2016 Outlook:

Modest global growth and market

returns as U.S. rates normalize

Timothy Hopper, Ph.D., Chief Economist

January 20, 2016

2

2016 outlook agenda

Economic forecast

Two views on the U.S. economy

The Fed’s intentions

Slowing global growth

Investment outlook

Equities

Fixed income

3

Tumultuous times reflect slowing global growth

The two views on whether U.S. interest rates are normalizing

Global growth is shifting from Emerging Markets to Developed Markets

Real GDP growth rates

* Quarterly estimates for China’s seasonally adjusted annual rate (SAAR) do not correspond to officially published YTD figures.

Sources: Haver Analytics, TIAA-CREF Asset Management.

4

-1

0

1

2

3

4

5

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2012 2013 2014 2015

Pessimist view: The cycle is nearing an end

Since Q3 2014: Slowing growth, falling capital spending, sub-normal

consumer spending, job growth peaking and net exports are a headwind

Nominal growth is slowing, ensuring that inflation will decelerate along

with real growth and corporate profits.

* Seasonally adjusted annual rate. Source: Haver Analytics.

Real GDP growth Quarterly, SAAR*

5

Oil prices as a proxy for capital spending

Capital spending got crushed last year by collapsing oil prices

Trend to continue this year based on near-term supply/demand dynamics

Data through December 2015. Source: Haver Analytics.

Oil prices West Texas Intermediate, dollars per barrel, weekly price

0

20

40

60

80

100

120

140

160

2000 2002 2004 2006 2008 2010 2012 2014 2015

6

Optimist view: The U.S. cycle is only now emerging

Job market fully recovered to near full employment implies that wages and

inflation will soon rise.

Data through November 2015. Source: Haver Analytics.

Total U.S. job losses vs. gains Thousands per month, 2008-2015

-1000

-800

-600

-400

-200

0

200

400

600

2008 2009 2010 2011 2012 2013 2014 2015

8.7 million lost 13.2 million gained

7

Will wage pressures pick up this year?

Real wage growth has emerged, but may reflect lower inflation—not higher

wages. We will determine which theory holds water in a few months.

Data through October 2015. Source: Haver Analytics.

Real wage growth (%) 2008-2015

-3

-2

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015

8

Are the Fed’s intentions realistic?

Shift focus from wage growth to inflation as primary gauge for rate hikes

Pace depends on the economy’s path over the next several quarters—but the

path is uncertain given recent financial market action.

Sources: TIAA-CREF Asset Management forecast.

Fed funds target rate

9

We have seen the steepest yield curve

Spreads unlikely to widen further as the yield curve flattens

Data through November 2015. Source: Haver Analytics.

Yield curve

-2

0

2

4

6

8

10

12

14

16

1983 1987 1991 1995 1999 2003 2007 2011 2015

Fed funds 2-year notes 10-year notes Spread

10

Regional growing pains

China’s slowdown weighs on global growth and hurts exports

Dotted lines = forecast. Sources: Haver Analytics, TIAA-CREF Asset Management.

Major country GDP forecast Real GDP growth

-20

-10

0

10

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

US Europe China Japan

%

11

Primary source of weakness is emerging markets

Emerging markets are slowing

Low commodity prices hurt growth and currencies of export-driven economies

Weak regulatory infrastructure, many have current account deficits

Wages increased dramatically, making EM less attractive for U.S. producers

China’s great transition

Growth rate is slowing, regulatory environment is changing

De-emphasizing infrastructure investment and FDI in favor of environmental

issues, consumer choice and market reforms

Closed capital account and non-floating currency hinder adjustment to

changing economic conditions

What you don’t hear about

Global trade is slowing—the primary cause of the turmoil we see today.

12

Global trade slows…to what?

Global trade to GDP ratio has slowed to 1:1, after growing from 2:1 to 3:1

between 2002 and 2008.

This typically signifies a “growth recession.”

Global trade

0

1000

2000

3000

4000

5000

6000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: Haver Analytics, TIAA-CREF Asset Management.

13

Emerging market currencies fall

Battered by low commodity prices and negative capital flows in 2015

* Weighted average of currencies of Turkey, Russia, Hungary, South Africa, Brazil,

Mexico, Chile, China, India, and Singapore.

Data through December 2015. Source: Bloomberg.

Sources: U.S. Federal Reserve, TIAA-CREF Asset Management.

Emerging-market currencies vs.

the U.S. dollar JPMorgan Emerging Market Currency Index*

Foreign exchange

Period ending

2015 2016 (forecast)

Euro 1.09 1.05

Yen 120.30 135.00

Renminbi (yuan) 6.49 7.00

Canadian dollar 0.72 0.90

Australian dollar 0.73 0.75

Brazilian real 4.00 3.75

60

70

80

90

100

110

2010 2011 2012 2013 2014 2015

14

Economic outlook summary

Base case: U.S. economy to remain stable in 2016 with growth in consumer

spending roughly offsetting weakness in net exports

Forecast 2.6% average GDP growth for 2016 is probably too high—depends

on near-term path of inflation.

