2. INVESTMENT DIRECTIONS [ 2 ]
Macroeconomic Overview
TABLE OF CONTENTS The state of the global economy is pretty much back to where it was in late 2011—an
anemic recovery threatened by Europe. Amid renewed concerns about a worsening
European crisis and a stalling recovery, stocks have erased most of their early 2012 gains.
Global Regions...................................4
Global equity markets finished May down 9%,* with European and emerging market
Global Sectors...................................6 stocks particularly suffering, and as investor sentiment turned more cautious, the yield
on the 10-year Treasury retreated in May to 1.56%. While stocks gained somewhat in the
Fixed Income Sectors.......................7 first half of June, rising 2.7% through June 15 on hopes policy makers will continue to
step in to save the day and revive slowing economies, many investors are still wondering
whether we’re on the verge of another global recession.
What’s New:
In our opinion, the most likely outcome for the global economy for the remainder
• Upgrade of Indonesia of the year continues to be slow, but positive, growth. The US economy is on firmer
footing, we expect emerging market growth to stabilize and there are some signs of
to Overweight a soft landing in China.
• Downgrade of Mexico hat
T said, two big risks remain, either of which could send the global economy into
to Underweight a double-dip recession. First, the possibility of a full-blown eurozone crisis remains
the major threat to the global recovery and, in particular, we’re concerned about a
• Downgrade of Mortgage- Spanish banking system crisis and the long-term risk of a Greek exit from the euro.
Second, if US policy makers don’t avert the United States’ pending fiscal drag, the
Backed Securities to odds of a double dip rise.
Neutral
n light of the uncertainty regarding the fate of the eurozone and of the United States’
I
fiscal policy, we believe markets are likely to remain highly volatile in the second half of the
year. While we continue to hold an overweight long-term view of global equities, especially
Risk Appetite Dial relative to bonds, and we expect that stocks can move higher in the remainder of the year,
their ascent is likely to be anything but smooth.
s such, we continue to advocate a defensive portfolio positioning. We like high-quality,
A
dividend-paying stocks, including those in emerging markets; defensive sectors such as
global telecommunications; global mega capitalization (mega cap) stocks; and US and
international minimum volatility funds. We also prefer to get equity exposure through
select developed and emerging markets that have robust growth prospects and fewer
Low High debt and banking sector problems. Within fixed income, we like US spread products such
as investment grade and municipal bonds.
Our new global market risk appetite
measure accounts for ongoing shifts in *Global equity market performance data is based on the performance of the MSCI ACWI (All Country World Index).
investor sentiment around the macro
fundamentals that form the basis for our
near-term investment views. Please see Figure 1: Longer-Term Global Asset Allocation
the appendix for an explanation of our
risk appetite measure methodology.
Underweight Neutral Overweight
Our risk appetite measure is currently Global Equities n
mildly negative, signalling a continued Treasury Bonds n
cautious mood in the markets, thanks
Corporate Bonds n
to both widening US corporate credit
spreads and the drop in equity markets Municipals n
from their March high amid renewed Treasury Inflation-Protected Securities n
concerns about Europe.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of
future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment
advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative
and educational purposes and is subject to change.
3. INVESTMENT DIRECTIONS [ 3 ]
Figure 2: iShares Investment Strategy Group Near-Term Outlooks
Global Region Underweight Neutral Overweight Related iShares ETF Tickers
Developed Markets
Global Equities x ACWI, HDV, IOO, OEF, IDV, URTH, ACWV
Developed Markets x EFA, IDV, ACWX, EFAV, SCZ
Australia x EWA, EPP, EWAS, DVYA
Canada x EWC, EWCS
France x EWQ
Germany x EWG, EWGS
Hong Kong x EWH, EWHS
Italy x EWI
Japan x EWJ, SCJ
Netherlands x EWN
Norway x ENOR
Singapore x EWS, EWSS
Spain x EWP
Sweden x EWD
Switzerland x EWL
United Kingdom x EWU, EWUS
United States x EUSA, IWV, IVV, USMV
Emerging Markets
Emerging Markets x EEM, EEMV, DVYE, EEMS
Brazil x EWZ, EWZS
China x MCHI, ECNS
India x INDY, INDA, SMIN
Indonesia x EIDO
Mexico x EWW
Russia x ERUS
South Africa x EZA
South Korea x EWY
Taiwan x EWT
