A look back and a look ahead - Merrill Edge · Click the image above to watch the video. meaningfully Table of Contents Financial markets recap 2 ... investment ideas that we outline

BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 34 to 36. 11465442

The RIC Report

A look back and a look ahead

Investment Strategy | Global 13 January 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 What worked (or didn’t) in 2014 3 Asset allocation changes 8 How low can oil go? 9 Theme investing in 2015 13 RIC asset class views 17 Fixed Income, Econ, Commodities, Currencies: views & risks

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Global equity markets: views & risks 19 Asset allocation for individual investors 20 Portfolio of the month 26 Stock lists 27 Economic forecast summary 30 Global economic forecast summary 31 Interest rate forecast summary 31 FX rate forecast summary 31 Team Page 37

What worked (or didn’t) in 2014

We examine what worked and what didn’t in 2014 and draw investment conclusions for 2015.

Favor sectors that benefit from economic growth Large cap and midcap stocks should outperform again, in our view. Our favorite sectors within the stock market are technology and industrials. Japan is our favorite non-US developed market, and China and India our favorite emerging markets.

Be selective within energy For the near term, we believe extreme oil price volatility argues for a defensive posture of holding larger cap integrated stocks that have balance sheet strength or portfolio resilience. For longer-term investors, we suggest looking for stocks that appear oversold and/or those more leveraged to natural gas.

Income will remain scarce In our view, the Fed will likely keep rates near zero for most of the year, and the near-term risk for Treasury yields is lower. We favor stocks that have a combination of growing dividends and earnings. In bonds, we lean toward higher quality, intermediate maturities and tax-advantaged income.

Increase allocation to US equities at expense of Europe The RIC favors the US equity market over the next 12 months, and we are making corresponding asset allocation changes to our global model. We are increasing our allocation to North American equities and reducing our exposure to Europe (ex UK).

How low can oil go? The near-term risk for oil prices is lower, in our view. Producers are not likely to reduce supply soon, and it should take about six months for demand to rise meaningfully, things that will likely be needed for prices to rise.

Theme investing in 2015 We cite the investment themes associated with A Transforming World. The main investment ideas that we outline are: robotics, cybersecurity, the internet of things, solar power, water, and longevity.

A Transforming World

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http://research1.ml.com/C?q=QR2etnrFK6Aim59yMQFIfg

http://research1.ml.com/C?q=QR2etnrFK6Aim59yMQFIfg

The RIC Repor t 13 January 2015

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Financial markets recap Table 1: Total returns (%) As of 31 December 2014 Asset class 2013 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 Equity Indices (%, US dollar terms) S&P 500 32.4 -0.3 4.9 13.7 13.7 20.4 15.5 7.7 NASDAQ Comp 40.1 -1.1 5.7 14.7 14.7 23.6 17.2 9.1 FTSE 100 21.0 -2.5 -4.2 -5.3 -5.3 9.7 6.9 4.8 TOPIX 26.5 -0.7 -2.5 -3.0 -3.0 9.9 5.9 2.4 Hang Seng 6.5 -1.6 3.4 5.5 5.5 12.8 5.1 8.9 DJ Euro Stoxx 50 27.0 -5.7 -6.2 -8.7 -8.7 11.7 1.0 2.6 MSCI EAFE 23.3 -3.4 -3.5 -4.5 -4.5 11.6 5.8 4.9 MSCI Emerging Markets -2.3 -4.6 -4.4 -1.8 -1.8 4.4 2.1 8.8 Size & Style (%, US dollar terms) Russell 2000 38.8 2.8 9.7 4.9 4.9 19.2 15.5 7.8 S&P 500 Citigroup Growth 32.8 -1.0 5.1 14.9 14.9 20.5 16.0 8.5 S&P 500 Citigroup Value 32.0 0.5 4.8 12.4 12.4 20.4 14.9 6.7 S&P 600 Citigroup Growth 42.7 3.0 9.2 3.9 3.9 19.3 17.6 9.5 S&P 600 Citigroup Value 40.0 2.7 10.4 7.5 7.5 21.2 17.0 8.6 S&P 500 Sectors (%, US dollar terms) Consumer Discretionary 43.1 1.0 8.7 9.7 9.7 24.8 21.4 9.1 Consumer Staples 26.1 -1.0 8.2 16.0 16.0 17.5 16.1 10.7 Energy 25.1 0.5 -10.7 -7.8 -7.8 6.5 8.8 9.5 Financials 35.6 1.8 7.2 15.2 15.2 26.3 13.4 0.1 Health Care 41.5 -1.3 7.5 25.3 25.3 27.9 19.4 10.6 Industrials 40.7 -0.1 6.8 9.8 9.8 21.2 17.6 7.8 Information Technology 28.4 -1.7 5.2 20.1 20.1 21.0 14.9 8.9 Materials 25.6 -0.7 -1.8 6.9 6.9 15.6 11.2 7.6 Telecom Services 11.5 -6.1 -4.2 3.0 3.0 10.7 11.4 6.5 Utilities 13.2 3.5 13.2 29.0 29.0 13.9 13.3 9.6 BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) 10-Year Treasury -7.8 0.4 3.6 10.7 10.7 2.1 6.1 5.2 2-Year Treasury 0.3 -0.2 0.1 0.7 0.7 0.4 1.0 2.6 TIPS -9.4 -1.0 0.3 4.5 4.5 0.5 4.3 4.5 Municipals* -2.9 0.6 1.3 9.8 9.8 4.6 5.4 4.9 US Corporate Bonds -1.5 -0.1 1.4 7.5 7.5 5.4 6.6 5.5 US High Yield Bonds 7.4 -1.5 -1.1 2.5 2.5 8.4 8.9 7.6 Emerging Market Corporate Bonds -0.5 -2.8 -2.5 2.3 2.3 5.6 6.4 6.2 Emerging Market Sovereign Bonds -3.3 -2.3 -0.8 5.2 5.2 6.1 6.7 7.2 Preferreds -3.7 0.1 2.9 15.9 15.9 8.1 8.4 2.7 Foreign exchange** (%, in local currencies) US dollar 6.4 1.6 5.4 11.8 11.8 6.5 3.2 0.9 British pound 1.9 1.8 0.0 3.6 3.6 2.9 1.7 -1.3 Euro 6.8 -1.2 0.3 -4.9 -4.9 0.8 -2.0 -0.2 Yen -18.9 0.5 -6.4 -7.2 -7.2 -12.5 -3.7 -1.1 Commodities** (%, US dollar terms) CRB Index -5.0 -9.6 -17.4 -17.9 -17.9 -9.0 -4.1 -1.9 Gold -28.1 1.8 -1.7 -1.4 -1.4 -9.0 1.6 10.5 WTI Crude Oil 7.2 -19.5 -41.6 -45.9 -45.9 -18.6 -7.7 2.1 Brent Crude Oil -0.3 -18.3 -39.4 -48.3 -48.3 -18.9 -6.0 3.5 Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ 9.7 1.5 0.7 5.4 4.1 7.1 6.1 6.0 Hedge Fund - HFRI Fund of Funds¹ 9.0 1.3 0.4 4.4 3.0 5.4 3.4 3.2 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).

2014 review The US equity market had another strong year with the S&P 500 gaining 13.7%. Overseas stock markets did not fare so well, with every index we follow down in US dollar terms except for Hong Kong. Small caps trailed large caps by almost 900bp in 2014. Large cap growth was the top performer among all size and style buckets (+14.9%), while small cap growth was the laggard at 3.9%. As for US sectors, Utilities, Health Care, and Info Tech were each up more than 20% last year. Consumer Staples and Financials also outperformed the S&P 500. Energy was the only sector to finish the year in negative territory, falling 7.8%. The top sector in fixed income was Preferreds at 15.9%. Ten-year Treasuries also performed well at 10.7%, followed by munis at 9.8%. Two-year Treasuries, US high yield and EM corporates were the laggards in 2014 with each gaining less than 3%. In FX markets, the strong dollar was the story in 2014, gaining 11.8%. In contrast, the euro slipped 4.9%, while the yen fell 7.2%. Oil declined significantly, with WTI falling 45.9%. The decline in oil dragged down the CRB index, which fell 17.9%. In contrast, Gold was only down 1.4%.


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What worked (or didn’t) in 2014 US investors once again experienced some of the best returns available from their home markets, with US stocks ending the year up 13.7% and US bonds up 6.3%. These returns came despite the end of quantitative easing (QE) by the Federal Reserve, a collapse in the price of oil, significant slowdowns in Europe and China and worldwide deflationary fears. We will look at worked and what didn’t for investors, and draw conclusions for 2015.

US equities have a 3rd double-digit year 2014 – Large caps and mid caps handily beat small caps Large cap stocks (13.7%) did best in 2014 with midcaps (13.2%) close behind, but small caps (4.9%) lagged significantly – by the widest margin since 1998, as smaller retailers had a particularly rough year. Stocks of Apple and Microsoft – the two largest holdings in the S&P 500 and several other indices – had total returns well in excess of market averages: up 38% and 24%, respectively.

2015 – Be more selective; large/mid outperform again For 2015, we expect US equities once again to generate positive returns, but perhaps not at double-digit levels. Stocks are still under-owned relative to bonds, cash levels remain high and corporate balance sheets have become far less leveraged, suggesting that stocks could command a premium for quality and stability. US Equity Strategist Savita Subramanian forecasts healthy 6% growth in earnings but notes that S&P 500 valuations are near fair value, so investors should be more selective. We think that volatility will increase, creating opportunities to take profits after price increases and to add to equity positions after price declines. We encourage investors to implement a rebalancing strategy at regular intervals.