Monthly employment growth has probably peaked, but we need to see

progress in real wages.

Falling commodity prices, global trade and inflation will completely offset

strengthening developed market growth, leaving the world in a weaker spot

this year.

Number of Fed rate hikes depends largely on inflation.

Housing activity is a stable growth platform for the economy, but will not be a

primary driver this year.

15

Equity market uncertainty continues in 2016

Market correction, skeptical investors, and heightened volatility

5

15

25

35

45

55

65

75

85

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

VIX (or “fear index”) daily levels, 2006-2016 Index measures market expectation of near-term volatility on the S&P 500 Index,

conveyed by stock index option prices

Source: Chicago Board Options Exchange.

16

-500

0

500

1000

1500

2000

2500

3000

3500

4000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

ThousandsThousands

Manufacturing sector

Service sector

Mining and logging

Positive indicators can support future growth

Job growth, housing improvement, record auto sales, bank lending

Source: BLS, Haver Analytics, Deutsche Bank Research.

Energy and manufacturing

sectors are small relative

to the service sector

Jobs created since July 2014

17

Housing sector continues to improve

New households, low interest rates, and rising home prices are drivers

200

400

600

800

1,000

1,200

1,400

2009 2010 2011 2012 2013 2014 2015

Num

be

r o

f u

nits (

tho

usa

nd

s)

Housing starts Building permits Homes under construction

Signs of strength in the housing market Housing starts, building permits, and homes under construction

Source: U.S. Census Bureau.

18

Some positive indicators in U.S. equity sectors

Growth trends across sectors reflect underlying U.S. economic strength

– UnitedHealth Group (UNH): “Initial growth trends are very encouraging

and service performance for January business is strong.”

– Delta Air Lines (DAL): “We are poised to continue outperforming as low

fuel prices will allow us to produce further earnings and margin expansion

in 2016.”

– JPMorgan Chase (JPM): “We saw growth in consumer drivers on the

back of improvement in the U.S. economy…core loan growth rose 16%

year-over-year.”

– Alcoa (AA): “Aerospace is expected to grow 8%-9% in 2016, driven by

6.9% passenger growth and 2.8% cargo demand.”

“Auto is expected to grow 1%-5% in U.S., 1%-4% in Europe and 3.1%

in China.”

“Building and construction is forecasted to grow 4%-6% in North

America, driven by 8.6% growth in nonresidential construction and 11%

in housing starts.”

19

Non-U.S. markets have lower valuations and margins

U.S., Europe and India are more attractive

0.69

-2.84

9.57

-14.92

-7.82 -6.12

16.6114.97 14.14

11.19.91

17.2

2.771.78 1.36 1.22 1.41

3.22

9.0

1.0

16.0

-9.0

-24.0

4.0

U.S. Europe Japan Emerging Markets China India

2015 return % (USD) Forward P/E P/B Margins vs. long-term average (% difference)

* Current trailing 12 months’ EBIDTA margins for MSCI indexes relative to long-term averages. Long-term average calculated for MSCI USA, MSCI Europe, and MSCI

Japan from January 1997-December 2015; and for MSCI EM, MSCI China, MSCI India from January 1998-December 2015. Sources: FactSet, MSCI, TIAA-CREF.

It is not possible to invest in an index. Performance for indices does not reflect investment fees or transactions costs.

Equity returns, valuations and margins* in key markets U.S., Europe, Japan, Emerging Markets, China and India as of 12/31/2015

20

2015 fixed income year in review

Risk assets retreat as flight to quality takes off.

Global growth weighs on liquidity and sectors most linked to commodities.

3.31.5 1.2 1.2 1.0 0.9 0.8 0.5

-0.7-1.4

-4.5

-18.0

Muni MBS ABS EM($US

Denom)

Agency CMBS Treasury U.S. Agg Corp Inf Linked HighYield

EM(Local

currency)

Fixed-income market total returns (%) 12 months ended 12/31/2015

Sources: Developed-market bond segments are represented by their respective Barclays indexes and related subsets: U.S. Aggregate, Treasury, Agencies,

Mortgage-Backed Securities (MBS), Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS), Investment-Grade Corporate, High-Yield,

and Treasury Inflation-Protected Securities (TIPS). For emerging markets, USD-denominated and local currency segments are represented by the JPMorgan

Emerging Market Bond Index (EMBI)-Global Diversified and the JPMorgan Government Bond Index (GBI)-EM Global Diversified Composite, respectively.

It is not possible to invest in an index. Performance for indices does not reflect investment fees or transactions costs.

