities – Low EPS growth, higher expected rates keep us UW. Growth = Not much value in “growth vs value” trade, more sensitivity to GDP growth, growth should do better as profit growth slows. Value = Scarcity of yield gives credence to value stocks; favor Industrials and selected Energy. Small cap = Valuations remain high; higher volatility works against small caps, prefer larger and higher quality segment. Large cap + “Big, old and ugly;” large global cyclicals look attractively valued vs small caps, especially after Energy and Industrials sell off.

Europe (ex. UK) + QE appears to have “jump started” economies, as credit growth is rising and we raised our inflation forecast; still favor more defensive, large cap, high quality stocks until recovery appears more certain.

United Kingdom = GDP growth strong but credit growth slowing; mixed economic data likely to keep BoE on hold.

Japan + Lower corporate tax rates, higher inflation expected; look for consumption and GDP recovery. ROEs are higher. BoJ could lower rates again. Expect increased share buybacks. Prefer industries that benefit from higher domestic demand.

Asia Pac (ex. Japan) – Region dependent on easing from PBoC; inflation data look weaker; lower oil prices are a positive as most are net importers.

Emerging markets = Falling growth and lower inflation expectations have led to massive central bank easing. Expect weaker currencies in LatAm, need for government reform. Favor India for rate cuts and reforms. Also like China, Asian exporters to Europe.

Fixed income markets Treasuries – Intermediate and long-term yields should be slightly higher by the end of the year. Agencies / MBS = A shortage of new supply should contain yields. TIPS + Inflation likely to remain low, but yields and breakevens on TIPS now look attractive. US IG Corporates = Preferable to Treasuries for conservative investors. We favor average quality, and intermediate maturities. US HY Corporates = Risk from lower energy prices appears to have subsided. Fed rate hikes pose some 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. Gold = Demand from EM nations and limited supply growth should support prices. Oil = Potential new supply poses a near-term downward risk to prices. We forecast $50 /bbl WTI for 2015. US dollar + Greenback should strengthen against most developed and EM currencies. Source: BofA Merrill Lynch Research Investment Committee

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.


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Fixed Income, Econ, Commodities, Currencies: views & risks Table 7: Regional Strategist views & 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 is likely to benefit from stronger DM growth but low commodity prices pose headwinds.

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 (Priya Misra, Ralf Preusser) US: Even though we are looking for the 10y to rise to 2.35% by year-end, we are neutral long-end rates at current levels. Improving global growth and increasing oil prices are two pre-conditions for a significant sell-off in the long end of the curve, both of which do not appear imminent. We recommend being short the front end of the curve as a better risk reward trade going into the March FOMC meeting

US: Continued decline in inflation expectations, strengthening dollar and weaker stock markets are risks to our higher rates call.

Europe: The ECB will start QE purchases on 9 March. We remain bullish the front end, the periphery and Bunds on asset swap. The market is not fully pricing in either the targeted liquidity extension or the shortage of physical cash assets to invest in.

Europe: The risk to this view is renewed uncertainty in Greece, which could put peripheral spreads under pressure. Increased swapped EUR issuance is the risk to our Bund ASW widener.

Global Commodities (Francisco Blanch) We still see commercial inventory levels across the OECD increasing from 2,700 million at the end of 4Q14 to 2,880 million by the end of 3Q15 and believe downward pressure on petroleum prices will likely continue. Yet, the Brent market has been somewhat tighter than we projected. Meanwhile WTI weakness has become extremely pronounced even against nearby domestic grades like Light Louisiana Sweet. To reflect this, we lift our WTI end of 1Q and 2Q targets to $45 and $41 respectively, and move our Brent end of 1Q and 2Q targets to $55 and $48. So we remain bearish, but in a different shade of gray. We are lowering our average 2015 aluminium price forecast by 7.8% to $1,818/t (82c/lb); in fact, we see a risk that aluminium will touch $1,650/t (74c/lb) in the coming weeks. We are also lowering our global average premium forecast to $300/t this year. These downgrades are driven by a confluence of factors. Most notably perhaps, aluminium semi exports from China have remained at elevated levels, partially because authorities are reluctant to tackle shipments that illegitimately attract tax rebates.

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, with a range of $80/bbl. Very high inventory levels are perhaps the main micro reason to remain cautious on oil prices. Yet the global macro framework is not helping. To begin with, the USD has continued to strengthen even as Brent crude oil prices bounced up in recent weeks. Should the USD rally further, oil prices could face very severe headwinds. Looking further ahead 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. Upside risks to the US economy, leading to an earlier rate hiking cycle, have increased. 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. We are more comfortable owning pockets of HY. Technicals have been very supportive with massive inflows YTD. The stabilization of oil has removed a major headwind for HY in the short term. However, other downside risks surrounding geopolitics, rates volatility and strengthening USD still remain. Hence we recommend making way into selected high beta paper but remain cautious on the overall market.

The biggest risk to US IG 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. Upside risks: US HY sees the benefit of significant inflows from Europe and Asia; Oil prices spike (good for the Energy sector specifically, but potentially could negatively impact other sectors). HY Downside risks: weakness in energy sector spreads to no-energy high yield.

Municipals (Municipal Strategy Group) Puerto Rico: The governor will address residents on the evening of 9 March. While the subject is not certain, sources close to the governor and the legislature claim the governor will withdraw the bill to implement a VAT tax. PREPA missed its 2 March deadline to submit a restructuring plan to its forbearing creditors. Separately, a Bureau of Labor Statistics report shows the commonwealth’s population shrank by 22,000 between 2013 and 2014 and also that for 2014, the commonwealth’s unemployment rate was 13.9%. Pensions: A New Jersey court ruled that the state must fund its full statutorily required pension payment – an increase of $1.6bn – which is credit negative as it restrains a tool the state has used to balance its budget. In Illinois, state employee unions filed their brief to the Illinois Supreme Court asking it to uphold a lower court ruling invalidating pension reform laws, arguing pension benefits are not subject to Illinois’ police powers, as the state contends. Oral arguments begin 11 March.

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. Muni defaults and bankruptcies in 2015 should continue to remain low as tax revenues rise at both the state and local level.

Global FX (David Woo, Alberto Ades) We continue to look for a stronger USD, targeting end-2015 EUR-USD at 1.10, and our forecasts for a higher USD against a number of currencies.

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

Look for the USD to strengthen against G10 on strong US growth, concomitantly higher US yields, and chronic European weakness.