We believe large cap and midcap stocks are likely to beat small caps again, although the divergence should not be nearly as wide as in 2014. An increase in market volatility, combined with above average valuations, works against small caps according to Small Cap Strategist Steven DeSanctis. However, DeSanctis notes that US economic growth of around 3% and interest rate increases from the Fed would favor small caps.

2014 – No rhyme or reason to US sector returns The S&P 500 was up more than 13%, and in classic form, one-half of the sectors beat and the other half lagged the market. Utilities led the pack with a 29% return, benefitting from the decline in bond yields, followed by Health Care and Technology up 25% and 20%, respectively. We do not see any sort of pattern to these returns, except that in general, more defensive market sectors did better than the cyclicals – not what we had expected at the start of the year. It is interesting, however, that within Health Care, the best performers were not the more defensive pharmaceuticals, but rather the more aggressive biotechnology and medical technology stocks. Tech saw leadership from semiconductors and some large cap hardware names. Four of the five biggest contributors to S&P 500 performance are found within Technology: Apple, Microsoft, Facebook and Intel.

It is no surprise that Energy (-7.8%) was the worst performing sector in 2014, and the only one with a negative total return. The price of crude oil fell by 46% for the year, the biggest drop since 2008, amid concerns that increased oil production would result in oversupply.

Chart 1: Tumbling oil

Source: Bloomberg

Table 2: S&P 500 2014 sector returns Sector Total return S&P 500 13.7 Utilities 29.0 Health Care 25.3 Info Technology 20.1 Consumer Staples 16.0 Financials 15.2 Industrials 9.8 Consumer Discretionary 9.7 Materials 6.9 Telecom Services 3.0 Energy -7.8 Source: BofA Merrill Lynch Global Research, Bloomberg

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2015 – Technology, Industrials most favored Slowdowns in Europe, Japan, China and Latin America, along with a collapse in oil prices and geopolitical tensions in Russia and the Middle East, interrupted the global economic recovery that we expected in 2014. We have higher conviction now that the global economy will bounce back in 2015, especially within the US and Japan. Our global economics team expects economic growth of 3.7% in 2015 vs a 3.2% forecast for 2014.

Against this backdrop, we remain focused on the Technology and Industrials sectors that should benefit from acceleration in the global economy. While Technology was one of the better performing sectors in 2014, large cap “old tech” contributed an outsized portion of the return; we believe this broadens out in 2015. Our US Equity Strategy team points out that Tech is the most GDP-sensitive sector and historically has fared well in rising rate environments. Industrials did not do as well last year, and unlike Tech, the large cap “old” stocks generally were a drag on performance. The sector contains several multinationals that benefit from a global growth pickup, particularly in Europe and China. According to our US Equity Strategy team, Industrials benefit from a more competitive US manufacturing sector due to lower energy costs, a narrowing wage gap between the US and emerging markets, and ongoing low inflation.

2014 – Income remains the scarce commodity Bonds and interest-rate-sensitive stocks surprised us with stronger than expected returns in 2014, as both appear to be shaking off concerns related to anticipated Fed rate increases. Almost all higher yielding industry groups posted better-than-average returns in 2014, with the exception of telecom services and integrated oils. REITs were up 30%, utilities and pharmaceuticals were up over 20%, and banks, household products and tobacco all bested the market returns.

2015 – Income remains the scarce commodity Falling bond yields and strong performance from many income-oriented stocks in 2014 resulted in even fewer income opportunities at the beginning of 2015. We can make the case for higher yielding sectors and industries within equities, as current dividend yields are among the most attractive available from instruments of comparable quality. However, with expectations for a stronger global economy and rate increases from the Fed as early as 3Q, these stocks will not likely fare as well in 2015.

Rather than seeking out the highest yielding stocks, we prefer that investors look for a combination of growing dividends and earnings growth, even though that would involve sacrificing some current income in the process. This “total return” approach can be applied within a number of industries, including tech hardware, semiconductors, industrial conglomerates, medical technology, and many industries within Financials and Consumer Staples. We think REITs may continue to do well if Fed rate increases are a consequence of a stronger economy, as this would imply that rent increases are more likely.

2014 – Energy underperforms amid oil price collapse The decision by OPEC in late November to maintain oil production levels has contributed to oversupply in the market – resulting in a $60/bbl decline in Brent oil prices since last June. OPEC’s action removes the cartel’s traditional role of keeping supply and demand in balance, suggesting that volatility in oil prices is likely to be higher going forward. It appears that Saudi Arabia is targeting the elimination of higher cost production – much of which is North American-based.

Technology, which performed well in 2014, is once again favored. We also like Industrials, which underperformed last year.

Income is likely to remain scarce, but very high yielding stocks may not perform well if interest rates rise. Instead, we prefer stocks with more modest yields and rising dividends.


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Across the energy complex, stocks have not taken this news well; most are down 40-50% from their highs.

2015 – Oil price volatility remains Look carefully for opportunities within Energy Oil has continued its slide in 2015, with Brent prices down over 17% so far. Commodity Strategist Francisco Blanch writes that oil markets need non-OPEC supply curtailments, OPEC output cuts or stronger global demand in order to find a floor. Blanch believes that none of these outcomes are likely in the near term – see guest column on page 9.

Stocks in the Energy sector are at the center of a debate between falling oil prices that seem not to be able to find a bottom, and a complete reset of valuations that look increasingly attractive in an environment where rising global growth is expected to eventually drive demand for energy. In the near term, extreme oil price volatility argues for a defensive posture of holding larger cap integrated stocks that have balance sheet strength or portfolio resilience.

Energy Analyst Doug Leggate maintains that oil prices cannot remain this low for an extended period. For longer term investors, he suggests looking for stocks that appear oversold and/or those more leveraged to natural gas. While energy prices are likely to remain volatile as the bottoming process evolves, much of the damage is likely over, and further downside in oil prices appears limited. Nonetheless, investors should weigh pricing and timing risks in deciding when to increase allocation to the sector.

2014 – Europe and Japan did not come through Global equities, as represented by the MSCI All Country World Index, returned 4.7% (US dollars) in 2014, but ex-US the index returned -3.4%. This is because major regions of Europe (-6.7%) and Japan (-3.7%) had rough years. Emerging Markets were also in the red despite strong results from India (23.9%) and China (8.1%). A strong US dollar – up 11.8% in 2014, exacerbated the poor relative returns of many non-US markets.

We had expected better performance by developed markets, particularly Japan, as that country implemented structural reforms intended to stimulate growth and investment. However, the government’s increase in the consumption tax was not accompanied by a higher level of exports as the rest of the world slowed; therefore, economic recovery has been delayed. And in Europe, almost all of the major equity markets had negative returns in US dollar terms, as the European Central Bank was not able to stem the tide of deflation and weakening currencies caused by sluggish economic growth.

2015 – Great expectations for Japan, China and India Japan is once again our favorite non-US developed market, as the Bank of Japan has expanded its monetary easing, and the Abe government has taken action to implement measures to stimulate the economy – including corporate tax reductions. Corporate profitability has improved because of a rebound in pricing power and the end of deflation, enabling increases in capital spending and wages. In 2015, the administration’s economic policies are likely to become more stimulative, according to Economist Masayuki Kichikawa. Strategist Ajay Kapur writes that the weaker yen, higher inflation, high operating leverage, potential for lower taxes, low interest costs and share buybacks are likely to propel Japanese EPS higher.

Expectations for continued oil price volatility argue for a defensive posture in the near term. Longer term investors may want to start looking for energy stocks that appear oversold and/or those leveraged to natural gas prices.

Japan is our favorite non-US developed market for 2015, as stimulative economic policies, the end of deflation, a weaker yen and an improved environment for corporates should propel earnings growth.


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Europe is not such an “easy fix.” Even though we expect the European Central Bank to take major strides regarding QE, without structural reforms at the country level, the benefits are likely to be limited. Economist Gilles Moec writes that slack must be lowered to the point that deflation ceases to be a threat and potential GDP must be lifted. For 2015, he is forecasting only around 1.2% growth and modest inflation of 0.5%. Strategist Manish Kabra notes the lack of earnings optimism raises the risk of a correction and higher stock price volatility, causing him to favor higher quality, defensive stocks. The risk here is that ECB tactics prove to be more effective than expected, causing stocks to rally.

Within emerging markets, we prefer China and India. Both should benefit from respective central banks’ easing of monetary policy and a variety of other factors – please see pp. 7-8 of last month’s RIC Report for a more complete rationale: The RIC Report: Year of the sheep – not great, but not so b-a-a-a-d 09 December 2014.

2014: Bond investors sought duration above all Bond investors favored long duration in 2014. Quality was less of a concern for most of the year, except for energy, which got battered from the plunge in oil prices. Table 3 to the left shows that the top performers were the 30-year Treasury, preferreds, and high-yield municipals, all of which are above market duration. Our high yield corporate index had a 2.5% return, the smallest among the domestic sectors, dragged down by a -7.4% return for the energy sector.

The only losses among the major bond sectors in 2014 came from outside the US because of currency translation into dollars. Based on our indexes, dollar-denominated investors suffered losses of 2.9% and 4.5% in developed and emerging market sovereign debt respectively.

Chart 2: Dollar on the rise

Source: Bloomberg

Chart 3: Falling in lockstep

Source: Bloomberg

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2015: Find ways to squeeze out yield For 2015, we do not think that long duration will perform well. We expect high quality to outperform low quality and that a rising dollar will continue to pull down returns from non-dollar assets. We recommend seeking income by extending to intermediate maturities and favoring tax-advantaged income.