Global Sector Underweight Neutral Overweight Related iShares ETF Tickers
Consumer Discretionary x
Consumer Staples x IYK, KXI, AXSL
Energy x IXC, FILL, EMEY, AXEN
European Banks x EUFN
Financials x IYF, IXG, AXFN, EMFN, EUFN, FEFN, IAT
Healthcare x IYH, IXJ, AXHE
Industrials x IYJ, EXI, AXID
Information Technology x IXN, AXIT, AAIT, IYW, SOXX
Materials x IYM, MXI, AXMT, EMMT, RING, PICK, SLVP
REITs x ICF, IYR
Telecommunications x IXP, AXTE, IYZ
US Industrials x IYJ
US Regional Banks x IAT
US Retail x N/A
US Technology x IYW
US Utilities x IDU
Utilities x IDV, JXI, AXUT
Fixed Income Sector Underweight Neutral Overweight Related iShares ETF Tickers
Emerging Markets x EMB, LEMB, CEMB, EMHY
High Yield Credit x HYG, HYXU, GHYG, QLTB, QLTC
LQD, FLOT, QLTA, MONY, ENGN, AMPS, CSJ,
Investment Grade Credit x
CIU, CFT, CLY, QLTA
Mortgage-Backed Securities x MBB, GNMA, CMBS
Municipals x SUB, MUB
Non-US Developed Markets x ISHG, IGOV
TIPS/Global Inflation-Linked x STIP, TIP, GTIP, ITIP
US Treasuries x SHY, IEI, IEF, TLH, TLT, GOVT, SHV
Global Style Underweight Neutral Overweight Related iShares ETF Tickers
Global Mega Caps x OEF, IOO, HDV, DVY, IDV
Small Caps x IWM
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information
should not be relied upon by the reader as research, investment advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for
illustrative and educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
4. INVESTMENT DIRECTIONS [ 4 ]
Global Regions
With the exception of a downgrade of Mexico and an upgrade of watching events in Greece, we’re also watching for three other
Indonesia, we have maintained all our country outlooks this month. developments. First, further Greek banking system outflows would
Developed Markets: In the developed world, we still expect certain mean a worsening crisis. Second, we’re awaiting more clarity on
smaller developed countries—Canada, Australia, Singapore, the rescue plan for Spain and on how Spain plans to recapitalize
Switzerland and Hong Kong (the CASSH countries)—to outper- its banking system. Finally, we’re watching for more evidence of a
form other developed markets over the long term given their softening German position toward eurobonds, which would be a
generally lower debt levels and more robust growth prospects. In positive for markets. We believe a worsening eurozone crisis can
the near term, among developed markets, we especially like Hong be avoided if European politicians get more aggressive in address-
Kong and Singapore and certain countries in northern Europe. ing their region’s problems. But as there’s little likelihood of an
imminent solution, the region is likely to be a source of near-term
Despite the outcome of the recent Greek election, Europe is not
market volatility. While we do like some countries in more econom-
out of the woods. While, at the time of writing, we expect a likely
ically stable northern Europe, we continue to advocate under-
New Democracy-led government to try to keep Greece in the euro,
weighting Italy and Spain, which look cheap for a reason.
further Greek defaults and an eventual Grexit are still significant
continue to hold a neutral view of US equities, which no longer
We
long-term risks. Meanwhile, the Spanish banking system is now a
bigger threat than a Grexit. Looking forward, in addition to look cheap on a relative valuation basis. While US growth remains
Figure 3: Global Region Near-Term Outlooks
Global Region Valuations Growth Profitability Risk/ Our View Related iShares
Developed Markets (P/B) Sentiment Underweight Neutral Overweight ETF Tickers
EWA, EPP,
Australia + + EWAS, DVYA
Canada – – + EWC, EWCS
France + – – – EWQ
Germany + – + EWG, EWGS
Hong Kong + + EWH, EWHS
Italy + – – – EWI
Japan + + – EWJ, SCJ
Netherlands + – EWN
Singapore – – EWS, EWSS
Spain + – – – EWP
Sweden – + EWD
Switzerland – + EWL
United Kingdom – + EWU, EWUS
EUSA, IWV, IVV,
United States – + + + USMV
Emerging Markets
Brazil + – EWZ, EWZS
China + + MCHI, ECNS
INDY, INDA,
India – + SMIN
Indonesia + + EIDO
Mexico – + – EWW
Russia + + + – ERUS
South Africa – + + – EZA
South Korea EWY
Taiwan – + EWT
– unattractive + attractive neutral previous month (if not shown—same as current) current month
* Please see appendix for an explanation of our factor methodology. **Norway is not included in this table due to its size. This material represents an assessment of the market environment at
a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a
recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative and educational purposes and is subject to change. This information does not
represent the actual current, past or future holdings or portfolio of any BlackRock client.