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

EM currencies could remain on the back foot due to strengthening USD. However, we would expect Asia FX to outperform in general.

Growth concerns in China and Europe, as well as rising UST yields remain the main risks for EM currencies.

Source: BofA Merrill Lynch Research Investment Committee


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Global equity markets: views & risks Table 8: Regional Strategist views & associated risks Views Risks Global Equities (Michael Hartnett) The MSCI All-Country World Index year-end 2015 target is 470. We are bullish growth, bullish stocks, bullish the 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 and/or a financial shock. The conditions for a bear market (higher rates, lower EPS) will likely be absent.

A “credit event” in the US, policy failure in EU and/or China, and/or an EPS recession in 2015 would be catalysts for asset prices to surprise on downside. European/Chinese credit growth and/or a further drop in oil prices would be a catalyst for asset prices to surprise on the upside.

United States (Savita Subramanian) 2015 YE S&P 500 target is 2200, which 18.4x our 2015 EPS forecast of $119.50. 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: OW Tech and Industrials. UW Utilities, Telecom Services and Consumer Disc.

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 (Manish Kabra) Earnings downgrades slowing in Europe; increasing money supply supports further recovery. Increased EPS revision ratios can keep equity markets on stretched valuations. However, lack of optimism in Banks implies that most upgrades driven by zero-sum FX games. Wait for Style Cycle to enter Recovery phase before rotating into cyclicals. In sectors, we favor the defensives: Pharmaceuticals, Staples and the consumer sectors of Personal Goods, Travel, Retail and Media. In countries, we prefer the defensive regions of the UK and Switzerland over France and Germany. In terms of style, our preference is for higher quality, large-cap companies with low earnings/dividend dispersion. Low risk DY stocks could see valuation bubbles from inflows into bond proxies and depressed financing costs.

Downside risks: 1) collapse in Chinese demand, triggering economic recession and political turmoil; 2) Europe slips deeper into deflation and economic data are worse than expected. Upside risks: 1) Unexpectedly strong domestic credit growth, driving demand, inflation and nominal earnings; 2) More aggressive monetary stimulus from the PBoC feeds into an investment-led recovery in China. This would be significant enough to kick-start the European business cycle and global commodity cycle, providing strong boost to European earnings.

Japan (Ajay Kapur) We remain structurally bullish, as we believe the weaker yen, higher inflation, high operating leverage, lower taxes and low interest costs will result in higher earnings growth and higher ROE. With wages picking-up, it would help the BoJ’s 2% target inflation objective. A shift into equities from bonds is under way as asset allocators rebalance their portfolio for mild inflation. Buy firms that are announcing share buybacks.

Downside risks Strong consensus USD bullishness is a contrary negative for Yen and Japan equities. The inflation target not being met in the given timeframe due to lower oil dampening inflation expectations.

Asia-Pac ex-Japan (Ajay Kapur) Our key theme for this year is that central bankers globally are underestimating the deflation threat, and once recognized, they will be surprised at how much they have to ease to fight it. Falling growth and collapsing inflation expectations should lead to nervous central banks that would ease policy – this should be positive for Asian equities. Key investment ideas: 1) Buy rate-sensitive China as policymakers will need to ease to fight oncoming debt deflation. 2) Buy India – benefitting from lower oil, the easing cycle should continue as inflation abates. 3) Buy Asian exporters to Europe, which should benefit from an improving European economy. OW: India, Taiwan, China; UW: Malaysia, Hong Kong, The Philippines and Korea.

Downside risks China slowdown worsens and the government stays away from broad easing. Higher US interest rates.

Emerging Markets (Ajay Kapur) Easing global monetary policy (at least 15 central banks have eased policy YTD) should be positive for EM equities as they are a derivative play on world inflation expectations. Expanding balance sheet of major central banks is generally positive for risk assets. A stronger US$ is negative for commodity producers but is positive for commodity consumers. EMEA and LatAm suffer while Asia is likely to benefit. EM in total would keep underperforming DMs if the US$ keeps rising. Our LatAm strategist, Felipe Hirai, likes bond proxies in Brazil, as he is positive on coming fiscal adjustment but remains cautious on Brazilian equities in general. Our Russian economist, Vladimir Osakovskiy, thinks that there is a meaningful risk (as inflation remains high at 16%, YoY) that the CBR will deliver another 200-300bp rate cut at its next policy meeting on 13 March, in our opinion. Tentative signs of slowing inflation could support its relaxed stance reflected in the surprise cut in January. OW: India, Taiwan, China, Thailand, Indonesia, Brazil; UW: Malaysia, Mexico, Chile, The Philippines, Turkey and Korea.

Downside risks 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. Any unexpected rise in US bond yields and stronger USD, which will reverse the carry flow and hurt dollar-short EM countries.

Source: BofA Merrill Lynch Research Investment Committee


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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 9: Strategic and RIC allocations without alternative assets (Tier 0 liquidity)


Conservative Moderate Moderately Aggressive Aggressive

Strat. RIC Strat. RIC Strat. RIC Strat. RIC Strat. RIC Traditional Assets Stocks 20% 23% 40% 44% 60% 66% 70% 78% 80% 86% Bonds 55% 53% 50% 46% 35% 30% 25% 19% 15% 11% Cash 25% 24% 10% 10% 5% 4% 5% 3% 5% 3% Alternative Assets 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Table 10: Strategic and RIC allocations with alternative assets (Tier 1 liquidity)



Strat. RIC Strat. RIC Strat. RIC Strat. RIC Strat. RIC Traditional Assets Stocks 20% 23% 40% 44% 55% 60% 65% 73% 70% 75% Bonds 50% 48% 45% 41% 30% 26% 20% 14% 10% 6% 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.









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.

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). Tier 1 (higher liquidity): Up to 10% of the portfolio may be unavailable for 3–5 years. Tier 2 (moderate liquidity): Up to 20% of the portfolio may be unavailable for 3–5 years. Tier 3 (lower liquidity) Up to 30% of the portfolio may be unavailable for 3–5 years.