Treasury yields will likely head lower for as long as oil prices are falling and deflationary pressures persist in Europe and elsewhere. The decline in the yield on the 10-year Treasury since mid-2014 mirrored the decline in the yield on 10-year German bund, as Chart 3 above right shows. Sovereign yields across Europe, except for Greece, are lower than in the US. Rates Strategist Priya Misra thinks that the course of bund yields will be an important near-term influence on Treasury yields. Misra sees the risk that yields will decline further in the coming weeks, before rising later in the year.

If we are right that US economic growth will remain on track and oil prices will begin to head higher by the second half of the year, that combination would probably result in higher long-term Treasury yields, although global forces may limit the magnitude of the rise.

Yield will likely remain scarce in 2015. We expect the Fed to keep short-term rates near zero through September, and to move gradually beyond then. We favor intermediate-term maturities to capture some of the remaining steepness in the yield curve. We also like tax-advantaged income for those in higher tax brackets. Municipal yields are high in relation to Treasury yields for those in the top tax brackets. We also like preferreds that pay qualified dividend income, including those with fixed-to-floating coupons.


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Asset allocation changes Increase North American equities in Global model The RIC favors the US equity market over the next 12 months, and we are making corresponding asset allocation changes to our global model. We are increasing our allocation to North American equities and reducing our exposure to Europe (ex UK).

Fundamentals for US equities remain strong with improving economic growth, reasonable valuations, and solid earnings. Global Economics Co-Head Ethan Harris is forecasting GDP growth in the US to improve from 2.5% in 2014 to 3.5% this year. US Equity Strategist Savita Subramanian is forecasting mid-single-digit EPS growth in 2015, which is in line with the trend over the last three years.

Deflation remains a threat to Europe. Our European Economics team is forecasting negative headline inflation for the first two months of the year. In an attempt to stave off deflation, we believe that the European Central Bank will enact sovereign quantitative easing at its next meeting on January 22. This move is widely anticipated by the market, in our opinion, and will likely not be enough to stimulate economic growth without country-level reforms.

In addition, our EU Composite Macro Index has five of its six signals declining, and the indicator remains in the “Recession” phase, which means that European equities are exposed to downside risks.

Asset allocation change details For global investors with Tier 0 liquidity and a moderate risk profile, the RIC increased its weight in North America by 2% to 33% and decreased its asset allocation to Europe (ex-UK) by 2% to 10% (Table 4).

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

Conservative Moderately

Moderate Moderately Aggressive Aggressive Conservative 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 10% 11% 1% 22% 23% 1% 31% 33% 2% 36% 39% 3% 41% 44% 3% Europe (ex UK) 5% 4% -1% 8% 7% -1% 12% 10% -2% 15% 12% -3% 18% 15% -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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How low can oil go? Are oil prices about to turn and move to $80/bbl? Not yet Brent crude oil prices have come off almost in a straight line from $115 to $47/bbl, making three very brief stops at $85, $80, and $60. That marks the second steepest six-month decline in the oil market’s history (Chart 4). Are prices about to turn and head higher? We don’t think so, as supply keeps running above demand.

As OPEC fails to curb output, stocks should keep building Inventories typically build in any given market because supply exceeds demand. But in some markets like oil or gas, storage capacity is a finite number and price declines can accelerate as inventories build. In previous oil price downturns, OPEC would reduce supply as stocks built to prevent a collapse in the term structure of prices. After all, when the price of storage goes through the roof, storage operators make a killing and oil producers suffer. But in a dramatic policy shift, OPEC supply has kept on increasing in recent quarters despite falling prices as Saudi seems intent on increasing its market share irrespective of the impact on price. This will likely create a large inventory overhang, suggesting further downside risks to oil prices (Chart 5). According to latest available data, oil stocks across the OECD have continued to build at an alarming speed in recent weeks and against seasonal patterns (Chart 6).

Chart 5: Unlike in previous downturns, OPEC supply has kept on increasing despite falling prices, suggesting further downside risks

Source: IEA, BofA Merrill Lynch Global Commodity Research

Chart 6: Inventories across the OECD have continued to build at an alarming speed in recent weeks and against seasonal patterns


Non-OPEC supply will not be turned off immediately To restore equilibrium in the oil market, we need a sizeable supply cut of at least 1 million b/d. Is it reasonable to expect non-cartelized production to shut down immediately as prices fall? We don’t think so, as many producers are well hedged, face very low cash costs, are partially protected by falling domestic currencies or tax breaks, or are notoriously slow to react. In the absence of a moderating agent like Saudi Arabia, this means prices have to fall below operating cash costs (non-shale) or well below cash flow break-evens (shale) for marginal producers. The reality is that the vast majority of producers remain free operating-cash-flow positive, suggesting no immediate extensive output cuts at current prices (Chart 7).

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Chart 4: Brent prices have come off from $115 to $47/bbl, one of the steepest drops in history

Source: Bloomberg, BofA Merrill Lynch Global Commodity Research

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But prices are well below full cycle costs in many areas Yet, even if most companies, with the exception of small highly levered players, can cover their operating expenses and production is unlikely to be heavily affected in the short-run, future investments will likely be the biggest victim of the new OPEC policy. We expect many longer-term investments to be put on hold over the next quarter or two. Due to large capital outlays in many cases, full cycle crude oil production costs are much higher than operating costs (Chart 8). In fact, much of the world’s crude oil production is challenged below $70/bbl over a 10-year investment cycle (Chart 9). Technically, that should lend a fair amount of support to prices over the longer term, which is why long-dated (Dec-20) Brent crude oil prices have rebounded from $75 to $78/bbl since mid December. However, these decisions ultimately will affect production over the longer term, not in the short run. On the contrary, production guidance continues to point up for many of these cost-cutting producers, suggesting more near-term downside risk to oil prices.

Chart 8: Due to large capital outlays in many cases, full cycle crude oil production costs are much higher than operating costs

Source: BofA Merrill Lynch Global Commodity Research

Chart 9: Much of the world’s crude oil production is challenged below $70/bbl over a 10-year investment cycle


Shale producers face lower cash flows, pushing rigs lower So who is to cut supply and balance the oil market? Shale producers are most at risk, in our view, but they have never been stress-tested by low oil prices before. US shale oil production is very sensitive to prices. Unlike conventional oil production, shale oil operates with shorter lead times and minimal upfront capital outlays, making production shut-ins easier to justify. In fact, the rig count for oil has already started to push lower and so has permitting, a lead indicator for drilling. However, production has kept on increasing on a combination of factors, including rising efficiencies and cost reductions (Chart 10). So prices may still have to push lower in order to force more aggressive spending cuts, even though we are approaching marginal economics for shale oil.

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Chart 10: The rig count has already started to push lower, but production has kept on increasing in recent months

Source: EIA, Bloomberg, BofA Merrill Lynch Global Commodity Research

Yet Saudi could still increase output when prices recover We have argued that once these spending cuts are in place, prices should start to recover toward an average of $77/bbl in 2015. Yet this assumption relies heavily on Saudi Arabian production staying at 9.7 million b/d, on average, throughout the year. While the kingdom pledges not to cut output to prevent prices from falling, this new OPEC policy can only imply raising output, and thus cutting into effective spare capacity, to prevent oil prices from rising too quickly.

Global oil demand growth is set to accelerate in 2H2015 So how quickly can global oil demand react to the lower prices? Our models suggest a six-month lag before lower prices start to positively influence consumption. Assuming the lower prices do not create a spiraling effect in Emerging Markets, this means that global consumption should see a meaningful acceleration in the second half of this year and into 2016. So we are projecting a meaningful acceleration in global oil demand around the world, particularly in 2H15 (Chart 11).

Chart 11: We are projecting a meaningful acceleration in global oil demand around the world, particularly in 2H15


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Yet oil producing countries could see slower consumption While large importing countries like the US, China or India will likely see a bounce in consumption in 2015 and 2016, oil producing countries could see meaningfully slower demand next year as recession bites in Russia and lower oil prices negatively impact Middle East economies. After all, many oil producers had their cake and ate it too for years as oil prices rose. So now we remain very concerned that slower demand from oil producing countries could come back to haunt the market. On our estimates, 50% of the growth in demand in the last 10 years has come from oil producing countries, a clear downside risk to prices from here.

A deeper rout in EMs may hurt a global demand recovery So far, only Russia’s currency has really suffered, as lower oil prices have come on top of US and European sanctions, but the falling ruble also cuts domestic production costs and makes it more difficult to reduce excess supply. As the coal market has shown, this dynamic can perpetuate a cycle of low prices. On top of that, other emerging economies seem to be struggling, judging by a variety of indicators, and the risks of lower oil prices to the Brazilian economy keep rising at an alarming speed.

WTI & Brent could hit $35/bbl & $40/bbl near-term With US oil imports flowing in and inventories at Cushing continuing to build, prices could push lower. We now see a growing risk of WTI hitting $35/bbl in the near term (Chart 12). Brent could slip to $40/bbl. But that has not stopped most North American companies from continuing to announce higher production guidance for 2015. That needs to change and budgets have to be further curtailed, as low hedge ratios suggest that current capex plans are unsustainable on an industry-wide basis. As we highlighted in The United Petrostates of America, money flowing into the oil and natural gas sector hit 20% of total US private fixed structure investment, the highest level ever in US history. Reverting back to a historical average of 5% will not be a painless exercise (Chart 13).