21

Spread sectors highly correlated to oil prices

The fixed-income landscape will remain volatile in 2016.

Issuer selection will continue to drive returns.

Proper diversification will help buffer short-term volatility.

Data through December 2015. Source: Haver Analytics, Morningstar, TIAA-CREF.

It is not possible to invest in an index. Performance for indices does not reflect investment fees or transactions costs.

High-yield performance tracked decline in oil prices during 2015 Barclays U.S. High Yield Index vs. WTI crude oil spot price

35

40

45

50

55

60

65

94

95

96

97

98

99

100

101

102

103

104

105

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

High-yield index (left scale)

Oil price, $/barrel (right scale)

22

2016 outlook hinges on central bank policy

Ten-year bond yields

* 5-year, 5-year forward inflation expectations, percent, daily, not seasonally adjusted.

Data as of 12/31/15. Source: FactSet, Federal Reserve Bank of St. Louis, TIAA-CREF Asset Management.

Central banks will continue to drive interest rate volatility.

Until global growth stabilizes, the long-term trajectory remains in place.

The prospect for additional action by ECB and BoJ hangs over the market.

0

1

2

3

4

5

0

1

2

3

4

5

Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

Fed funds target = 0.25%

US

UK

Germany

Inflation Expectations*

%%

Inflation expectations*

23

Dollar IndexDXY—last price

The case for a sustained low rate environment

Dollar strength backstops any U.S. rate rise and influences pace of

Fed actions.

Reduced net exports combined with growing U.S. inventories and waning

residential construction dampen consumer impact on GDP.

Source: Bloomberg.

60

70

80

90

100

110

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

24

It’s not all doom and gloom…

Opportunities exist across the globe to benefit from the recent volatility.

Not all Emerging Markets are the same.

Default outlook for U.S. credit sectors ex-energy remains attractive relative

to yield/spread compensation.

24

(85)

(5) (6)

111 84

150 160 133

408

(4)%(20)%

(10)%(27)%

(64)%

0 %

(20)%(34)%

(138)%

(93)%

(150)

(130)

(110)

(90)

(70)

(50)

(30)

(10)

10

30(100)

0

100

200

300

400

Ch

ina

India

South

Kore

a

Pola

nd

Turk

ey

Un

ited A

rab E

mira

tes

Indon

esia

Me

xic

o

Ru

ssia

Bra

zil

Commodity Importer Commodity Exporter

3 Year % Change in spreads (12/31/2012 - 12/31/2015)

FX Changes (12/31/2012 - 12/31/2015)

3 Y

ear

Change in S

pre

ads (

BP

S)

3 Y

ear

% d

epre

cia

tion a

gain

st U

SD

Emerging markets FX and spreads have had a healthy correction since 2012—

commodity importers fared better than exporters.

Data source: JP Morgan, 12/31/12 – 12/31/15. Data based on JP Morgan Corporate Emerging Market Bond Index (CEMBI) and JP Morgan Emerging Market Bond Index (EMBI).

%

Commodity Importer Commodity Exporter

25

7th, 8th or 9th inning? Where are we…?

The cycle has room to run, but we are in late innings.

Low to modest growth and low inflation typically supportive of FI assets

Massive central bank intervention has changed bond market composition.

Range-bound credit spreads and interest rates will offer opportunities to trade

tactically and expose benefits of diversification.

25.1%

17.7%43.7%

13.5%

36.4%

24.3%

30.7%

8.2%

Treasury

Corporate

Securitized (MBS,CMBS, ABS, other)

Other

Source: Barclays Bank PLC

as of 12/31/2008 as of 12/31/2015

26

Important information

This material is prepared by TIAA-CREF Asset Management and represents the views of Timothy Hopper as

of January 20, 2016. These views may change in response to changing economic and market conditions. Any

projections included in this material are for asset classes only, and do not reflect the experience of any

product or service offered by TIAA-CREF. The material is for informational purposes only and should not be

regarded as a recommendation or an offer to buy or sell any product or service to which this information may

relate. Certain products and services may not be available to all entities or persons.

Past performance is not an indicator of future results.

Please note that investments in equity and fixed-income securities are not guaranteed and are subject to

market, interest rate, inflation, and credit risks. Some fixed-income sectors may be subject to liquidity risk.

High-yield investments are subject to higher credit risk, and investments in foreign securities are subject to

special risks, including currency fluctuation and political and economic instability. Investments in asset-backed

securities may be subject to prepayment or extension risks.

TIAA-CREF Asset Management provides investment advice and portfolio management services to the

TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF

Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers

Advisors, Inc., is a registered investment advisor and wholly owned subsidiary of Teachers Insurance

and Annuity Association (TIAA).

©2016 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund,

(TIAA-CREF), 730 Third Ave., New York, NY 10017

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