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Fixed-income allocation for US clients Table 13: Combined municipal and taxable recommended sector allocations by Investor Profile Conservative Moderate** Aggressive Federal tax bracket Sector <25%* 28% 43.4% <25%* 28% 43.4% <25%* 28% 43.4% 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 14: Portfolio Strategy team's US equity sector weightings by investor profile

Weight in


Moderate Moderately

Aggressive S&P 500 conservative aggressive Consumer Discretionary 12.5% 10.0% 6.0% 11.0% 12.0% 13.0% Consumer Staples 9.8% 25.0% 15.0% 12.0% 8.0% 4.0% Energy 8.1% 9.0% 12.0% 10.0% 10.0% 11.0% Financials 16.0% 12.0% 14.0% 15.0% 8.0% 6.0% Health Care 14.8% 15.0% 11.0% 11.0% 17.0% 18.0% Industrials 10.3% 11.0% 12.0% 16.0% 18.0% 15.0% Info Technology 19.9% 6.0% 8.0% 14.0% 24.0% 27.0% Materials 3.3% 0.0% 2.0% 2.0% 3.0% 3.0% Telecom Services 2.3% 3.0% 10.0% 3.0% 0.0% 3.0% Utilities 3.0% 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.


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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 15: 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% 23% 40% 44% 60% 66% 70% 78% 80% 86% Lg. Cap Growth 8% 9% 16% 17% 23% 25% 25% 28% 27% 27% Lg. Cap Value 12% 12% 16% 18% 23% 25% 25% 28% 21% 24% Small Growth 0% 0% 2% 2% 2% 2% 3% 3% 6% 6% Small Value 0% 0% 2% 1% 2% 1% 3% 2% 6% 5% Intl: Developed 0% 1% 3% 5% 8% 11% 11% 14% 16% 20% Intl: Emerging 0% 1% 1% 1% 2% 2% 3% 3% 4% 4% Bonds 55% 53% 50% 46% 35% 30% 25% 19% 15% 11% Tsys, CDs & GSEs 35% 41% 27% 17% 13% 11% 6% 7% 2% 4% Mortgage Backed 14% 1% 13% 11% 9% 7% 6% 5% 4% 2% IG Corp & Preferred 6% 11% 10% 11% 9% 7% 9% 4% 5% 2% High Yield 0% 0% 0% 3% 2% 2% 1% 1% 2% 1% International 0% 0% 0% 4% 2% 3% 3% 2% 2% 2% Cash 25% 24% 10% 10% 5% 4% 5% 3% 5% 3% Source: BofA Merrill Lynch Global Research

Table 16: Stocks – 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% 39% 40% 40% 38% 38% 35% 36% 33% 31% Large cap value 60% 53% 40% 41% 38% 38% 35% 35% 26% 28% Small growth 0% 0% 4% 4% 4% 3% 4% 4% 8% 7% Small value 0% 0% 4% 2% 4% 2% 4% 3% 8% 6% International: Developed 0% 4% 10% 11% 13% 16% 18% 18% 20% 23% International: Emerging 0% 4% 2% 2% 3% 3% 4% 4% 5% 5% Source: BofA Merrill Lynch Global Research

Table 17: Bonds – 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% 37% 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% 7% 5% 6% 5% 6% 10% 8% International 0% 0% 0% 9% 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.


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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 18: Strategic and RIC allocations without alternatives (Tier 0 liquidity)


conservative Moderate Moderately Aggressive Aggressive

Strat. RIC Strat. RIC Strat. RIC Strat. RIC Strat. RIC Global Equities 20% 24% 40% 45% 60% 66% 70% 78% 80% 90% North America 8% 10% 19% 22% 28% 31% 32% 36% 37% 41% Europe (ex UK) 4% 5% 7% 8% 11% 12% 13% 15% 15% 18% 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% 4% 5% 6% 8% 8% 9% 10% 10% 12% Global Fixed Income 55% 56% 50% 47% 38% 32% 28% 20% 18% 8% Govt Bonds 34% 34% 30% 26% 24% 18% 18% 11% 10% 1% Inv. Grade Credit 8% 8% 8% 9% 6% 6% 4% 4% 3% 3% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% Collateralized Debt 11% 12% 10% 10% 7% 7% 5% 4% 4% 3% Cash (USD) 25% 20% 10% 8% 2% 2% 2% 2% 2% 2% Global Real Assets* 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Global Hedge Fund Strat 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Global Private Equity 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% *Real Assets include commodities, TIPs, Real estate, incl. REITS; Figures may not sum to 100 because of rounding; collateralized debt includes MBS Table 19: Strategic and RIC allocations with alternatives (Tier 1 liquidity)



Strat. RIC Strat. RIC Strat. RIC Strat. RIC Strat. RIC Global Equities 18% 22% 38% 43% 56% 62% 66% 74% 73% 80% North America 8% 10% 18% 21% 26% 29% 30% 34% 34% 37% Europe (ex UK) 3% 4% 7% 8% 10% 11% 12% 14% 14% 15% 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% 3% 5% 6% 7% 7% 9% 10% 9% 11% Global Fixed Income 52% 53% 50% 47% 32% 26% 22% 14% 10% 3% Govt Bonds 32% 32% 30% 26% 20% 14% 14% 7% 6% 0% Inv. Grade Credit 8% 8% 8% 9% 5% 5% 3% 3% 2% 2% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 0% 0% Collateralized Debt 10% 11% 10% 10% 6% 6% 4% 3% 2% 1% Cash (USD) 25% 20% 7% 5% 2% 2% 2% 2% 2% 2% Global Real Assets* 1% 1% 1% 1% 2% 2% 6% 6% 12% 12% Global Hedge Fund Strat 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.

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).

Tier 1 (higher liquidity): Up to 10% of the portfolio may be unavailable for 3–5 years. Note: The RIC does not provide core allocations to Alternative Investments due to their less liquid nature. Recommended allocations in these categories reflect strategic allocations.


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Asset allocation for global clients (continued)

Table 20: Strategic and RIC allocations with alternatives (Tier 2 liquidity)



Strat. RIC Strat. RIC Strat. RIC Strat. RIC Strat. RIC Global Equities 14% 18% 35% 40% 45% 51% 51% 59% 53% 63% North America 6% 8% 16% 19% 21% 24% 24% 28% 24% 28% Europe (ex UK) 3% 4% 6% 7% 8% 9% 9% 11% 10% 13% 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% 3% 5% 6% 6% 6% 7% 8% 7% 9% Global Fixed Income 51% 52% 48% 45% 33% 27% 27% 19% 15% 5% Govt Bonds 31% 31% 30% 26% 21% 15% 17% 10% 9% 0% Inv. Grade Credit 8% 8% 7% 8% 5% 5% 4% 4% 2% 2% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% Collateralized Debt 10% 11% 9% 9% 6% 6% 5% 4% 3% 2% Cash (USD) 25% 20% 7% 5% 2% 2% 2% 2% 2% 2% Global Real Assets* 2% 2% 2% 2% 4% 4% 4% 4% 8% 8% Global Hedge Fund Strat 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 21: Strategic and RIC allocations with alternatives (Tier 3 liquidity)