Chart 12: Prices could push lower and now see a growing risk of WTI hitting $35/bbl in the near term

Source: Bloomberg, BofA Merrill Lynch Global Commodity Research

Chart 13: Reverting back to a historical average of 5% of investments flowing into the O&G sector will not be a painless exercise

Source: BEA, BofA Merrill Lynch Global Commodity Research

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Theme investing in 2015 A framework that links multiple investment themes is required in a Transforming World, in our view, to identify the major trends that will likely influence asset markets in coming years and identify the biggest winners and losers. BofA Merrill Lynch Global Research’s framework connects the world using five clusters as follows:

People – the allocation of scarce human resources

Innovation – the disruptive role of technology

Markets – the allocation of scarce financial capital

Government – the role of public policy

Earth – the allocation of scarce natural resources

This article is an abbreviated version of the report published November 25, 2014, A Transforming World –Year Ahead 2015, which will contain stock ideas for each of the themes listed below.

Theme investing and performance The last seven years have been characterized by a series of unprecedented financial crises, an unprecedented financial policy response and abnormally large asset price returns. We believe the liquidity-aided asset returns of recent years are coming to an end as the drivers of the macro market, zero rates and record profits, max out. In our view, the normalization of economic growth and policy rates in coming years is likely to coincide with more normal bond and equity returns, and higher volatility. Lower expected returns in bond and equity markets suggest that thematic investing will become more important in adding alpha, in our view.

Indeed, as is supported by returns from certain widely followed third-party indices in Chart 14, we note that certain themes which resonate with our Transforming World framework, such as biotech, water and cybersecurity, outperformed the returns from equities in 2014 (Chart 14). While other similar thematic indices may not reflect the same level of performance, we do think they support our view that thematic investing is likely to outperform in the brave, new, post-QE world. Position for lower expected returns from financial markets by concentrating portfolios in assets related to our long-term themes.

Investment themes for 2015 Below we highlight actionable research on seven investment themes for 2015: financial repression, robotics, cybersecurity, Internet of Things, solar, water and the longevity revolution.

Financial repression (Markets) Global central bank assets, including FX reserves, now total $22.6 trillion, a sum larger than the combined GDP of the US and Japan. Eighty-three percent of the world’s equity market cap is currently supported by zero interest rate policies; and 50% of all government bonds in the world currently yield 1% or less. In 2014, government bond yields fell to all-time lows in Japan, Germany, France, Spain, Italy, Ireland, Portugal, Sweden, Switzerland, Korea, Czech Republic, Hungary and Poland.

Chart 14: 2014 thematic performance versus global stocks

Source: Cyber Security = ISE Cyber Sec TR; Waste = DJ US Waste Dsp Srv; Biotech = Nasdaq Biotech Index; Global Stocks = MSCI World Index

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Michael Hartnett Chief Investment Strategist

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The current level of global interest rates, both real and nominal, is depression-like, with only the 1930s a comparable period (Chart 15). Currently, 1.4 billion people are experiencing negative real interest rates (Chart 17). Low rates mean low returns and, as stated above, enhance the appeal of theme investing.

In addition, we believe investors should position for higher volatility across their portfolios in 2015 as the denouement of financial repression approaches, in the form of either rising interest rates or debt monetization in 2015 or beyond.

Chart 17: Six years after Lehman

*Market cap of US + Japan + HK + Europe **US + Euro Area + UK + Japan + HK + Mexico + others ***Calculation based on data from Bank for International Settlements and BofAML Fixed Income Indices across all maturities ^As defined by Wikipedia; countries: Mexico, Syria, Sudan, Iraq, Israel, Afghanistan, Somalia, Nigeria, Pakistan, Egypt, Libya, CAR, Ukraine ^^Central bank policy rates vs inflation Source: BofA Merrill Lynch Global Investment Strategy

Robotics (Innovation) Nike employed 106,000 fewer contract workers in 2013 due to greater automation. In 2014 and 2015, robot installations are estimated to increase by 12% per year (source: IFR), with the trend to automation continuing to be driven by corporate focus on cost competitiveness, outsourcing of engineering functions, increasing quality requirements and rising wage inflation across emerging markets. In our view, companies that should benefit from robotics include industrial automation and robots, robotic surgery, control systems and equipment, and industrial PCs/smart planet.

Cybersecurity (Innovation) The estimated number of cyber-attacks per week is 122,000. In 2014, major attacks were made on eBay, Home Depot, JP Morgan and Target. The average successful cyber-attack cost $12.7 million per US company this year and cyber-crime costs the global economy an estimated $0.5 trillion annually (source: CSIS, McAfee). With cybersecurity attacks and critical infrastructure breakdowns now recognized as one of the top five global risks today (source: WEF), we expect companies to increase investment significantly. In our view, companies that should benefit from cybersecurity include content security, network security, data protection, hardware based on software blades, identification and analyzing machine generated big data.

Internet of Things (IoT) (Innovation) There were 500 million connected devices in 2003; in 2015 there will be 7.2 billion, and in 2020 there will be 50 billion, or well over six per person.

The adoption of the Internet of Things, including connected devices that incorporate sensors and smart nodes into various devices to “undumb” hardware, is at a tipping point in 2015. Seventy-five percent of companies are either actively exploring or using IoT, and 96% expect their business to be using IoT in some

Chart 15: Annual 3-month treasury yield (%)

Source: BofA Merrill Lynch Global Research , GFD

Chart 16: Long robots, short humans (millions)

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respect in three years. We estimate the IoT market size for software will be US$36bn by 2017. This will not be a replacement market, but rather will generate incremental revenue opportunities in areas such as big data, analytics, data/app integration, the sales Cloud, marketing cloud, as well as end-to-end vertical solution providers.

Solar (Earth) Solar power is a growth industry. Installed pricing, including equipment, customer acquisition, permitting and financing costs, continues to fall sharply (Chart 18), while demand grows sharply. By the end of 2014, an additional 48.4GW of solar will be added to the global grid and in 2015, annual installed capacity is estimated to grow 20% to reach 58.3GW. Penetration remains low in this addressable market that continues to grow, particularly in the US. By 2016, our Alternative Energy team estimates that the total addressable market for residential and commercial market could exceed $25 billion of electricity sales in the US alone.

As important, since 90% of global power generation is water-intensive and water is becoming scarce, demand for solar and wind, both of which use the lowest amount of water per unit of electricity generated, has another structural tailwind. In our view, companies with thematic clean tech exposure that should benefit include those financing, installing and servicing solar power arrays, solar project developers, and wind and solar power generators.

Water (Earth) A perfect storm is threatening (Chart 19). By 2030, global food demand is set to increase by 50%, energy demand by 50% and water demand by 40%. The threat from this nexus is increasingly evident, particularly regarding water, with geopolitical tensions over water and energy coincide with a sharp rise in drought and water stress. Drought affected 100% of California in 2014, and Brazil suffered its worst drought in 80 years. By 2030, it is estimated that half the people on the planet will be living in conditions of water stress. The necessary focus on water treatment, management, infrastructure and supply could lead to a water market worth over $1 trillion by 2020. As noted above regarding solar, 90% of global power generation is water-intensive and despite new alternative sources of energy, the demand for water for energy purposes is likely to double by 2035 (50% of US areas that are fracked already suffer from water stress today). In our view, companies with water exposure that should benefit include China water treatment, “more crop per drop” actors, water meters and medical waste treatment.

Chart 18: Price of solar continues to fall ($/kG)

Source: BNEF, PVInsights, BofA Merrill Lynch Global Research estimates

Chart 19: Global water demand to 2050 (water use km3)

Source: OECD, BofA Merrill Lynch Global Research

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Longevity (People) Ageing populations are a universal phenomenon. The number of older persons (60+) is forecast to more than double from 841 million in 2013 to 2 billion+ by 2050 (Chart 20), with 80% living in emerging markets (Source: UN). Average life expectancy has risen by 20 years since 1980, and by the end of this century, there will be 8 million centenarians.

We believe that all aspects of society and the economy need to be viewed through the lens of this demographic and societal transformation. In the financial sector, retirement systems are under the most pressure, as a one-year increase in life expectancy means up to 7-9% in additional liabilities. Many countries could face additional costs of up to 50% of 2010 GDP by 2050 (Source: IMF). In the pharma sector, life expectancy gains mean higher levels of chronic diseases and degenerative illnesses, increasing the need for medical devices, hearing aids, dental and vision care. Also, the global spending power of 60+ consumers is expected to reach $15 trillion by 2020 (Source: Euromonitor).

In our view, companies in the following industries should benefit the most from the longevity theme: pharma and healthcare, senior living, insurers, drug stores, and death care.

Chart 20: Global population over 60

Source: United Nations


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RIC asset class views Table 5: 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, 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 = Downgrade to market weight; valuations attractive but prices have fallen faster than EPS; oil price vol will collapse multiples. Financials = Benefits from housing, US cyclical recovery; outperforms with rising dollar; risks are regulatory reform, Europe. Healthcare = Preferred defensive sector, benefits from demographics; pharma good yield play; HC reform benefits many services. Industrials + Benefits from US manufacturing and global economic recoveries. Be selective; prefer large cap multinationals. Info Technology + Benefits from cyclical recovery; highest foreign exposure; more cash than debt; low EPS volatility; prefer semis and “old tech.” Materials = Hurt by near-term weak commodity prices, overcapacity; should get interest as global economy recovers. Telecom – Best dividend yield sector, but not much dividend growth as payout ratios high; worst risk/reward trade-off. Utilities – Best performer in 2014; even more expensive than last year; low EPS growth, higher expected rates keep us UW. Growth = Not much value in “growth vs value” trade, more sensitivity to GDP growth, foreign sales; div growth better here too. Value = Accelerating earnings growth favors value; better dividend yield here; favor Industrials. Small cap = Valuations remain high despite underperformance in 2014; higher volatility, weaker US housing work against small caps. Large cap + Like “big, old and ugly;” large global cyclicals look attractively valued, especially after Energy and Industrials sell off.