5. INVESTMENT DIRECTIONS [ 5 ]
a bright spot in the world outlook and most measures continue to Figure 4: Valuations and Market Returns–Price/Book
suggest that the United States will avoid another recession, the 2.5
US recovery is still stuck in first gear thanks to the debt overhang 2.2 2.3
2.1
of the last decade. Based on our estimates, US growth is likely to 2.0 2.0
2.0
1.8
be around 2% this year and with job creation and wage growth at 1.8
current slow paces, consumer spending is very likely going to slow 1.5 1.5
1.5 1.4 1.4
down. US politicians have yet to address the pending tax hikes 1.2
and spending cuts scheduled to take effect in January 2013 that
1.0
could pose a headwind to the US market later this year and
significantly lower US growth in 2013. Finally, Europe remains a
0.5
major risk to the US economy due to the impact a worsening
eurozone crisis would have on US exports and banks.
0.0
Within developed Asia, we are retaining our neutral view of Japan
Current month 3 months ago 1 year ago 3 years ago
although the market has once again started to look more
MSCI US MSCI Emerging
interesting thanks to compressed valuations on the back of Equity Index MSCI EAFE Index Markets Index
foreign investor selling in May’s risk-off environment. But while
Japan’s growth in the first quarter of 2012 was impressive, it was Sources: MSCI, FactSet, as of 5/31/12.
largely supported by post-earthquake government spending. In
addition, the strengthening of the yen as a traditional safe haven
is likely to provide headwinds for the country’s exporters. Still,
Figure 5: Valuations and Market Returns–Price/Earnings
market sentiment could benefit in coming months from further
quantitative easing by the Bank of Japan. Also, resolution of the 20
18.5
uncertainty surrounding a pending sales tax hike could help
restore market confidence in the country’s fiscal position 14.9
15.6
15 14.0
Emerging Markets: Despite emerging markets’ weak performance in 13.8 13.8
13.3 13.5 13.9
12.7
12.1
May, we continue to advocate overweighting select emerging market
11.1
countries relative to their respective weights in the MSCI ACWI
10
benchmark and overweighting emerging markets relative to developed
markets. Emerging markets are generally experiencing a longer-term
trend toward less volatility and offer stronger growth prospects than
5
many developed markets. In addition, falling inflation in most
emerging market countries has yet to translate into multiple expan-
sions, and valuations remain compelling. In general, we prefer Brazil in
0
Latin America, and China and Taiwan in emerging Asia at the expense Current month 3 months ago 1 year ago 3 years ago
of emerging Europe, the Middle East and Africa (EMEA). We also prefer
gaining emerging market exposure through high-dividend funds. MSCI US MSCI Emerging
Equity Index MSCI EAFE Index Markets Index
Within Latin America, we have downgraded our view of Mexico to
underweight from neutral as the market’s valuations currently Sources: MSCI, FactSet, as of 5/31/12.
look comparatively rich. While the country’s economic outlook is
robust, Mexico’s inflation actually ticked up in May. In addition,
with Mexico’s banking sector dominated by Spanish banks,
Elsewhere in Asia, we continue to hold an overweight view of
Mexico is directly exposed to the Spanish banking crisis.
China. Based on leading economic indicators, we expect China to
like emerging Asian countries thanks to their robust growth
We be able to engineer a soft landing in the back half of the year, with
prospects and relatively attractive valuations. Within emerging
growth settling at around 8%. In our view, China has both the
Asia, we have upgraded our view of Indonesia to overweight from
motivation and ability to maintain growth at a respectable rate as
neutral. The Indonesian market currently looks like a good value
the country readies itself for a leadership transition later this year.
relative its own trading history, and as the country’s near-term
Government officials still have room for both fiscal and monetary
growth prospects remain robust, Indonesia represents a rare
stimulus measures such as the surprise early June rate cut.
growth play in a slow-growth environment. In addition, Indonesian
companies are very profitable with a high aggregate return on Given India’s slowing growth, stubbornly high inflation, large
assets (ROA). Risks to our view include a government-controlled current account deficit and chronic budget deficit, we continue to
fuel price hike, though the hike could improve the country’s hold an underweight view of the market.
financial position in the longer term.
6. INVESTMENT DIRECTIONS [ 6 ]
Global Sectors
While the market finished down in May, defensive sectors suffered This is because marginal supply is increasingly coming from
less than cyclical ones as investor sentiment remained cautious. unconventional sources where production costs are higher, many
Telecommunications was the top performing sector, followed by of the largest oil producing countries now require a higher crude
consumer staples and utilities. Materials performed the worst, price to balance their budgets and OPEC currently has very little
followed by energy and financials. This month we have maintained spare capacity, meaning any supply disruptions are likely to push
all our sector outlooks. crude prices up sharply.