Strat. RIC Strat. RIC Strat. RIC Strat. RIC Strat. RIC Global Equities 12% 16% 32% 37% 41% 47% 47% 55% 46% 52% North America 5% 7% 14% 17% 19% 22% 22% 26% 21% 23% Europe (ex UK) 2% 3% 6% 7% 8% 9% 9% 11% 9% 11% 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% 3% 4% 5% 5% 5% 6% 7% 6% 7% Global Fixed Income 48% 49% 48% 45% 27% 21% 21% 13% 7% 1% Govt Bonds 30% 30% 30% 26% 17% 11% 13% 6% 5% 0% Inv. Grade Credit 7% 7% 7% 8% 4% 4% 3% 3% 1% 1% High Yield Credit 2% 2% 2% 2% 1% 1% 1% 1% 0% 0% Collateralized Debt 9% 10% 9% 9% 5% 5% 4% 3% 1% 0% Cash (USD) 25% 20% 5% 3% 2% 2% 2% 2% 2% 2% Global Real Assets* 3% 3% 3% 3% 6% 6% 7% 7% 15% 15% Global Hedge Fund Strat 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.

Tier 2 (moderate liquidity): Up to 20% of the portfolio may be unavailable for 3–5 years. Note: The RIC does not provide core allocations to Alternative Investments due to their less liquid nature. Recommended allocations in these categories reflect strategic allocations.

Tier 3 (lower liquidity): Up to 30% of the portfolio may be unavailable for 3–5 years. Note: The RIC does not provide core allocations to Alternative Investments due to their less liquid nature. Recommended allocations in these categories reflect strategic allocations.


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US Equity Strategy Sector Views Table 22: Sector Weightings (Sectors listed in order of preference)

Sector Weight in S&P 500

BofAML Weight (+ / = / -) Comments

Industry Preferences / Themes

Information Technology 19.9% +

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 both 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”, Semis

Industrials 10.3% + Less risky than might be expected: 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, and other high quality multinationals

Energy 8.1% =

Risk-reward looks balanced; our strategists expect oil to decline further in 2Q before rebounding the remainder of the year

Trading at a large discount to history on several valuation metrics (though looks expensive on forward P/E as estimates cuts have more than caught up with negative price action )

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

Health Care 14.8% =

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 government exposure of any sector, overweight by mutual funds; implementation

risk around HC Reform

Pharmaceuticals, Biotechnology, aging demographics beneficiaries

Consumer Staples 9.8% =

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

Low-end retailers and supermarkets (beneficiaries of lower oil prices)

Financials 16.0% =

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 fwd 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)

Materials 3.3% = 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)

Consumer Discretionary 12.5% -

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

Discount retailers over luxury retailers Avoid labor-intensive stocks trading near peak margins

Telecom 2.3% - 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 ten sectors, should underperform as interest rates rise

Utilities 3.0% - Most expensive sector vs history on rel. fwd. 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

*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


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Portfolio of the month Equity International The primary is to build wealth over a multi-year period through ownership of a geographically diverse portfolio of non-US equities

Sector weights are passively benchmarked to the MSCI All Country World ex-US index and rebalanced quarterly.

Table 23: International

Price Sectors/Target Weights Symbol Proposed Weight Country Close 02/6/2015 Average Cost QRQ Rating Yield † Footnote Consumer Discretionary (11.0%) Tata Motors Ltd. TTM 3.50% India $48.35 $45.39 XRVW 0.33% Bbijopsvw Toyota Motor TM 4.00% Japan $135.52 $113.31 B-1-7 1.86% BObgijopsv Vipshop VIPS 3.50% China $24.49 $18.80 C-1-9 0.00% Bbgisv Consumer Staples (10.0%) Brit American BTI 2.50% UK $116.21 $53.06 A-1-7 4.00% Bbijopv AmBev ABEV 3.00% Brazil $6.16 $8.03 B-2-7 5.00% Bb AB InBev BUD 2.50% Belgium $126.32 $52.09 A-1-7 2.56% BObgijopsv CBD CBD 2.00% Brazil $32.55 $51.83 C-1-7 2.24% Bbijopsvw Energy (7.5%) Canadian Natl Re CNQ 4.00% Canada $29.64 $33.13 B-1-7 3.09% BObgijopsv BP plc BP 3.50% UK $41.53 $41.82 B-1-7 5.78% BObijopsv Financials (27.5%) SMFG SMFG 4.50% Japan $7.84 $6.99 B-1-7 2.55% BObgijopsv Banco Santander SAN 3.50% Spain $7.20 $11.54 XRVW 9.18% BObgijopsv ICICI Bank - A IBN 4.00% India $11.55 $6.11 C-1-7 1.32% BObgijopsvw Prudential PUK 2.50% UK $49.83 $11.46 B-1-7 2.34% Bbijopsv ACE Limited ACE 3.50% Switzerland $112.60 $44.03 B-1-7 2.31% Bbijopsvw Credicorp Ltd BAP 3.50% Peru $148.72 $130.18 C-1-7 1.47% Bbjop ING Group ING 2.50% Netherlands $14.53 $12.02 B-2-7 2.65% BObgijopsv Barclays BCS 3.50% UK $16.03 $12.90 C-1-7 2.56% Bbgijopsv Health Care (8.5%) Mallinckrodt plc MNK 3.00% Ireland $116.19 $81.41 C-1-9 0.00% Bbjow Teva TEVA 2.50% Israel $56.56 $57.79 C-1-7 2.44% BObijpvw WuXi PharmaTech WX 3.00% China $40.70 $18.40 XRVW 0.00% Bbw Industrials (11.0%) Sensata ST 3.00% Netherlands $56.03 $47.41 C-1-9 0.00% Bbgijopsvw CP Rail CP 4.00% Canada $190.79 $96.23 B-1-7 0.73% Bbgijopsv Ingersoll-Rand IR 4.00% Ireland $67.00 $58.79 B-1-7 1.73% Bbgijopsvw Information Technology (7.5%) NXP NXPI 4.00% Netherlands $99.47 $30.87 C-1-9 0.00% Bbgijopsvw Baidu.com-ADR BIDU 3.50% China $207.69 $88.02 C-1-9 0.00% Bbiv Materials (8.0%) Silver Wheaton SLW 3.00% Canada $19.90 $21.15 RSTR** 1.21% Bbgijopv Syngenta AG SYT 3.00% Switzerland $68.53 $67.22 A-1-7 3.41% Bbijopsv LyondellBasell LYB 2.00% Netherlands $87.24 $39.91 C-2-7 3.21% Bbgijopsv Telecom Services (5.5%) China Unicom -A CHU 3.00% Hong Kong $15.74 $17.36 C-1-7 1.65% Bbiv SK Telecom SKM 2.50% Korea $29.30 $23.23 B-1-7 3.42% Bbijopsv Utilities (3.5%) Abengoa Yield ABY 3.50% Spain $32.62 $32.54 C-1-7 3.18% Bbgijopsvw Cash (0%) 0%