Europe (ex. UK) = Weak oil prices suggest even lower inflation than expected; expectations are for ECB to implement “sovereign QE” in first quarter. EPS growth poor, so favor defensive, large cap, high quality stocks.

United Kingdom = GDP growth remains strong, labor market strong with low inflation; fiscal deficit suggests BoE on hold for rate hikes.

Japan + Lower corporate tax rates; look for consumption and GDP recovery in 2015, Expect higher ROEs at corporates. Own sectors that benefit from better domestic demand like construction, insurance, transports, consumer electronics.

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 = PBOC rate cut first in two years; China news improving amid lower inflation, proactive tax policy, allowing for more government easing. Expect weaker currencies in LatAm, need for government reform; buy India.

Fixed income markets Treasuries – Near-term risk for lower yields, but yields should be higher than now at year-end. Agencies / MBS = A shortage of new supply should counter the effects of Fed tapering. 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 = Fundamentals less positive than before. Lower energy prices a risk. Preferred securities = Favor high coupons, 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 = Sustained EM demand growth and lack of selling ex-China are supportive. Risks include high real rates, and strong equity mkts. Oil = Risk of lower prices near term, but supply cuts and demand increase should boost prices by around mid year. 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 6: 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 global growth and accommodative DM policy.

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, faster EM growth.

Global Rates (Priya Misra, Ralf Preusser) US: We remain short duration as we believe that both Fed expectations and term premiums have room to re-price higher. Strong growth should help increase market expectations of the terminal funds rate and demand from foreign official sources and domestic banks should be slower.

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

Europe: The EUR front-end is not pricing in the B/S expansion targeted by the ECB, let alone the liquidity consistent with QE (which we expect in Q1). We target German 5y rates at 0% and see particular upside in the periphery.

Europe: The risk to peripheral longs is that ECB QE is delayed, and political risks arise while inflation continues to surprise to the downside. This scenario would lead to renewed debt sustainability concerns.

Global Commodities (Francisco Blanch) We see a growing risk of WTI and Brent falling to $35 and $40/bbl near term to force either non-OPEC producers or Saudi to cut. The main driver for the sharp drop in Brent has come from the supply side. Saudi seems determined to force shale production to grow at a much slower pace in the US. With oil having to “balance itself” going forward, OPEC has given up on its traditional role of keeping supply and demand in check. The only way to balance an oversupplied market in the absence of a cartel is to destroy market-based supply or encourage incremental demand via lower prices. Nickel prices have further upside, and we expect prices to hit $23,000/t in the next 12 months. Indonesia has implemented an export ban on nickel, and while producers have some ore stocks, they are unlikely to last for more than one year. We believe the market is moving to a deficit in 2015 and expect prices to rise.

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. Near term the oil market may become more disorderly as oil prices try to find a floor near operating cash costs, so we expect even higher volatility. 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. In global IG, we favor expanding central bank balance sheets – overweight European, underweight US credit.

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 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. HY 2015 total return forecast is 2-3%. Expect defaults to pick up to 2.0-2.5% as investors will be unwilling to extend credit to troubled companies in a world where QE is over, cash is limited, liquidity is poor. We are not, however, overly concerned about the fundamentals of the broad market.

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) The GDB’s Economic Activity Index for Puerto Rico fell 2.1% year-over-year in November. The commonwealth’s treasury department appealed a lower court’s decision in favor of Doral Financial Corp. to the Court of Appeals. Meanwhile, the market awaits the timing of PRIFA’s $2.9bn issuance. As oil prices continue their steep decline, Alaska plans to tap into its reserves while North Dakota plans to spend on infrastructure, while also calling for lower taxes. Both states remain highly rated; Alaska is rated Aaa, while North Dakota is rated Aa1. We expect 2015 to be a post-Great Recession “normal” year. Though there will be more challenges ahead as we navigate our way through the pension problems of some states and localities, overall, the regional economic picture is much brighter going forward.

We see a benign rate environment in 2015 based on historical patterns. As such, we expect muni volatility to be benign as well. We estimate that 2015 issuance should be $350bn, and scheduled principal redemption of $221bn will cause the volume of outstanding muni bonds to rise to $3,743bn. 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 1.20 and general further upside in USD-JPY.

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, especially at the 22-January meeting.

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 remain the main risks for EM currencies

Source: BofA Merrill Lynch Research Investment Committee


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Global equity markets: views & risks Table 7: 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 (to say Brent<$40/b) 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 17.5x our 2015 EPS forecast of $124. 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) Expect flat earnings growth for 2015, as we remain in the Recession phase of our Style Cycle:1) synchronized drop in European macro indicators; 2) above-average equity valuations; 3) an ongoing earnings downgrade cycle – the longest in over 20 years; 4) falling bond yields; and 5) plummeting commodity prices all contribute to cautious outlook. We are skeptical of persistent impacts on stocks from ECB QE, given the strength of consensus that has been priced in. 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 dispersion.

Downside risks: 1) Europe slips into deflation and economic data are worse than expected; 2) European markets overreact to new hurdles in ECB monetary policy implementation and disappointing earnings data; and 3) collapse in Chinese demand, triggering economic recession and political turmoil. Upside risks: PBoC engaging in unexpectedly aggressive monetary stimulus feeds into an investment-led recovery in China. This would be significant enough to kick-start the European business cycle, moving markets into an earnings upgrade cycle for the first time in three years.

Japan (Ajay Kapur) We are structurally bullish, as we feel the weaker yen, higher inflation, high operating leverage, possible lower taxes, continued buybacks and rising corporate leverage, and low interest costs are likely to see Japanese EPS grow substantially above the paltry consensus of 7% and 12% for Mar-15, and Mar-16. Buy firms that have executed a buyback in the prior year, or have announced one in the prior two months. BoJ ramped up QQE program showing support of central bank to sustain inflation of 2%. GPIF asset allocation shift includes more in domestic and foreign stocks and foreign bonds, with lower allocations to Japanese bonds. GPIF will invest in EM equities for the first time ever.

Strong consensus USD bullishness is a contrary negative for Yen and Japan equities. US employment trend and Fed's communication to the market. PM Abe’s leadership depends on his popularity, which can be unstable with his potential foreign affairs actions. Geopolitical issues in Europe and Asia, with potentially high energy/natural resources cost.

Asia-Pac ex-Japan (Ajay Kapur) The outlook remains challenging for Asia with a strong USD, weak global growth, falling inflation expectations, deflationary yen and lower capex in energy sector, therefore we focus on specific investment ideas. Buy rate-sensitive China, policymakers will need to ease to fight oncoming debt deflation. Buy Asia yield players with sustained EPS growth. Buy India as earnings and the market can double in the next four years. Buy pure Macau gaming stocks as macro drivers are stabilizing/improving. OW: India, Taiwan, China; UW: Malaysia, Hong Kong, The Philippines, Korea.

Downside risks Global growth continues to disappoint. China slowdown worsens and the government stays away from broad easing. We could be wrong on the SOE theme if governments fail to deliver on reforms.

Emerging Markets (Ajay Kapur) 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 will keep underperforming DMs if US$ keeps rising. Countries that account for 86% of EM market capitalization are net oil importers and should benefit from lower oil prices, if it reflects excess supply, not a collapse in global demand. Our Russia economist, Vladimir Osakovskiy, feels that Russia is due to enter economic recession starting from 4Q14 and will likely remain in economic decline until at least end of next year with the cut in oil price outlook. Our LatAm strategist Felipe Hirai expects a low return (0-5%) for LatAm equities in 2015, mostly given: 1) still weak GDP growth, although stronger than in 2014; 2) higher rates in the US closer to the Fed hiking cycle; 3) lower commodities prices; 4) high leverage and higher taxation; and 5) still weak consumer growth (Brazil). He believes that country allocation will continue to be challenging, and maintains higher conviction on sector/theme/stock positioning. OW: India, Taiwan, China, Thailand, Indonesia, Brazil; UW: Malaysia, Mexico, Chile, the Philippines, Turkey and Korea.

Downside risks Inaction from major central banks to resolve the ongoing slowdown/lower inflation. 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 8: 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 9: 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 12: 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 13: Portfolio Strategy team's US equity sector weightings by investor profile

Weight in


Moderate Moderately

Aggressive S&P 500 conservative aggressive Consumer Discretionary 12.1% 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 8.4% 9.0% 12.0% 10.0% 10.0% 11.0% Financials 16.6% 12.0% 14.0% 15.0% 8.0% 6.0% Health Care 14.2% 15.0% 11.0% 11.0% 17.0% 18.0% Industrials 10.4% 11.0% 12.0% 16.0% 18.0% 15.0% Info Technology 19.7% 6.0% 8.0% 14.0% 24.0% 27.0% Materials 3.2% 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 3.2% 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 14: Strategic and RIC allocations without alternatives Conservative Moderately conservative Moderate Moderately aggressive Aggressive Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC Stocks 20% 23% 40% 44% 60% 66% 70% 78% 80% 86% Lg. Cap Growth 8% 9% 16% 18% 23% 26% 25% 29% 27% 28% 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% 4% 8% 10% 11% 13% 16% 19% 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 15: 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% 41% 38% 39% 35% 37% 33% 32% 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% 10% 13% 15% 18% 17% 20% 22% International: Emerging 0% 4% 2% 2% 3% 3% 4% 4% 5% 5% Source: BofA Merrill Lynch Global Research