As we expect markets to remain volatile in coming months, we We continue to hold a neutral view of global and US technology
continue to generally prefer more defensive global sectors to stocks. While the technology sector still looks interesting over the
cyclical ones, and we like sectors with more mega cap exposure or longer term, current valuations appear a bit rich relative to their
an attractive income stream. five-year history and to other cyclical sectors. It’s hard to justify this
Our favorite defensive sector remains global telecommunications. premium considering recent slippage in fundamentals, in particu-
In addition to the sector’s compelling valuations, telecommunica- lar in capacity utilization, which suggests that technology compa-
tions’ low beta (a measure of the tendency of securities to move nies—Apple aside—may have modestly less pricing power going
with the market at large) and relatively high yield should provide forward. In addition, technology stocks generally tend to be more
some cushion during market volatility and sell-offs. sensitive to market volatility than stocks in more defensive sectors.
Our least preferred sectors are still global consumer discretion-
Within cyclicals, we continue to advocate an overweight allocation
to global energy stocks, which are currently cheaper than US large ary, financials and US retail. We continue to hold an underweight
cap energy companies and may offer a healthy dividend yield. In view of the global financials sector as we believe it’s likely to
addition, while weakness in global growth prospects and fears of remain under pressure due to uncertainty regarding the eurozone
a hard landing in China are likely to keep oil prices muted in the crisis, regulatory changes and earnings. In our view, US consumer
near term, we expect crude prices to rebound in the longer term. discretionary stocks look very expensive in an economy charac-
terized by no real wage growth and slow job creation.
Figure 6: Global Sector Near-Term Outlooks and the Factors Behind Them*
Valuations Profitability Risk/ Our View
Global Sector (P/B) Sentiment underweight neutral overweight Related iShares ETF Tickers
Consumer Discretionary –
Consumer Staples – + IYK, KXI, AXSL
Energy + IXC, FILL, EMEY, AXEN
IYF, IXG, AXFN, EMFN, EUFN,
Financials** + – –
FEFN, IAT
Healthcare – + + IYH, IXJ, AXHE
Industrials** IYJ, EXI, AXID
Information Technology – + + IXN, AXIT, AAIT, IYW, SOXX
IYM, MXI, AXMT, EMMT, RING,
Materials + –
PICK, SLVP
Telecommunications + – IXP, AXTE, IYZ
Utilities** + – IDV, JXI, AXUT
– unattractive + attractive neutral previous month (if not shown—same as current) current month
* Please see appendix for an explanation of our factor methodology.
** This chart focuses on global sector views only. For US sector views, please see the chart on pg. 3. The view for US utilities is underweight, the view for US regional banks is neutral, the view
for European banks is neutral and the view for US industrials is overweight.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should
not be relied upon by the reader as research, investment advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative and
educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.
7. INVESTMENT DIRECTIONS [ 7 ]
Fixed Income Sectors
Figure 7: Fixed Income Sector Near-Term Outlooks
Fixed Income Sector Underweight Neutral Overweight Related iShares ETF
Tickers
EMB, LEMB, CEMB,
Emerging Markets x
EMHY
HYG, HYXU, GHYG,
High Yield Credit x
QLTB, QLTC
LQD, FLOT, QLTA, MONY,
Investment Grade Credit x ENGN, AMPS, CSJ, CIU,
CFT, CLY, QLTA
Mortgage-Backed Securities x MBB, GNMA, CMBS
Municipals x SUB, MUB
Non-US Developed Markets x ISHG, IGOV
TIPS/Global Inflation-Linked x STIP, TIP, GTIP, ITIP
SHY, IEI, IEF, TLH, TLT,
US Treasuries x
GOVT, SHV
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of
future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment
advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative
and educational purposes and is subject to change. This information does not represent the actual current, past or future
holdings or portfolio of any BlackRock client.
The search for perceived safety trumped the search for returns in 2011 and are delivering again this year. At the same time, credit
May. Investors fled risky assets for the relative safety of the US risks in the high grade muni space are modest and investors can
Treasury market, in which yields hit new lows last month along pick up a significant incremental yield through this asset class. In
with the yields on other safe-haven assets such as German and addition, for now, there are few signs that Washington is seriously
UK government bonds. The yield on the 10-year Treasury finished contemplating any change in the tax-exempt status of municipals.
May at 1.56%. Eurozone peripheral government debt yields, We still hold an underweight long-term and a neutral near-term
meanwhile, hit levels close to November 2011 highs. view of Treasuries and TIPS. We remain cautious on TIPS over the
Looking forward, assuming a continued slow, but positive, global long term in light of negative real rates. Still, for aggressive
recovery, we believe that yields will rise modestly in 2012, with the investors with a short-term horizon, we are seeing a potential
10-year Treasury yield drifting to around the 2.75% to 3% level. opportunity in shorter-duration TIPS as long as inflation remains at
However, factors—including price insensitive government current levels. Currently, 2-year TIPS are implying that inflation over
buyers—that have conspired to keep rates abnormally low for the the next year—the breakeven level—is around 1%. At the same
past year are still in place. This month, we have only changed our time, core inflation has been running at well over 2% for the past
view of mortgage-backed securities. eight months.