100% 2.22% Source: Bloomberg, BofA Merrill Lynch Global Research †: 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 International Portfolio own such securities: Baidu, Banco Santander


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Stock lists US 1 List (link to latest report) Table 24: US 1 list (6 March 2015) Ticker Company Rating Date added Price when added Price as of 06 March Footnotes ACM AECOM Technology C-1-9 08/12/14 35.08 29.37 Bbgijopsvw AIG AIG C-1-7 02/03/15 51.33 56.00 BObgijopsv BLK BlackRock, Inc. B-1-7 02/10/15 370.67 365.47 BCbgijopsvw C Citigroup B-1-7 02/10/15 49.39 53.06 BObgijopsvw CELG Celgene Corp. B-1-9 10/28/14 105.70 118.03 Bbgijopsvw CHKP Check Point C-1-9 11/18/14 76.53 82.00 Bbijosw CMCSA Comcast Corp A-1-7 11/25/14 56.62 60.37 #Bbgijopsvw CYH Community Health C-1-9 05/20/14 37.79 50.78 Bbijopsvw DIS Disney Walt B-1-7 02/25/15 105.57 103.82 Bbijoprsvw EIX Edison Int'l A-1-7 07/08/14 56.72 61.32 BObijopv EQIX Equinix B-1-9 06/17/14 206.87 235.52 Bbgijopsv FDX FedEx Corp. B-1-7 12/02/14 180.39 173.19 Bbgijopsvw GGP General Growth Prop B-1-7 02/03/15 30.53 28.20 Bbijopsv KMI Kinder Morgan C-1-7 09/23/14 38.21 40.41 Bbgijopsvw KORS Michael Kors B-1-9 09/30/14 71.39 65.98 Bbijopvw MMM 3M B-1-7 02/25/15 168.89 164.36 Bbgijopsvw NWL Newell C-1-7 10/21/14 34.58 38.55 Bbgijopsvw NXPI NXP C-1-9 11/18/14 74.55 98.48 Bbgijopsvw OXY Occidental B-1-7 09/24/14 94.44 74.77 Bbijopsvw PCP Precision Cast B-1-7 01/21/15 208.75 212.71 Bbijopsvw PNRA Panera Bread C-1-9 09/30/14 162.72 159.42 Bbijopsw STJ St Jude Medical B-1-7 04/29/14 63.39 66.53 Bbijopsvw TMO Thermo Fisher A-1-7 03/05/15 131.46 128.51 BObgijopsvw VZ Verizon Comm A-1-7 03/05/15 48.92 48.29 BObgijopsvw WHR Whirlpool B-1-7 09/23/14 152.49 203.42 Bbgijopsvw 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. Source: BofA Merrill Lynch Global Research.

Endeavor, the Small Cap US Buy List (link to latest report) Table 25: Endeavor Stocks / US Small Cap Buy List (9 Mar 2015) MLSCR Model Scores (100=best; 1=worst)

GICS Sector Company Symbol BofA-ML Opinion

Price 3/9/15

Mkt Value ($ Millions) Aurora

Enhanced Contrarian Add Date

Price on Add date Footnote

Consumer Disc American Axle & Mfg Holdings AXL C-1-9 24.61 1,831 91 98 8/9/2010 10.37 Bbgijopsvw Consumer Disc Jack In The Box Inc JACK C-1-7 96.70 3,661 65 25 7/9/2012 27.62 Bbijpsvw Consumer Disc Stage Stores Inc SSI C-1-7 21.06 662 92 84 3/9/2015 21.06 Bbijpvw Consumer Disc Standard Pacific Corp SPF B-2-9 8.33 2,295 80 72 6/14/2013 8.96 Bbgijpsvw Financials Coresite Realty Corp COR C-1-7 46.49 1,003 100 94 5/14/2012 24.65 Bbijpvw Financials Endurance Specialty Holdings ENH C-2-7 63.31 2,819 91 93 7/15/2014 53.43 Bbjopw Financials Selective Ins Group Inc SIGI B-1-7 26.73 1,494 92 90 3/9/2015 26.73 Bbijopv Health Care Molina Healthcare Inc MOH B-1-9 62.00 3,047 100 96 8/15/2013 34.48 Bbijopsw Health Care Pharmerica Corp PMC C-1-9 26.54 813 74 84 1/19/2009 16.21 Bbijpsvw Industrials Swift Transportation Co SWFT C-1-9 27.86 3,955 94 85 8/15/2013 17.50 Bbijopsvw Industrials Curtiss-Wright Corp CW B-1-8 71.25 3,397 81 65 2/11/2014 59.41 Bbijopsw Industrials West Corp WSTC C-1-7 34.78 2,899 70 87 8/13/2014 26.66 BObgijopsw Industrials Greenbrier Companies Inc GBX C-1-7 53.77 1,503 100 98 11/12/2014 62.45 Bbijopsw Info Tech Advanced Energy Inds Inc AEIS C-1-9 25.60 1,027 83 82 2/5/2015 26.32 Bbw Info Tech Mentor Graphics Corp MENT C-1-7 23.02 2,654 69 88 5/14/2012 14.05 Bbijopsvw Info Tech Take-Two Interactive Sftwr TTWO C-1-9 24.82 2,192 98 72 3/13/2014 20.88 Bbjopw Materials AK Steel Holding Corp AKS C-1-9 4.08 728 16 81 10/13/2014 5.78 Bbgijopsvw Materials Berry Plastics Group Inc BERY C-1-9 34.50 4,062 99 85 6/14/2013 23.44 Bbijopsv Source: BofA Merrill Lynch Small Cap Research