Table 16: 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 17: 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% 11% 19% 23% 28% 33% 32% 39% 37% 44% Europe (ex UK) 4% 4% 7% 7% 11% 10% 13% 12% 15% 15% 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 18: 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% 11% 18% 22% 26% 31% 30% 37% 34% 40% Europe (ex UK) 3% 3% 7% 7% 10% 9% 12% 11% 14% 13% 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% 2% 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 19: 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% 9% 16% 20% 21% 26% 24% 31% 24% 31% Europe (ex UK) 3% 3% 6% 6% 8% 7% 9% 8% 10% 10% 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 20: 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% 8% 14% 18% 19% 24% 22% 29% 21% 26% Europe (ex UK) 2% 2% 6% 6% 8% 7% 9% 8% 9% 8% 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 21: Sector Weightings (Sectors listed in order of preference)

Sector Weight in S&P 500

BofAML Weight (+ / = / -) Comments

Industry Preferences / Themes

Information Technology 19.7% +

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 10.4% + Less risky than you might expect: second-highest percentage of high quality stocks after

Consumer Staples GDP-sensitive, capex exposure, global exposure; beneficiary of recovery in Europe Risks: Capex recovery could stall, no acceleration in global growth

Industrial Conglomerates and other high quality multinationals

Energy 8.4% =

Risk-reward now looks more balanced, as our strategists no longer expect oil to stabilize at much higher levels

Trading at a large discount to history across relative valuation metrics, but may be a value trap in the near term

Record underweight by large cap mutual funds (since 2008) Benefits from US domestic energy advantage, pick-up in global growth 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 14.2% =

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

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

Attractive across valuation metrics Health Care Reform benefits hospitals, Medicaid managed care, labs, and PBMs Risks: Most govt. exposure of any sector, overweight by mutual funds; implementation risk

around HC Reform

Pharmaceuticals, Biotechnology, aging

demographics beneficiaries

Consumer Staples 9.8% =

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) 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 16.6% =

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 REITs and mortgage plays (slowing housing cycle)

Materials 3.2% = 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 12.1% -

Overweight by active managers, expensive across various valuation metrics Rising rates may drive shift from spending to saving and may slow housing recovery Historically underperforms mid/late cycle Most labor-intensive sector and operating margins near peak levels Business spending forecast to grow 2x faster than consumer spending in 2015

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 3.2% - 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 Income & Growth Portfolio The primary objective is to utilize a total return approach with a cross-section of stocks that combine income and dividend growth

for inflation protection, and earnings growth for wealth accumulation. Stock selection should involve less volatility than assumed by the pure growth investor and may have a lower yield than sought by

the pure income investor. No minimum yield is required, but the stocks must provide a regular secure dividend. Equity Income & Growth

Price Sectors/Target Weights Symbol Proposed Weight Close 01/09/2015 Average Cost Yield † QRQ Rating Footnote Consumer Discretionary (11%) The Home Depot HD 3% 104.89 $50.97 1.79% A-1-7 BObgijopsvw Comcast Corp CMCSA 3% 56.29 $32.33 1.60% A-1-7 #BObgijopsvw Disney Walt DIS 3% 94.25 $87.60 1.22% B-1-7 Bbijoprsvw Nike NKE 2% 95.99 $40.83 1.17% B-1-7 Bbijopsvw Consumer Staples (12%) Mondelez Int MDLZ 4% 37.22 $37.11 1.61% B-1-7 BObijopsvw Costco COST 4% 143.32 $65.81 0.99% B-1-7 Bbijopsvw CVS Health CVS 4% 97.92 $35.78 1.43% B-1-7 Bbgijoprsvw Energy (10%) Valero VLO 3% 48.65 $43.33 2.26% B-2-7 Bbjopw Hess HES 4% 71.12 $74.36 1.41% B-1-7 BObgijopsvw Schlumberger SLB 3% 81.22 $61.73 1.97% B-1-7 Bbijopsvw Financials (15%) Wells Fargo WFC 3% 52.68 $29.90 2.66% B-1-7 BObgijopsvw ACE Limited ACE 2% 113.37 $48.69 2.29% B-1-7 BObijopsvw American Tower AMT 3% 99.41 $97.65 1.53% B-1-7 BObgijopsvw Amer Express AXP 4% 90.42 $43.85 1.15% B-1-7 BObgijopsvw Citigroup C 3% 50.78 $40.92 0.08% B-1-7 BObgijopsvw Health Care (11%) St Jude Medical STJ 4% 66.20 $70.13 1.63% B-1-7 Bbijopsvw Cardinal Health CAH 3% 83.84 $54.95 1.63% B-1-7 BObijopsvw Thermo Fisher TMO 4% 129.75 $71.60 0.46% A-1-7 BObgijopsvw Industrials (16%) Caterpillar Inc CAT 3% 87.65 $75.93 3.19% B-2-7 BObgijopsvw Honeywell HON 4% 98.93 $46.16 2.09% B-1-7 Bbijopsvw FedEx Corp. FDX 3% 172.66 $104.90 0.46% B-1-7 Bbgijopsvw Cummins Inc CMI 3% 143.60 $135.41 2.17% B-1-7 Bbijopsvw United Tech UTX 3% 114.02 $72.72 2.07% B-1-7 Bbijopsvw Information Technology (14%) Visa V 3% 260.53 $99.90 0.74% B-1-7 Bbijopsvw Hewlett-Packard HPQ 3% 40.67 $27.51 1.57% B-1-7 BObijopsv Oracle ORCL 4% 43.39 $29.63 1.11% B-1-7 BObgijopsv ADP ADP 4% 84.56 $85.15 2.32% B-1-7 Bbijopsvw Materials (2%) Monsanto MON 2% 119.04 $86.90 1.65% B-1-7 Bbgijopsvw Telecomm. Services (3%) Verizon Comm VZ 3% 46.76 $47.98 4.70% A-1-7 BObgijopsvw Utilities (6%) American Water Works AWK 3% 54.30 $25.64 2.28% A-1-7 Bbijopsvw Dominion D 3% 76.50 $56.48 3.14% A-1-7 BObgijopsvw Cash (0%) 0% 100% 1.72% †: 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. Source: Bloomberg, BofA Merrill Lynch Global Research XRVW: This stock has been placed under extended review because there is no current coverage and we do not have an investment opinion. Until the opinion is reinstated, solicitations must follow procedures established for no opinion securities including a review of the Approved Extended Review List.


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Stock lists US 1 List (link to latest report) Table 22: US 1 list (9 January 2015) Ticker Company Rating Date added Price when added Price as of 09 January Footnotes ACM AECOM Technology C-1-9 08/12/14 35.08 28.70 Bbgijopsv AIG AIG C-1-7 01/28/14 48.46 53.32 BObgijopsv C Citigroup B-1-7 02/07/14 49.34 50.78 BObgijopsvw CELG Celgene Corp. B-1-9 10/28/14 105.70 113.67 Bbgijopsvw CHKP Check Point C-1-9 11/18/14 76.53 80.58 Bbijosvw CMCSA Comcast Corp A-1-7 11/25/14 56.62 56.29 #BObgijopsvw CYH Community Health C-1-9 05/20/14 37.79 55.08 Bbgijopsvw DIS Disney Walt B-1-7 02/04/14 71.05 94.25 Bbijoprsvw EIX Edison Int'l A-1-7 07/08/14 56.72 67.38 BObijopvw EMN Eastman Chemical B-1-7 04/29/14 86.19 74.44 Bbgijopsvw EQIX Equinix B-1-9 06/17/14 206.87 216.89 Bbgijopsvw FDX FedEx Corp. B-1-7 12/02/14 180.39 172.66 Bbgijopsvw KMI Kinder Morgan C-1-7 09/23/14 38.21 41.81 Bbgijopsvw KORS Michael Kors B-1-9 09/30/14 71.39 69.26 Bbjopw MET MetLife Inc. B-1-7 04/01/14 53.44 51.02 BObgijopsvw MMM 3M B-1-7 02/25/14 132.93 161.62 Bbgijopsvw NUE Nucor C-1-7 01/28/14 48.99 47.78 Bbijopsvw NWL Newell C-1-7 10/20/14 33.66 37.45 Bbgijopsvw NXPI NXP C-1-9 11/18/14 74.55 80.32 Bbgijopsvw OXY Occidental B-1-7 09/24/14 94.44 77.54 BObijopsvw PDCO Patterson Cos B-1-7 09/23/14 41.45 50.43 Bbijopvw PNRA Panera Bread C-1-9 09/30/14 162.72 175.64 Bbijopsw STJ St Jude Medical B-1-7 04/29/14 63.39 66.20 Bbijopsvw VZ Verizon Comm A-1-7 02/25/14 46.29 46.76 BObgijopsvw WHR Whirlpool B-1-7 09/23/14 152.49 197.23 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 23: Endeavor Stocks / US Small Cap Buy List (8 Jan 2015) MLSCR Model Scores (100=best; 1=worst)