We continue to advocate reducing duration risk—for which we While we continue to believe that investors are being fairly
believe investors are not currently being adequately compensat- compensated for both prepayment and extension risk, we are
ed—and modestly adding exposure to spread products. now advocating a benchmark weight to mortgage-backed
We still hold a neutral view of high yield, which continues to securities rather than an overweight position. We believe the
appear close to fair value on a risk-adjusted basis. However, for potential for further upside appreciation is limited by ambiguity
investors with a higher risk tolerance, recent spread widening over further quantitative easing efforts as well as by prepayment
may provide a near-term opportunity for additional positioning. uncertainty driven by lower rates and the potential for new policy
Meanwhile, current investment grade bond spread levels look tools to finally unfreeze the refinancing market.
extreme unless you believe the United States is headed back Outside of the United States, we continue to see opportunities in
toward another recession. As such, we believe investors should emerging market bonds, which we believe investors should
continue to consider a shift into investment grade credit. consider including at a benchmark weight. Emerging market debt
We continue to believe that munis offer value relative to Treasur- is offering historically high yields relative to the US Treasury
ies, and muni/Treasury ratios remain wide. Munis outperformed in market and recent spread widening in this sector may allow for
additional opportunistic positioning.
8. INVESTMENT DIRECTIONS [ 8 ]
Contributors
Russ Koesterich, CFA, is the Global Chief Investment Strategist for BlackRock’s iShares ETF business. He is a founding member
of the BlackRock Investment Institute, delivering BlackRock’s insights on global investment issues. During his 20+ year career
as an investment researcher and strategist, Mr. Koesterich has served as the Global Head of Investment Strategy for scientific
active equities and as a senior portfolio manager in the US Market Neutral Group at BlackRock. Mr. Koesterich is a frequent
contributor to financial news media and can regularly be seen on CNBC, Fox Business News and Bloomberg TV. He is the author
of two books, including his most recent, The Ten Trillion Dollar Gamble, which details how to position portfolios for the impact of
the growing U.S. deficit. Mr. Koesterich is also regularly quoted in print media including the Wall Street Journal, USA Today,
MSNBC.com, and MarketWatch. He earned a BA degree in history from Brandeis University, a JD from Boston College and an
MBA in capital markets from Columbia University.
Nelli Oster, PhD, is an Investment Strategist in BlackRock’s iShares business, where her responsibilities include developing
tactical country, sector, commodity and asset allocation models implementable with iShares ETFs. Dr. Oster’s service with the
firm dates back to 2008, including her time with Barclays Global Investors (BGI), which merged with BlackRock in 2009. Before
joining iShares, Dr. Oster did research and portfolio management in BGI’s quantitative stock selection business, spanning US,
Canada, Japan and emerging markets portfolios. Prior to joining BGI, Dr. Oster was an equity research analyst at Goldman
Sachs, and she started her career in the mergers and acquisitions group of Salomon Smith Barney. Dr. Oster holds a BSc
(Hons) in management sciences from the London School of Economics and a PhD in finance from the Stanford Graduate
School of Business, where her Behavioral Finance dissertation focused on expectations formation and learning in the
financial markets.
Matthew Tucker, CFA, has spent the past 16 years focused on fixed income portfolio management, analytics and strategy.
As Head of North American Fixed Income iShares Strategy within BlackRock’s Fixed Income Portfolio Management team,
Mr. Tucker leads the investment strategy for fixed income ETFs in North America and Latin America, focusing on product
development, client support, and thought leadership. He previously worked with Barclays Global Investors before it merged
with BlackRock, and he led the US Fixed Income Investment Solutions team responsible for overseeing product strategy for
active, index, enhanced index, iShares and long/short products. Mr. Tucker was also a portfolio manager and a trader in fixed
income focused on U.S. government securities. He began his career at Barra, where he supported clients using the company’s
fixed income analytics. He holds a bachelor of business administration degree from the University of California, Berkeley, and
is a Chartered Financial Analyst charterholder.
Stephen Laipply is a member of BlackRock’s Model-Based Fixed Income Portfolio Management Group. Mr. Laipply’s service
with the firm dates back to 2009, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009.