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US High Quality & Dividend Yield Screen (methodology) Table 26: High Quality and Dividend Yield Screen (March 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 Tech 24.4 0.4 2.2 A 42,826 55.19 88.84 B-1-7 1.7 Bbijopsvw 3/2/2015 BA Boeing Industrials 46.3 1.0 1.9 A- 107,545 150.85 B-2-7 2.4 Bbgijopsv 2/2/2015 CHRW C.H. Robinson Industrials 45.3 1.1 1.9 A+ 10,869 75.23 74.30 B-1-7 2.3 Bbijopsw 3/2/2015 CMI Cummins Inc Industrials 21.6 0.2 2.0 A- 25,984 142.23 B-1-7 2.7 Bbijopsvw 2/3/2014 DD DuPont Materials 24.4 0.8 2.4 A- 70,528 61.61 77.85 B-1-7 1.9 Bbijopsvw 11/3/2014 DOV Dover Corp Industrials 17.1 0.8 2.2 A 11,914 79.09 72.05 B-2-7 3.6 Bbijopsvw 3/1/2013 JNJ Johnson & Johnson Health Care 22.7 0.3 2.7 A+ 286,937 76.70 102.51 A-2-7 2.1 Bbgijopsvw 10/1/2012 LLTC Linear Technology Information Tech 38.8 0.0 2.2 A- 11,494 31.82 48.19 B-2-7 1.8 Bbjpw 5/1/2014 MMM 3M Industrials 32.4 0.5 2.0 A+ 108,074 140.12 168.65 B-1-7 2.2 Bbgijopsvw 2/3/2014 NSC Norfolk Southern Industrials 16.9 0.8 2.0 A 33,779 91.79 109.16 A-2-7 1.2 Bbijopvw 2/1/2013 PG Procter & Gamble Consumer Staples 16.3 0.5 3.0 A+ 230,031 75.92 85.13 A-1-7 1.3 Bbgijopsvw 4/1/2012 PAYX Paychex Information Tech 36.2 0.0 2.9 A 18,082 30.99 49.84 A-2-7 1.3 Bbijopvw 12/1/2014 QCOM QUALCOMM Information Tech 21.3 0.0 2.2 A- 120,555 73.32 72.51 C-2-7 3.0 Bbijopsvw 8/1/2013 RTN Raytheon Co. Industrials 21.2 0.6 2.2 A+ 33,541 75.65 108.77 A-2-7 3.1 Bbgijopsvw 6/2/2014 UTX United Tech Industrials 19.7 0.6 1.9 A+ 111,140 117.82 121.91 B-1-7 3.0 Bbijopsvw 12/3/2012 WMT Wal*Mart Stores Consumer Staples 20.5 0.6 2.3 A+ 270,522 72.02 83.93 A-1-7 2.2 Bbgijopsv 2/1/2012 XOM ExxonMobil Energy 18.7 0.2 3.0 A 374,925 83.74 88.54 A-1-7 1.4 Bbgijopsvw Average 26.1 0.5 2.3 109,926 2.2 S&P 500 benchmark: 15.5 1.1 1.9 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 (methodology) Table 27: International Low Volatility & Dividend Yield screen (March 2015)

Ticker Company Country Sector Market Value

Price as of

Mar 6

LT Debt /

Equity†

Gross Div.

Yield†1

5 Year Annualized

Dividend Growth† QRQ Footnote

ABB ABB Switzerland Industrials 48,031 20.75 43.6 2.8 12.1 A-2-7 Bbijopsv AZN AstraZeneca United Kingdom Health Care 83,718 66.27 42.7 5.5 4.0 B-1-7 Bbijopsv BMO Bank of Montreal Canada Financials 39,080 60.40 13.9 4.2 1.4 B-2-7 Bbgijopsv BHP BHP Billiton Ltd-Spon ADR Australia Materials 128,525 49.35 35.5 4.7 7.8 A-2-7 Bbijopsv CNQ Canadian Natural Resources Limited Canada Energy 32,447 29.71 31.9 2.7 34.2 B-1-7 BObgijopsv CAJ Canon Japan Information Technology 44,108 33.07 0.0 4.4 2.6 A-2-7 Bbijopsv CVE Cenovus Energy Incorporated Canada Energy 14,396 17.46 53.6 5.0 36.8 B-2-8 Bbgijopsv ABEV Companhia de Bebidas das Americas (AmBev) Brazil Consumer Staples 93,940 5.98 3.7 4.1 21.5 B-2-7 Bb NVS Novartis Switzerland Health Care 263,746 97.46 19.5 2.8 7.7 A-2-7 Bbijopsv DCM NTT DoCoMo Japan Telecommunication Services 79,836 18.29 3.9 2.8 0.2 A-2-7 Bbijopsv PSO Pearson United Kingdom Consumer Discretionary 17,841 21.75 31.5 4.8 9.0 A-1-7 Bbijopsv PHG Philips NV Netherlands Industrials 27,686 28.94 33.8 3.1 3.0 B-1-7 Bbijopsv RY Royal Bank of Canada Canada Financials 88,157 61.11 14.4 3.9 7.3 B-1-7 BObgijopsv SNY Sanofi France Health Care 125,129 47.42 23.6 3.3 5.8 A-1-7 Bbijopsv BNS Scotiabank Canada Financials 61,944 51.19 9.9 4.1 6.0 B-2-7 Bbgijopsv SKM SK Telecom Korea, Republic Of Telecommunication Services 20,355 28.01 35.4 3.5 5.1 B-1-7 Bbijopsv STM STMicroelectronics NV France Information Technology 8,362 9.18 31.7 4.4 27.2 B-1-7 Bbijops SLF Sun Life Financial Inc. Canada Financials 19,265 31.42 26.6 3.7 0.0 B-2-7 Bbgijopsv SU Suncor Energy Incorporated Canada Energy 42,248 29.25 30.0 3.0 23.3 B-2-7 Bbgijopsv SYT Syngenta AG Switzerland Materials 31,179 67.09 33.4 3.2 16.8 A-1-7 Bbijopsv TD The Toronto-Dominion Bank Canada Financials 79,569 43.03 13.8 3.7 9.3 B-1-7 Bbgijopsv TRI Thomson Reuters Canada Consumer Discretionary 31,061 39.02 51.7 3.4 3.4 B-1-7 Bbgijopsvw UL Unilever PLC United Kingdom Consumer Staples 128,904 43.02 50.4 3.0 6.2 A-1-7 Bbijopsv Average: 27.6 3.7 10.9 MSCI ACWI ex-USA index: 89.5 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


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Research portfolios and stock lists Stock lists 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

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.