GICS Sector Company Symbol BofA-ML Opinion

Price 1/8/15

Mkt Value ($ Millions) Aurora

Enhanced Contrarian Add Date

Price on Add date Footnote

Consumer Disc American Axle & Mfg Holdings AXL C-1-9 22.91 1,727 86 97 8/9/2010 10.37 Bbgijopsvw Consumer Disc Jack In The Box Inc JACK C-1-7 84.24 3,202 84 46 7/9/2012 27.62 Bbijpsvw Consumer Disc Standard Pacific Corp SPF B-2-9 7.31 2,012 20 63 6/14/2013 8.96 Bbgijpsvw Energy Rosetta Resources Inc ROSE C-1-9 20.36 1,168 13 81 6/14/2013 45.46 Bbgijopsw Financials Coresite Realty Corp COR C-2-7 42.27 901 73 88 5/14/2012 24.65 Bbijpvw Financials Endurance Specialty Holdings ENH C-2-7 60.77 2,657 78 87 7/15/2014 53.43 Bbijopvw Health Care Medassets Inc MDAS C-2-9 19.43 1,158 76 94 1/11/2013 18.60 Bbijpsvw Health Care Molina Healthcare Inc MOH B-1-9 51.51 2,436 75 79 8/15/2013 34.48 Bbijopsw Health Care Pharmerica Corp PMC C-1-9 21.68 625 88 89 1/19/2009 16.21 Bbijpsw Industrials Swift Transportation Co SWFT C-1-9 28.33 3,901 93 81 8/15/2013 17.50 Bbijopsw Industrials Curtiss-Wright Corp CW B-1-8 68.20 3,215 59 60 2/11/2014 59.41 Bbijopsw Industrials West Corp WSTC C-1-7 31.39 2,644 97 95 8/13/2014 26.66 BObgijopsw Industrials Greenbrier Companies Inc GBX C-1-7 54.70 1,420 100 97 11/12/2014 62.45 Bbijopsw Info Tech Mentor Graphics Corp MENT C-1-7 21.65 2,450 71 87 5/14/2012 14.05 Bbijopsvw Info Tech Take-Two Interactive Sftwr TTWO C-1-9 28.46 2,485 100 100 3/13/2014 20.88 Bbjopw Materials AK Steel Holding Corp AKS C-1-9 5.58 993 20 79 10/13/2014 5.78 Bbgijopsw Materials Berry Plastics Group Inc BERY C-1-9 32.19 3,768 80 83 6/14/2013 23.44 Bbijopsvw Materials Graphic Packaging Holding Co GPK C-1-9 14.02 4,438 68 58 5/18/2011 5.30 Bbijopsvw Source: BofA Merrill Lynch Small Cap Research


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US High Quality & Dividend Yield Screen (methodology) Table 24: High Quality and Dividend Yield Screen (January 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 25.6 0.3 2.3 A 40,189 55.19 83.37 B-1-7 1.7 Bbijopsvw 2/3/2014 DD DuPont Materials 21.0 0.8 2.5 A- 66,986 61.61 73.94 B-1-7 1.7 Bbijopsvw 11/3/2014 DOV Dover Corp Industrials 18.2 0.7 2.1 A 11,860 79.09 71.72 B-2-7 3.7 Bbijopsvw 1/2/2013 EMR Emerson Industrials 20.7 0.6 2.8 A+ 42,818 54.86 61.73 B-2-7 1.8 Bbijopsvw 7/1/2013 GPC Genuine Parts Consumer Disc 21.0 0.2 2.1 A 16,290 83.23 106.57 A-2-7 2.1 Bbijopsvw 3/1/2013 JNJ Johnson & Johnson Health Care 23.7 0.2 2.6 A+ 292,703 76.70 104.57 A-2-7 2.3 Bbgijopsvw 10/1/2012 LLTC Linear Technology Information Tech 39.5 0.0 2.3 A- 10,877 31.82 45.60 B-2-7 1.8 Bbijpvw 5/1/2014 MMM 3M Industrials 28.7 0.5 1.9 A+ 105,299 140.12 164.32 B-1-7 2.3 Bbgijopsvw 2/3/2014 NSC Norfolk Southern Industrials 17.6 0.7 2.0 A 33,918 91.79 109.61 A-2-7 1.6 BObijopvw 2/1/2013 PG Procter & Gamble Consumer Staples 15.7 0.5 2.7 A+ 246,136 75.92 91.09 A-1-7 1.4 Bbgijopsvw 4/1/2012 PAYX Paychex Information Tech 36.2 0.0 3.2 A 16,752 30.99 46.17 A-2-7 1.3 Bbijopvw 12/1/2014 QCOM QUALCOMM Information Tech 20.0 0.0 2.1 A- 123,581 73.32 74.33 C-2-7 3.1 Bbijopsvw 8/1/2013 RTN Raytheon Co. Industrials 20.1 0.4 2.2 A+ 33,356 75.65 108.17 A-2-7 3.2 Bbgijopsvw 6/2/2014 UTX United Tech Industrials 19.8 0.6 2.1 A+ 104,841 117.82 115.00 B-1-7 3.0 Bbijopsvw 12/3/2012 WMT Wal*Mart Stores Consumer Staples 20.4 0.7 2.2 A+ 276,808 72.02 85.88 A-1-7 2.1 Bbgijopsv 2/1/2012 XOM ExxonMobil Energy 19.6 0.1 2.9 A 391,482 83.74 92.45 A-1-7 1.6 Bbgijopsvw Average 23.0 0.4 2.4 113,368 2.2 S&P 500 benchmarks: 15.1 1.0 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 25: International Low Volatility & Dividend Yield screen (January 2015)

Ticker Company Country Sector Market Value

Price as of Jan 2

LT Debt / Equity†

Gross Div.

Yield1†

5 Year Annualized

Dividend Growth† QRQ

ABB ABB Switzerland Industrials 46,503 21.08 39.4 3.9 12.1 A-1-7 AZN AstraZeneca United Kingdom Health Care 87,713 70.40 36.9 4 6 B-1-7 BMO Bank of Montreal Canada Financials 42,845 70.17 13.9 4 2.5 B-2-7 BHP BHP Billiton Ltd-Spon ADR Australia Materials 119,397 47.54 35.5 5.4 8.1 A-2-7 CAJ Canon Japan Information Technology 41,440 31.68 0 4.6 2.6 A-2-7 CVE Cenovus Energy Incorporated Canada Energy 15,148 20.75 50.2 4.7 36.8 B-1-7 ABEV Companhia de Bebidas das Americas (AmBev) Brazil Consumer Staples 98,653 5.95 4.2 4.4 19.9 B-2-7 NVS Novartis Switzerland Health Care 260,119 92.25 15.1 3 10 A-2-7 NTT NTT Japan Telecommunication Services 60,199 25.63 32.2 3 5.5 A-1-7 DCM NTT DoCoMo Japan Telecommunication Services 67,832 14.65 3.9 3.5 0.2 A-2-7 PSO Pearson United Kingdom Consumer Discretionary 14,660 18.09 42.5 3.1 9 A-1-7 PHG Philips NV Netherlands Industrials 26,385 29.19 29.5 3.9 3 B-1-7 RY Royal Bank of Canada Canada Financials 94,149 68.55 14.4 3.8 8.1 B-1-7 SNY Sanofi France Health Care 118,234 45.52 18.3 4.3 5.8 A-2-7 BNS Scotiabank Canada Financials 64,581 55.88 9.9 4.1 6 B-2-7 SKM SK Telecom Korea, Republic Of Telecommunication Services 19,534 27.34 35.4 3.7 5.1 B-1-7 SLF Sun Life Financial Inc. Canada Financials 20,742 35.76 30.3 3.6 0.3 B-2-7 SU Suncor Energy Incorporated Canada Energy 43,414 31.73 24.8 3.3 27.8 B-2-7 SYT Syngenta AG Switzerland Materials 30,347 64.34 18.1 3.6 16.8 A-1-7 TD The Toronto-Dominion Bank Canada Financials 81,791 46.91 13.8 3.5 9.3 B-1-7 TRI Thomson Reuters Canada Consumer Discretionary 31,150 39.96 45.5 3.4 3.3 B-1-7 Average: 24.5 3.8 9.4 MSCI ACWI ex-USA index: 88.2 2.8 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.