At BGI, he was a senior investment strategist on the US Fixed Income Investment Solutions team, responsible for developing and
delivering fixed income solutions to clients. Mr. Laipply focuses primarily on the iShares (ETF) fixed income product suite. Prior to
joining BGI, he was a senior member in both the Strategic Solutions and Interest Rate Structuring Groups at Bank of America
Merrill Lynch, where he structured and marketed fixed income solutions across interest rates, credit and mortgages to institu-
tional investors. Mr. Laipply earned a BS degree, with honors, in finance from Miami University, and an MBA in finance from the
University of Pennsylvania.
How do you use this market commentary and do you find it useful?
Please share your feedback and any questions or concerns you have at questions@iShares.com.
You also can find the latest market commentary from the iShares Investment Strategy Group at
iSharesblog.com and iShares.com.
9. INVESTMENT DIRECTIONS [ 9 ]
Appendix
The analysis behind our views: Growth prospects: We focus on leading indicators that are
Our country and sector views are based on a systematic analysis constructed to predict a country’s future economic growth. We
of the extent to which macroeconomic factors have been priced in assign a “+” to countries that are expected to grow fast relative to
at the country and sector level. their own past trends and to other countries, and a “-“ to coun-
tries that are growing more slowly.
In coming up with our country views, we use price-to-book (P/B)
ratio as a measure of a country’s value. This ratio captures how the Corporate sector profitability: We focus on return on assets (ROA)
market prices a given country relative to the assets it has available and on cross-country comparisons, although we also take into
for production. The higher the ratio, the more favorably the market account developments in a country’s ROA over time. A country with
views the country relative to its own history and to other countries. a highly profitable corporate sector is assigned a “+”; one with low
profitability is assigned a “-.”
The price the market is willing to pay for the assets of a country is
positively related to its expected future growth and corporate Risk / sentiment: We focus on sovereign credit default swap (CDS)
sector profitability, and negatively related to the riskiness of its spreads, which measure investor perception of the likelihood that
assets. We use factors such as leading economic indicators and a given country will default on its obligations. We mainly compare
retail sales growth as proxies for expected future growth. We use CDS spreads across countries, although we also take into account
return on assets (ROA) as a proxy for future profitability and we use trends in a country’s CDS spreads over time. A country that is
credit default swap (CDS) spreads as a measure of risk and perceived as relatively safe is assigned a “+”; a risky country is
sentiment. In addition, we consider factors such as commodity assigned a “-.”
prices that affect importer and exporter countries in opposite ways.
While the valuation, growth, profitability and risk / sentiment
In determining the sensitivity of a country’s valuations to these factor readings are discrete, we use continuous measures in our
macroeconomic factors, we look at trends both over time and investment process. In addition, the factors are not equally
across countries. We are overweight (underweight) countries important in driving returns at a given point in time. As a result,
where market valuations are low (high) relative to what we would when it comes to formulating our final views, the various factor
expect, with the expectation that the economic factors will be fully readings are not additive. For example, a “+” value factor, indicat-
incorporated into prices in the future. We use a similar process for ing that a country looks cheap, may overshadow negative readings
coming up with our sector views. in other factors, leading us to still like the country.
Factor table methodology We use a similar methodology in coming up with the readings in
Here’s an explanation of the methodology of our country our sector factor table. We focus on a mix of cross-sectional and
factor table: time-series comparisons of valuations (P/B), profitability (ROE)
and risk / sentiment (sector spreads). In addition, we consider the
Valuations: In determining whether a country looks cheap or global growth outlook for cyclical and defensive sectors.
expensive, we focus on price-to-book ratio (P/B), both over time
and across countries. If a country has a low P/B relative to both Risk appetite dial methodology
its own trading history and to other countries, we assign it a “+”; if Our global risk appetite dial measures current market sentiment.
it has a high P/B, we assign it a “-.” We mainly compare developed It is constructed from equity market returns, corporate credit
market countries to other developed market countries and spreads and expectations for future economic growth. High equity
emerging market countries to other emerging market countries. returns, narrow credit spreads and a good growth outlook tend to
We compare countries that benefit or suffer from their own coincide with positive investor sentiment and stronger appetite for
specific issues, e.g., corporate governance problems in Russia, to risky assets.
their own trading histories.
Glossary
Underweight: Potentially decrease allocation Overweight: Potentially increase allocation Neutral: Consider benchmark allocation
Long Term: Longer than one year Near Term: 12 months or less
10. INVESTMENT DIRECTIONS [ 10 ]
Carefully consider the iShares Funds’ investment objectives, risk factors, Statement (“PDS”) or prospectus for each iShares ETF that is offered in Australia is available at
and charges and expenses before investing. This and other information iShares.com.au. You should read the PDS or prospectus and consider whether an iShares ETF
can be found in the Funds’ prospectuses, which may be obtained by calling is appropriate for you before deciding to invest.