10 March 2015

The RIC Report

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Economic forecast summary Real Economic Activity, % SAAR 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 2013 2014 2015 2016 Real GDP 1.8 4.5 3.5 -2.1 4.6 5.0 2.2 2.0 3.5 3.2 3.2 2.2 2.4 3.1 3.1 % Change, Year Ago 1.8 2.3 3.1 1.9 2.6 2.7 2.4 3.4 3.2 2.7 3.0 Final Sales 1.5 3.0 3.9 -1.0 3.2 5.0 2.1 2.5 3.5 3.4 3.1 2.2 2.3 3.1 3.1 Domestic Demand 1.9 2.3 2.7 0.7 3.4 4.2 3.2 2.2 3.8 3.6 3.4 1.9 2.4 3.3 3.3 Consumer Spending 1.8 2.0 3.7 1.2 2.5 3.2 4.2 2.9 4.0 3.9 3.5 2.4 2.5 3.5 3.2 Residential Investment 19.0 11.2 -8.5 -5.3 8.8 3.3 3.3 3.0 8.0 8.0 8.5 11.9 1.6 5.3 8.9 Nonresidential Investment 1.6 5.5 10.4 1.6 9.7 8.9 4.8 3.2 5.1 4.2 4.3 3.0 6.3 5.1 4.8 Structures 7.3 11.1 12.8 2.9 12.6 4.8 5.0 -4.0 1.0 -3.0 -3.0 -0.5 8.1 0.8 -0.5 Equipment 1.5 4.7 14.1 -1.0 11.2 11.0 0.9 5.0 8.0 8.0 8.0 4.6 6.5 6.4 7.8 Intellectual Property -1.9 2.8 3.6 4.7 5.5 8.8 10.9 6.0 4.0 4.0 4.0 3.4 4.9 6.4 4.0 Government 0.2 0.2 -3.8 -0.8 1.7 4.4 -1.8 -1.5 1.0 1.0 1.0 -2.0 -0.2 0.3 1.0 Exports 6.3 5.1 10.0 -9.2 11.0 4.6 3.2 -5.5 4.0 4.0 4.0 3.0 3.1 1.9 4.3 Imports 8.5 0.6 1.3 2.2 11.3 -0.9 10.1 -6.5 5.5 5.0 5.0 1.1 4.0 2.6 5.0 Net Exports (Bil 09$) -446 -425 -384 -447 -460 -431 -476 -463 -477 -488 -499 -420 -454 -482 -522 Contribution to growth (ppts) && -0.5 0.6 1.1 -1.7 -0.3 0.8 -1.2 0.3 -0.3 -0.3 -0.3 0.2 -0.2 -0.2 -0.2 Inventory Accumulation (Bil 09$) 43.4 95.6 81.8 35.2 84.8 82.2 88.4 68.4 69.4 60.4 60.4 63.6 72.7 64.7 60.4 Contribution to growth (ppts) () 0.3 1.5 -0.3 -1.2 1.4 0.0 0.1 -0.5 0.0 -0.2 0.0 0.0 0.1 -0.1 0.0 Nominal GDP (Bil $, SAAR) 16619 16872 17078 17044 17328 17600 17701 17769 17864 18083 18340 16768 17418 18014 18940 % SAAR 2.9 6.2 5.0 -0.8 6.8 6.4 2.3 1.5 2.1 5.0 5.8 3.7 3.9 3.4 5.1 Key Indicators Industrial Production (% SAAR) 1.9 2.4 5.0 3.9 5.7 4.2 4.1 2.9 4.5 4.1 4.1 2.9 4.2 4.0 3.8 Capacity Utilization (%) 77.8 77.9 78.4 78.6 79.1 79.3 79.4 79.5 79.8 80.0 80.3 78.0 79.1 79.9 80.5 Nonfarm Payrolls (Avg mom change, 000s) 178 190 217 193 284 237 324 261 225 250 250 199 260 247 213 Civilian Unemployment Rate (%) 7.5 7.3 7.0 6.6 6.2 6.1 5.7 5.6 5.4 5.2 5.0 7.4 6.2 5.3 4.7 Civilian Participation Rate (%) 63.4 63.2 62.9 63.0 62.8 62.8 62.8 62.9 62.9 62.9 63.0 63.2 62.9 62.9 63.1 Productivity (% SAAR) 0.5 3.6 3.3 -4.5 2.9 3.7 -1.8 0.9 1.2 1.4 1.5 0.9 0.8 1.0 1.5 Personal Savings Rate (%) 5.2 5.2 4.4 4.9 5.1 4.7 4.6 5.4 5.2 5.2 5.2 4.9 4.8 5.2 5.5 Light Vehicle Sales (Millions SAAR) 15.5 15.6 15.6 15.7 16.5 16.7 16.7 16.7 17.4 17.5 17.7 15.5 16.4 17.3 18.1 Housing Starts (Thous. SAAR) 865 882 1025 925 985 1030 1065 1082 1144 1207 1269 930 1001 1175 1400 Current Account (% of GDP) -2.4 -2.3 -2.1 -2.4 US Budget Balance ($bn, Fiscal Year) -680 -485 -475 -525 Inflation GDP Price Index (% SAAR) 1.2 1.7 1.5 1.3 2.1 1.4 0.1 -0.6 -1.3 1.8 2.6 1.5 1.5 0.3 2.0 % Change, Year Ago& 1.5 1.4 1.4 1.4 1.7 1.6 1.2 0.8 -0.1 0.0 0.6 Core PCE Chain Prices (% SAAR) 1.0 1.4 1.3 1.2 2.0 1.4 1.1 0.8 1.4 1.4 1.4 1.3 1.4 1.2 1.6 % Change, Year Ago$ 1.3 1.3 1.3 1.2 1.5 1.5 1.4 1.3 1.2 1.2 1.3 CPI, Consumer Prices (% SAAR) -0.1 2.3 1.4 2.1 2.4 1.2 -0.9 -3.1 2.1 2.1 2.5 1.5 1.6 0.2 2.4 % Change, Year Ago! 1.4 1.5 1.2 1.4 2.1 1.8 1.2 -0.1 -0.2 0.1 0.9 CPI ex Food & Energy ( % SAAR) 1.1 1.9 1.7 1.8 2.2 1.4 1.5 1.6 1.9 1.8 1.8 1.8 1.7 1.7 2.0 % Change, Year Ago@ 1.7 1.7 1.7 1.6 1.9 1.8 1.7 1.7 1.6 1.7 1.8 Shaded regions represent BofA Merrill Lynch US Economics Research forecast Source: BofA Merrill Lynch US Economics Research