13 January 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 3.5 3.0 3.2 3.2 3.1 2.2 2.5 3.5 3.0 % Change, Year Ago 1.8 2.3 3.1 1.9 2.6 2.7 2.7 4.0 3.7 3.2 3.1 Final Sales 1.5 3.0 3.9 -1.0 3.2 5.0 3.0 3.3 3.4 3.2 3.1 2.2 2.3 3.4 3.0 Domestic Demand 1.9 2.3 2.7 0.7 3.4 4.2 3.2 3.5 3.6 3.4 3.4 1.9 2.4 3.5 3.3 Consumer Spending 1.8 2.0 3.7 1.2 2.5 3.2 4.3 3.6 3.8 3.5 3.2 2.4 2.5 3.6 3.0 Residential Investment 19.0 11.2 -8.5 -5.3 8.8 3.3 6.5 7.0 8.0 8.0 9.0 11.9 1.8 7.0 9.1 Nonresidential Investment 1.6 5.5 10.4 1.6 9.7 8.9 2.5 5.6 5.0 4.5 5.3 3.0 6.2 5.4 5.7 Structures 7.3 11.1 12.8 2.9 12.6 4.8 4.0 3.0 0.5 -1.8 1.7 -0.5 8.1 2.8 3.6 Equipment 1.5 4.7 14.1 -1.0 11.2 11.0 -0.5 8.0 8.0 8.0 8.0 4.6 6.4 6.9 7.8 Intellectual Property -1.9 2.8 3.6 4.7 5.5 8.8 6.0 4.0 4.0 4.0 4.0 3.4 4.6 5.0 4.0 Government 0.2 0.2 -3.8 -0.8 1.7 4.4 -1.0 1.0 1.0 1.0 1.0 -2.0 -0.1 1.1 1.0 Exports 6.3 5.1 10.0 -9.2 11.0 4.6 1.5 4.0 4.5 4.5 4.5 3.0 3.0 4.2 4.5 Imports 8.5 0.6 1.3 2.2 11.3 -0.9 3.0 5.0 5.0 5.0 5.0 1.1 3.5 4.2 5.0 Net Exports (Bil 09$) -446 -425 -384 -447 -460 -431 -442 -453 -461 -469 -478 -420 -445 -465 -499 Contribution to growth (ppts) && -0.5 0.6 1.1 -1.7 -0.3 0.8 -0.3 -0.3 -0.2 -0.2 -0.2 0.2 -0.2 -0.1 -0.2 Inventory Accumulation (Bil 09$) 43.4 95.6 81.8 35.2 84.8 82.2 102.0 92.0 82.0 80.0 78.0 63.6 76.1 83.0 76.0 Contribution to growth (ppts) () 0.3 1.5 -0.3 -1.2 1.4 0.0 0.5 -0.3 -0.3 -0.1 0.0 0.0 0.1 0.0 0.0 Nominal GDP (Bil $, SAAR) 16619 16872 17078 17044 17328 17600 17802 17957 18160 18388 18644 16768 17444 18287 19251 % SAAR 2.9 6.2 5.0 -0.8 6.8 6.4 4.7 3.5 4.6 5.1 5.7 3.7 4.0 4.8 5.3 Key Indicators Industrial Production (% SAAR) 1.9 2.4 5.0 3.9 5.7 3.9 6.4 5.4 5.9 5.1 5.5 2.9 4.3 5.5 5.0 Capacity Utilization (%) 77.8 77.9 78.4 78.6 79.1 79.3 79.8 80.3 80.9 81.3 81.7 78.0 79.2 81.0 82.5 Nonfarm Payrolls (Avg mom change, 000s) 201 172 198 190 267 239 289 225 225 250 250 194 246 238 213 Civilian Unemployment Rate (%) 7.5 7.3 7.0 6.6 6.2 6.1 5.7 5.5 5.3 5.1 5.0 7.4 6.2 5.2 4.7 Civilian Participation Rate (%) 63.4 63.2 62.9 63.0 62.8 62.8 62.8 62.8 62.8 62.8 62.8 63.2 62.9 62.8 63.0 Productivity (% SAAR) 0.5 3.6 3.3 -4.5 2.9 2.3 0.1 1.2 1.4 1.5 1.4 0.9 0.8 1.3 1.5 Personal Savings Rate (%) 4.7 4.9 4.3 4.9 5.1 5.0 5.0 5.0 4.9 4.9 4.8 4.5 5.0 4.9 5.2 Light Vehicle Sales (Millions SAAR) 15.5 15.6 15.6 15.7 16.5 16.7 16.7 17.2 17.4 17.5 17.7 15.5 16.4 17.4 18.1 Housing Starts (Thous. SAAR) 865 882 1025 925 985 1033 1052 1115 1149 1184 1220 930 999 1167 1391 Current Account (% of GDP) -2.4 -2.2 -2.0 -2.3 US Budget Balance ($bn, Fiscal Year) -680 -483 -475 -550 Inflation GDP Price Index (% SAAR) 1.2 1.7 1.5 1.3 2.1 1.4 1.0 0.5 1.4 1.9 2.5 1.5 1.5 1.3 2.2 % Change, Year Ago& 1.5 1.4 1.4 1.4 1.7 1.6 1.5 1.3 1.1 1.2 1.6 Core PCE Chain Prices (% SAAR) 1.0 1.4 1.3 1.2 2.0 1.4 1.3 1.4 1.5 1.4 1.4 1.3 1.4 1.4 1.6 % Change, Year Ago$ 1.3 1.3 1.3 1.2 1.5 1.5 1.5 1.5 1.4 1.4 1.4 CPI, Consumer Prices (% SAAR) 0.4 2.2 1.1 1.9 3.0 1.1 -1.2 -3.6 2.3 3.1 3.3 1.5 1.6 0.2 2.9 % Change, Year Ago! 1.4 1.5 1.2 1.4 2.1 1.8 1.2 -0.2 -0.4 0.1 1.3 CPI ex Food & Energy ( % SAAR) 1.4 1.8 1.6 1.6 2.5 1.3 1.6 1.8 1.9 1.8 1.8 1.8 1.8 1.7 2.0 % Change, Year Ago@ 1.7 1.7 1.7 1.6 1.9 1.8 1.8 1.8 1.6 1.8 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 2014F 2015F 2016F 2013 2014F 2015F 2016F Current 2014F 2015F 2016F Global 3.2 3.2 3.7 3.9 3.6 3.8 3.6 3.6 3.68 3.54 3.67 3.88 Global ex US 3.5 3.4 3.7 4.1 4.1 4.3 4.3 3.8 4.49 4.31 4.35 4.38 Euro Area -0.4 0.8 1.2 1.3 1.4 0.5 0.3 1.0 0.05 0.05 0.05 0.05 UK 1.7 3.0 2.7 2.8 2.6 1.5 0.8 1.9 0.50 0.50 1.00 1.75 Japan 1.5 0.2 1.6 1.3 0.4 2.7 1.4 1.8 0.10 0.10 0.10 0.10 Canada 2.0 2.5 2.4 2.1 1.0 1.9 0.9 1.8 1.00 1.00 1.00 1.50 Emerging EMEA 2.7 2.3 1.9 2.8 4.8 5.8 5.9 5.1 10.56 7.92 7.54 7.43 Latin America 2.5 0.6 1.6 3.1 9.7 13.5 14.6 8.7 8.94 10.33 11.59 11.12 Brazil 2.5 0.2 1.0 2.2 6.2 6.3 6.5 6.0 11.75 11.75 12.00 11.50 Emerging Asia 6.0 5.9 6.2 6.3 4.4 3.6 3.6 3.7 4.34 4.49 4.34 4.42 China 7.7 7.3 7.1 6.8 2.6 2.1 2.3 2.8 2.75 3.00 3.00 3.00 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 0.13 0.07 0.07 0.27 0.52 0.07 0.13 0.52 1.53 3-Month T-Bill 0.07 0.03 0.01 0.07 0.03 0.02 0.02 0.02 0.01 0.02 0.20 0.45 0.07 0.02 0.45 1.40 3-Month LIBOR 0.28 0.27 0.25 0.25 0.23 0.23 0.24 0.25 0.24 0.25 0.50 0.75 0.25 0.25 0.75 1.80 2-Year T-Note 0.24 0.36 0.32 0.38 0.42 0.46 0.57 0.52 0.70 0.90 1.10 1.30 0.38 0.52 1.30 2.25 5-Year T-Note 0.76 1.39 1.38 1.74 1.72 1.63 1.76 1.63 1.80 1.90 2.00 2.10 1.74 1.63 2.10 2.70 10-Year T-Note 1.85 2.49 2.61 3.03 2.72 2.53 2.49 2.34 2.60 2.65 2.70 2.75 3.03 2.34 2.75 3.25 30-Year T-Bond 3.10 3.50 3.68 3.97 3.56 3.36 3.20 3.06 3.30 3.40 3.45 3.50 3.97 3.06 3.50 3.75 2-Year swap 0.42 0.51 0.46 0.49 0.55 0.58 0.82 0.74 0.94 1.16 1.38 1.58 0.49 0.74 1.58 2.57 5-year swap 0.95 1.57 1.54 1.79 1.80 1.70 1.93 1.78 1.97 2.10 2.22 2.32 1.79 1.78 2.32 2.98 10-year swap 2.01 2.70 2.77 3.09 2.84 2.63 2.64 2.49 2.76 2.85 2.92 2.97 3.09 2.49 2.97 3.53 30-year swap 2.99 3.45 3.66 3.93 3.54 3.33 3.19 3.05 3.31 3.41 3.48 3.53 3.93 3.05 3.53 3.85 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 16-Sep 16-Dec G3 EUR-USD 1.18 1.23 1.21 1.20 1.20 1.18 1.16 1.15 1.15 USD-JPY 119 117 119 121 123 125 127 125 123 EUR-JPY 140 144 144 145 148 148 147 144 141 Dollar Bloc USD-CAD 1.19 1.14 1.14 1.12 1.11 1.10 1.09 1.08 1.08 AUD-USD 0.82 0.85 0.82 0.80 0.77 0.76 0.75 0.74 0.73 NZD-USD 0.78 0.76 0.72 0.70 0.68 0.67 0.66 0.66 0.65 Europe EUR-GBP 0.78 0.78 0.78 0.77 0.76 0.75 0.74 0.74 0.74 GBP-USD 1.52 1.58 1.55 1.56 1.58 1.57 1.57 1.55 1.55 EUR-CHF 1.20 1.21 1.21 1.22 1.22 1.22 1.23 1.23 1.23 USD-CHF 1.01 0.98 1.00 1.02 1.02 1.03 1.06 1.07 1.07 EUR-SEK 9.54 9.50 9.60 9.50 9.40 9.20 9.10 9.10 9.00 USD-SEK 8.05 7.72 7.93 7.92 7.83 7.80 7.84 7.91 7.83 EUR-NOK 9.09 9.20 9.20 9.10 9.00 9.00 8.90 8.80 8.80 USD-NOK 7.68 7.48 7.60 7.58 7.50 7.63 7.67 7.65 7.65 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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This research report has been prepared and issued by MLPF&S and/or one or more of its non-US affiliates. MLPF&S is the distributor of this research report in the US and accepts full responsibility for research reports of its non-US affiliates distributed to MLPF&S clients in the US. Any US person receiving this research report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates. Hong Kong recipients of this research report should contact Merrill Lynch (Asia Pacific) Limited in respect of any matters relating to dealing in securities or provision of specific advice on securities. Singapore recipients of this research report should contact Merrill Lynch International Bank Limited (Merchant Bank) and/or Merrill Lynch (Singapore) Pte Ltd in respect of any matters arising from, or in connection with, this research report.

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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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A look back and a look ahead - Merrill Edge · Click the image above to watch the video. meaningfully Table of Contents Financial markets recap 2 ... investment ideas that we outline