1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the iShares securities trade on ASX at market price (not, net asset value (“NAV”)). iShares
prospectuses carefully before investing. securities may only be redeemed directly by persons called “Authorised Participants.”
Investing involves risk, including possible loss of principal. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Dow Jones
In addition to the normal risks associated with investing, international investments may involve Trademark Holdings, LLC, JPMorgan Chase Co., MSCI Inc. Markit Indices Limited, or
risk of capital loss from unfavorable fluctuation in currency values, from differences in generally Standard Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital Inc. None of
accepted accounting principles or from economic or political instability in other nations. these companies make any representation regarding the advisability of investing in the Funds.
Emerging markets involve heightened risks related to the same factors as well as increased BlackRock is not affiliated with the companies listed above.
volatility and lower trading volume. Narrowly focused investments and securities focusing on a The MSCI ACWI (All Country World Index) IndexSM is a free float-adjusted market capitalization
single country may be subject to higher volatility. index that is designed to measure equity market performance in the global developed and
Bonds and bond funds will decrease in value as interest rates rise. A portion of a municipal bond emerging markets. As of April 2012, the MSCI ACWI consisted of 45 country indices comprising
fund’s income may be subject to federal or state income taxes or the alternative minimum tax. 24 developed and 21 emerging market country indices. The developed market country indices
Capital gains, if any, are subject to capital gains tax. High-yield securities may be more volatile, included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
be subject to greater levels of credit or default risk, and may be less liquid and more difficult to Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal,
sell at an advantageous time or price to value than higher-rated securities of similar maturity. Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The
Mortgage-backed securities are subject to prepayment and extension risk and therefore react emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic,
differently to changes in interest rates than other bonds. Small movements in interest rates Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland,
may quickly and significantly reduce the value of certain mortgage-backed securities. TIPS can Russia, South Africa, Taiwan, Thailand, and Turkey.
provide investors a hedge against inflation, as the inflation adjustment feature helps preserve The MSCI ACWI (All Country World Index) ex USA IndexSM is a free float-adjusted market
the purchasing power of the investment. Because of this inflation adjustment feature, inflation capitalization index that is designed to measure equity market performance in the global
protected bonds typically have lower yields than conventional fixed rate bonds and will likely developed and emerging markets, excluding the USA. As of April 2012, the MSCI ACWI ex
decline in price during periods of deflation, which could result in losses. Government backing USA consisted of the following 44 developed and emerging market country indices: Australia,
applies only to government issued securities, not iShares exchange traded funds. Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt,
An investment in the Fund(s) is not insured or guaranteed by the Federal Deposit Insurance Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy,
Corporation or any other government agency. Japan, Korea, Malaysia, Mexico, Morocco, the Netherlands, New Zealand, Norway, Peru,
Index returns are for illustrative purposes only and do not represent actual Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland,
iShares Fund performance. Index performance returns do not reflect any Taiwan, Thailand, Turkey and the United Kingdom.
management fees, transaction costs or expenses. Indexes are unmanaged The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market
and one cannot invest directly in an index. Past performance does not capitalization index that is designed to measure developed market equity performance,
guarantee future results. excluding the USA Canada. As of April 2012, the MSCI EAFE Index consisted of the following
For actual iShares Fund performance, please visit www.iShares.com or request a prospectus 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France,
by calling 1-800-iShares (1-800-474-2737). Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
This material does not constitute an offer or solicitation to sell or a solicitation of an offer to
buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in The MSCI Europe ex UK IndexSM is a free float-adjusted market capitalization index that is
any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the designed to measure developed market equity performance in Europe, excluding the United
securities law of that jurisdiction. Kingdom. As of April 2012, the MSCI Europe ex UK Index consisted of the following 15
developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany,
The iShares Funds that are registered with the US Securities and Exchange Commission Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
under the Investment Company Act of 1940 (“Funds”) are distributed in the US by BlackRock
Investments, LLC (together with its affiliates, “BlackRock”). The MSCI Germany IndexSM is a free float-adjusted market capitalization index that is designed
to measure equity market performance in Germany.
In Latin America, for Institutional and Professional Investors Only (Not for Public Distribution):
The MSCI Korea IndexSM is a free float-adjusted market capitalization index that is designed to
If any funds are mentioned or inferred to in this material, it is possible that some or all of the measure equity market performance in Korea.
funds mentioned or inferred to in this material have not been registered with the securities
regulator of Brazil, Chile, Colombia, Mexico, Peru, Uruguay or any other securities regulator in The MSCI Switzerland IndexSM is a free float-adjusted market capitalization index that is
any Latin American country, and thus, might not be publicly offered within any such country. designed to measure equity market performance in Switzerland.