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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 3.4 3.4 3.4 3.9 3.5 3.7 3.3 3.6 3.61 3.63 3.59 3.71 Global ex US 3.6 3.6 3.5 4.1 3.9 4.2 4.0 3.8 4.40 4.42 4.26 4.17 Euro Area -0.4 0.9 1.4 1.6 1.4 0.4 -0.4 1.0 0.05 0.05 0.05 0.05 UK 1.7 2.6 2.6 2.8 2.6 1.5 0.4 1.9 0.50 0.50 0.75 1.25 Japan 1.6 0.0 1.4 1.9 0.4 2.7 1.1 1.8 0.10 0.10 0.10 0.10 Canada 2.0 2.5 2.0 2.1 1.0 1.9 0.9 2.0 0.75 1.00 0.50 1.00 Emerging EMEA 2.7 2.3 1.3 2.7 4.8 5.5 7.3 4.9 10.82 10.17 8.29 7.13 Latin America 2.6 0.7 0.8 2.8 7.8 12.9 12.9 9.3 9.09 8.92 11.41 11.89 Brazil 2.5 0.2 -0.5 1.8 6.2 6.3 7.1 5.5 12.75 11.75 12.00 11.50 Emerging Asia 6.4 6.5 6.2 6.3 4.5 3.6 3.1 3.7 4.06 4.35 4.00 3.96 China 7.7 7.4 7.1 6.8 2.6 2.1 1.7 2.8 2.50 2.75 2.50 2.50 Shaded regions represent BofA Merrill Lynch Global Economics Research forecast. Source: BofA Merrill Lynch Global Economics Research

Interest rate forecast summary (% EOP) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 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 0-0.25 0-0.25 0.25-0.50 0.50-0.75 0-0.25 0-0.25 0.50-0.75 1.50-1.75 Fed effective 0.09 0.07 0.06 0.07 0.06 0.09 0.07 0.06 0.07 0.07 0.27 0.52 0.07 0.06 0.52 1.53 3-Month T-Bill 0.07 0.03 0.01 0.07 0.03 0.02 0.02 0.04 0.01 0.02 0.20 0.45 0.07 0.04 0.45 1.40 3-Month LIBOR 0.28 0.27 0.25 0.25 0.23 0.23 0.24 0.26 0.25 0.27 0.52 0.77 0.25 0.26 0.77 1.80 2-Year T-Note 0.24 0.36 0.32 0.38 0.42 0.46 0.57 0.66 0.70 0.80 1.00 1.20 0.38 0.66 1.20 2.00 5-Year T-Note 0.76 1.39 1.38 1.74 1.72 1.63 1.76 1.65 1.65 1.70 1.80 1.90 1.74 1.65 1.90 2.50 10-Year T-Note 1.85 2.49 2.61 3.03 2.72 2.53 2.49 2.17 2.15 2.20 2.25 2.35 3.03 2.17 2.35 2.85 30-Year T-Bond 3.10 3.50 3.68 3.97 3.56 3.36 3.20 2.75 2.80 2.85 2.90 3.00 3.97 2.75 3.00 3.40 2-Year swap 0.42 0.51 0.46 0.49 0.55 0.58 0.82 0.90 0.84 1.06 1.27 1.49 0.49 0.90 1.49 2.35 5-year swap 0.95 1.57 1.54 1.79 1.80 1.70 1.93 1.77 1.45 1.68 1.89 2.10 1.79 1.77 2.10 2.75 10-year swap 2.01 2.70 2.77 3.09 2.84 2.63 2.64 2.28 1.89 2.17 2.33 2.55 3.09 2.28 2.55 3.10 30-year swap 2.99 3.45 3.66 3.93 3.54 3.33 3.19 2.70 2.36 2.62 2.79 3.01 3.93 2.70 3.01 3.45 Shaded regions represent BofA Merrill Lynch US Rates Research forecast. Source: BofA Merrill Lynch US Rates Research

FX rate forecast summary

Spot 15-Mar 15-Jun 15-Sep 15-Dec 16-Mar 16-Jun G3 EUR-USD 1.09 1.16 1.14 1.12 1.10 1.08 1.06 USD-JPY 121 117 119 121 123 125 127 EUR-JPY 131 136 136 136 135 135 135 Dollar Bloc USD-CAD 1.26 1.25 1.29 1.31 1.30 1.27 1.26 AUD-USD 0.77 0.80 0.77 0.75 0.73 0.73 0.72 NZD-USD 0.74 0.74 0.72 0.70 0.68 0.67 0.66 Europe EUR-GBP 0.72 0.76 0.76 0.75 0.74 0.73 0.73 GBP-USD 1.51 1.53 1.50 1.49 1.49 1.48 1.45 EUR-CHF 1.07 1.07 1.08 1.09 1.10 1.10 1.11 USD-CHF 0.98 0.92 0.95 0.97 1.00 1.02 1.05 EUR-SEK 9.20 9.50 9.40 9.30 9.10 9.00 8.90 USD-SEK 8.48 8.19 8.25 8.30 8.27 8.33 8.40 EUR-NOK 8.58 8.70 8.50 8.40 8.30 8.20 8.10 USD-NOK 7.90 7.50 7.46 7.50 7.55 7.59 7.64 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


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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%.


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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. /x/ Customers of MLPF&S in the US can receive independent, third-party research on companies covered in this report, at no cost to them, if such research is available. Customers can access this independent research at http://www.ml.com/independentresearch or can call 1-800-637-7455 to request a copy of this research. /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


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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.

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Other Important Disclosures

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Team Page Research Investment Committee (RIC) Alberto Ades GEM FI/FX Strategy, Economist MLPF&S 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 Manish Kabra, CFA >> Equity & Quant Strategist MLI (UK) Ajay Singh Kapur, CFA >> Equity Strategist Merrill Lynch (Hong Kong) Martin Mauro Fixed Income Strategist MLPF&S Hans Mikkelsen Credit Strategist MLPF&S Priya Misra Rates Strategist MLPF&S Ralf Preusser, CFA Rates Strategist MLI (UK)

Kristen Pulley, CFA Portfolio Strategist MLPF&S Cheryl Rowan Portfolio 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 Matthew Trapp, CFA Investment 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.

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