The securities regulators of such countries have not confirmed the accuracy of any information The MSCI France IndexSM is a free float-adjusted market capitalization index that is designed to
contained herein. No information discussed herein can be provided to the general public in measure equity market performance in France.
Latin America. The MSCI UK IndexSM is a free float-adjusted market capitalization index that is designed to
Notice to residents in Australia: measure equity market performance in the United Kingdom.
Issued in Australia by BlackRock Investment Management (Australia) Limited ABN 13 006 The MSCI Japan IndexSM is a free float-adjusted market capitalization index that is designed to
165 975, AFSL 230523 (“BIMAL”) to institutional investors only. iShares® exchange traded measure equity market performance in Japan.
funds (“ETFs”) that are made available in Australia are issued by BIMAL, iShares, Inc. ARBN The MSCI Pacific Free ex Japan IndexSM is a free float-adjusted market capitalization index that
125 632 279 and iShares Trust ARBN 125 632 411. BlackRock Asset Management Australia is designed to measure developed market equity performance in the Pacific region, excluding
Limited (“BAMAL”) ABN 33 001 804 566, AFSL 225 398 is the local agent and intermediary Japan. As of April 2012, the MSCI Pacific Free ex Japan Index consisted of the following four
for iShares ETFs that are issued by iShares, Inc. and iShares Trust. BIMAL and BAMAL are developed market country indices: Australia, Hong Kong, New Zealand and Singapore.
wholly-owned subsidiaries of BlackRock, Inc. (collectively “BlackRock”). A Product Disclosure
![INVESTMENT DIRECTIONS [ 2 ]
Macroeconomic Overview
TABLE OF CONTENTS The state of the global economy is pretty much back to where it was in late 2011—an
anemic recovery threatened by Europe. Amid renewed concerns about a worsening
European crisis and a stalling recovery, stocks have erased most of their early 2012 gains.
Global Regions...................................4
Global equity markets finished May down 9%,* with European and emerging market
Global Sectors...................................6 stocks particularly suffering, and as investor sentiment turned more cautious, the yield
on the 10-year Treasury retreated in May to 1.56%. While stocks gained somewhat in the
Fixed Income Sectors.......................7 first half of June, rising 2.7% through June 15 on hopes policy makers will continue to
step in to save the day and revive slowing economies, many investors are still wondering
whether we’re on the verge of another global recession.
What’s New:
In our opinion, the most likely outcome for the global economy for the remainder
• Upgrade of Indonesia of the year continues to be slow, but positive, growth. The US economy is on firmer
footing, we expect emerging market growth to stabilize and there are some signs of
to Overweight a soft landing in China.
• Downgrade of Mexico hat
T said, two big risks remain, either of which could send the global economy into
to Underweight a double-dip recession. First, the possibility of a full-blown eurozone crisis remains
the major threat to the global recovery and, in particular, we’re concerned about a
• Downgrade of Mortgage- Spanish banking system crisis and the long-term risk of a Greek exit from the euro.
Second, if US policy makers don’t avert the United States’ pending fiscal drag, the
Backed Securities to odds of a double dip rise.
Neutral
n light of the uncertainty regarding the fate of the eurozone and of the United States’
I
fiscal policy, we believe markets are likely to remain highly volatile in the second half of the
year. While we continue to hold an overweight long-term view of global equities, especially
Risk Appetite Dial relative to bonds, and we expect that stocks can move higher in the remainder of the year,
their ascent is likely to be anything but smooth.
s such, we continue to advocate a defensive portfolio positioning. We like high-quality,
A
dividend-paying stocks, including those in emerging markets; defensive sectors such as
global telecommunications; global mega capitalization (mega cap) stocks; and US and
international minimum volatility funds. We also prefer to get equity exposure through
select developed and emerging markets that have robust growth prospects and fewer
Low High debt and banking sector problems. Within fixed income, we like US spread products such
as investment grade and municipal bonds.
Our new global market risk appetite
measure accounts for ongoing shifts in *Global equity market performance data is based on the performance of the MSCI ACWI (All Country World Index).
investor sentiment around the macro
fundamentals that form the basis for our
near-term investment views. Please see Figure 1: Longer-Term Global Asset Allocation
the appendix for an explanation of our
risk appetite measure methodology.
Underweight Neutral Overweight
Our risk appetite measure is currently Global Equities n
mildly negative, signalling a continued Treasury Bonds n
cautious mood in the markets, thanks
Corporate Bonds n
to both widening US corporate credit
spreads and the drop in equity markets Municipals n
from their March high amid renewed Treasury Inflation-Protected Securities n
concerns about Europe.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of
future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment
advice or a recommendation regarding the iShares Funds or any security in particular. This information is strictly for illustrative
and educational purposes and is subject to change.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)